Abstract
Book I is the core of The General Theory . I clarify that Keynes has succeeded in proving the existence of involuntary unemployment, which is incurable by reduction of nominal wage while many standardized textbook tells us that rigidity in the nominal wage is the crucial assumption that upholds Keynes’s proposition. What is acutely important is the interpretation of the incentive for labor supply (i.e., the interpretation of the second postulate of classical economics). Indeed, Keynes denies that the marginal disutility of labor is equalized to the real wage. However, one would surely find that Keynes also emphasizes that the real wage exceeds the corresponding marginal disutility of labor if one reads The General Theory carefully enough. It is a plausible assumption since, if such a relation is upheld, all workers are incentivized to participate. Whenever an economy faces a shortage of effective demand and labor demand contracts, the equilibrium real wage becomes costly because the marginal product of labor remains at a high level. In such a case, excess supply may possibly exist in the labor market, and such unemployment can be deemed involuntary.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Mathematically, this discussion suggests that Keynes regards the labor supply schedule not as a function but as a correspondence. When one defines the labor-supply function, which derived from the second postulate, as
\(L^{s} = \lambda \left( {\frac{w}{p}} \right),\quad \lambda^{\prime} > 0\),
Keynes’s labor-supply feasible set is defined by
\(L^{KS} = \left\{ {L|L \le \lambda \left( {\frac{w}{p}} \right)} \right\}\).
- 2.
There is a serious theoretical problem about whether capital investment is unrelated to savings to the extent that the ultimate owners of a firm are stockholders, and the employer is responsible to them. This problem will be considered in Sect. 1.5.
- 3.
Keynes asserts that
(5) Hence the volume of employment in equilibrium depends on (i) the aggregate supply function, \(\phi\), (ii) the propensity to consume, \(\chi\), and (iii) the volume of investment, \(D_{2}\). This is the essence of the General Theory of Employment.
(6) For every value of N there is a corresponding marginal productivity of labor in the wage-goods industries; and it is this which determines the real wage. (5) is, therefore, subject to the condition that N cannot exceed the value which reduces the real wage to equality with the marginal disutility of labor. This means that not all changes in D are compatible with our temporary assumption that monetary-wages are constant. Thus it will be essential to a full statement of our theory to dispense with this assumption (p.29)
This statement can be taken to mean that the equilibrium of an economy, which The General Theory considers, is confined to an underemployment economy where some workers are involuntary unemployed. However, a full-employment economy, where true inflation is associated, is also analyzed in Book V.
- 4.
The following description is in The General Theory:
Now the assumption that the general level of real wages depends on the money-wage bargains between the employers and the workers in not obviously true. Indeed, it is strange that so little attempt should have been made to prove or to refute it. For it is far from being consistent with the general tenor of the classical theory, which has taught us to believe that prices are governed by marginal prime cost in terms of money and that money-wages largely govern the marginal prime cost. Thus if money-wages change, one would have expected the classical school to argue that prices would change in almost the same proportion, leaving the real wage and the level of employment practically the same as before,… (p.12)
References
Arendt, H. (1951). The origins of totalitarianism. New York: Schocken Books (Reprint, New York: Harcourt Brace Jovanovich, 1973).
Burke, E. (1790). Reflections on the revolution in France, London: J. Dodsley (Reprint, Oxford: Oxford University Press, 2009).
Keynes, J. M. (1936). The general theory of employment, interest and money. London: Macmillan.
Pigou, A. C. (1933). The theory of unemployment. London: Macmillan.
Trevelyan, G. M. (1944). English social history: A survey of six centuries, Chaucer to Queen Victoria (Reprint, London: Book Club Associates, 1973).
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2016 Development Bank of Japan
About this chapter
Cite this chapter
Otaki, M. (2016). Analyzing Book I of The General Theory . In: Keynes’s General Theory Reconsidered in the Context of the Japanese Economy. SpringerBriefs in Economics(). Springer, Tokyo. https://doi.org/10.1007/978-4-431-55915-3_2
Download citation
DOI: https://doi.org/10.1007/978-4-431-55915-3_2
Published:
Publisher Name: Springer, Tokyo
Print ISBN: 978-4-431-55913-9
Online ISBN: 978-4-431-55915-3
eBook Packages: Economics and FinanceEconomics and Finance (R0)