Assignment on
“Relevance of Keynesian Theory to underdeveloped Economies”

Submitted to : Dr. A.K Monaw-war Uddin Ahmed Course instractor Macroeconomics MBA-510

Submitted By: Chowdhury Omar Hasan Munna ID-1130657

Date of submission: 22nd November,2011

Independent University ,Bangladesh

Keynesian theory and underdeveloped countries:
Lord John Maynard Keynes wrote the General Theory of Employment, Interest and Money as a solution to the problem of periodic unemployment faced by developed industrial nations of the West during the great depression of the thirties. Keynesian theory singles out deficiency of effective demand as the major cause of unemployment and low level of income in industrial economy operations under a laissez faire system. Deficiency of effective demand is a prominent feature of economies undergoing depression and in order to improve the level of effective demand in an economy. Keynes suggested policy measures like cheap money policy, government’s compensatory investment spending, deficit financing and other fiscal methods. In essence, therefore, Keynesian economics turn out to be economics of depression applicable to developed countries. Its applicability in underdeveloped countries is very limited. To quote Joan Robinson: “ Keynes’s theory has little to say directly, to the underdeveloped countries, for it was framed entirely in the context of an advanced industrial economy, with highly developed financial institutions and a sophisticated business class.

Though Keynesian Economics has revolutionized modern economic thinking, it has inherent weaknesses:

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It is fundamentally a capitalistic theory. It basically examines the determinants of employment in a free enterprise economy. Though Keynes suggests government intervention and controlled capitalism his theory fails to deal with the socialist economic system. In communism,