viner (1936) - keynes on unemployment

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Mr. Keynes on the Causes of Unemployment The General Theory of Employment Interest and Money by John Maynard Keynes Review by: Jacob Viner The Quarterly Journal of Economics, Vol. 51, No. 1 (Nov., 1936), pp. 147-167 Published by: Oxford University Press Stable URL: . Accessed: 26/01/2012 16:46Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]

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MR. KEYNES ON THE CAUSES OF UNEMPLOYMENT' The indebtednessof economiststo Mr. Keynes has been greatlyincreasedby this latest additionto his seriesof brilliant,original, and provocativebooks,whose contribution to our enlightenment prove, I am sure, to have been even will greaterin the long than in the shortrun. This book deals with almost everything, but the causes of and the future prospects of unemployment, cyclical and secular, are its centraltheme. It bringsmuch new light,but its display of dialecticalskillis so overwhelming that it will have probably morepersuasivepowerthan it deserves,and a concentration on the pointswhereI thinkI can detectdefectsin the argument,tho it would be unfairif presentedas an appraisal of the meritsof the book as a whole,may be moreusefulthan would a catalogue-which would have to be long to be complete- of its pointsof outstanding intellectual achievement. Written tho it is by a stylistof the first order,the book is not easy to read, to master,or to appraise. An extremely wide range of problems, none of themsimpleones, are dealt with in an unnecessarily small numberof pages. Had the book been made longer,the timerequiredforreadingit with a fairdegreeof understanding would have been shorter, for the argument oftenproceedsat breakneck speed and repeated rereadings necessary are beforeit can be grasped. The book, moreover, breaks with traditionalmodes of approach to its problemsat a numberof points- at the greatestpossible numberof points,one suspects- and no old termforan old concept is used when a new one can be coined, and if old termsare used new meaningsare generally assignedto them. The definitions provided,moreover, are sometimesof unbelievable complexity. The old-fashionedeconomist must, therefore, struggle onlywithnew ideas and new methods not1. John Maynard Keynes, The General Theory of Employment Interest and Money,Macmillanand Co., London,1936.147



of manipulating them,but also with a new language. There is ample reward,however,for the expenditureof time and of for attention necessary even partialmastery the argument.1. " INVOLUNTARY" UNEMPLOYMENT

Mr. Keynes claims that the "classical"2 economists recognized the possibility only of "frictional"and of "voluntary" unemployment, and that a vitally important chapter of about a thirdclass of economictheoryremainsto be written unemployment, whichtherewas no place in the "classical" for scheme of things, namely, "involuntary" unemployment. The concept of "frictional" unemployment relates to the inevitableloss of time between jobs, and presentsno diffias culties. "Voluntary" unemployment defined the unemis ployment"due to the refusalor inabilityof a unit of labor ... to accept a reward corresponding the value of the to product attributableto its marginal productivity,"but is used in such manneras to requirethe additionto this definition of the provisothat the moneywage offered mustnot be below what the laborerregardsas a properminimum rate of money wages. If laborersrefuseavailable employment a at money rate below this minimum,or if employed laborers refuseto permita prevailingmoneyrate to be loweredand unemployment resultsforthemselves forothersfromthis or refusal, Keynes would apparentlyregardit as "involuntary" unemployment, deny its possibilityor probability. He but defines"involuntary"unemployment follows:"Men are as involuntarily unemployed in the event of a small rise in if, the price of wage-goodsrelativelyto the moneywage, both the aggregatesupplyof labor willingto workforthe current money-wage and the aggregatedemand forit at that wage would be greaterthan the existingvolume of employment." (p. 15). What he seems to mean by this is that any unemploymentwhich would disappear if real wages were to be reducedby a rise in the prices of wage-goods,moneywages remaining same or rising less proportion, not the in but falling,2. Used by him to mean the later economists, such as J. S. Mill, Marshall, Edgeworth, Pigou, who in the main were adherents of the Ricardian tradition; a usage which I shall followhere.



would be involuntary. It is with "involuntary"unemploythat Keynes' its mentso understood, causes and its remedies, -and almost solely is analysisof unemployment primarily concerned. by In Keynes' classification unemployment its causes, of of due to downward-rigidity money-wages, unemployment which for the "classical" economistswas the chieftype of cyclical unemploymentand the only important type of no therefore finds place. unemployment, secularor persistent As willbe seen later,it is excludedon the groundthat resistance to reductionsin money wage-ratesgenerallydoes not and is, if involve a reductionin the volume of employment ratherthan the reverse. anything, favorableto employment The omissionchargedagainst the "classical" economists is of theirfailure notethe lesserresistance labor to reductions to in in real wages ifunassociatedwithreductions moneywages per se, and theirfailureto recognizethe existenceof a large is for volumeofunemployment whichthe former an available but not the latter. Keynes' reasonand practicableremedy, ing points obviously to the superiorityof inflationary reductions. In overmoney-wage remedies unemployment for a worldorganizedin accordancewith Keynes' specifications pressand therewouldbe a constantrace betweenthe printing the businessagents of the trade unions,with the problemof presscouldmainlargelysolvediftheprinting unemployment tain a constant lead and if only volume of employment, irrespective quality, is consideredimportant. of The only clash here between Keynes' position and the orthodoxone is in his denial that reductionof moneywage rates is a remedyfor unemployment.Keynes even follows the classical doctrine too closely when he concedes that "with a given organization, equipment and technique,real wages and the volume of output (and hence of employment) are uniquely correlated,so that, in general,an increase in of can employment onlyoccurto theaccompaniment a decline in the rate of real wages" (p. 17). This conclusion results fromtoo unqualifiedan application of law-of-diminishingfor returns analysis,and needs to be modified cyclicalunem-



ployment,as well as for the possibilitythat the prices of wage-goodsand of other goods may have divergentmovements. If a plant geared to workat say 80 per cent of rated capacity is being operated at say only 30 per cent,both the per capita and themarginaloutputoflabor may wellbe lower at the low rate of operationsthan at the higherrate,the law of diminishing returns notwithstanding. There is the further emDirical considerationthat if employersoperate in their wage policy in accordance with marginalcost analysis, it is done only imperfectly and unconsciously, and the level of wages they can be persuaded to establish is strongly influenced by the profitability theiroperationsas a whole,and of not solely if at all - by calculationsof the marginalcontributions labor to output. of Keynes uses the term "full employment"to signifythe absence of any involuntaryunemployment(p. 16). He describesit also as the conditionwhichwould prevail "when outputhas risento a level at whichthe marginalreturn from a representative unit of the factorsof productionhas fallen to the minimumfigureat which a quantity of the factors sufficient producethisoutputis available" (p. 303). There to are impliedhereseveralquestionablepropositions.The concept of diminishing marginalproductivity generallyused is in economicsin a partial differential sense to indicate the diminishing increments output which would result when of someparticular factor groupoffactors or was beingincreased, the remainder the workingcombinationbeing held conof stant. If all the factorsare being increasedsimultaneously it and in uniform proportions, requiressome such assumption as that of the general prevalence of externaltechnical diseconomiesfromincreasedproductionif it is to be accepted must that outputand return compoundunitofthefactors per be negatively correlated. There is also implied here the assumptionthat any increase in real wages (money wages remaining constant,or rising)will resultin an increasein the amount of labor available. If, as widely-held opinion since the seventeenthcenturyhas maintained,and as Professor for Paul Douglas's recentinvestigations urban labor in the



the supply schedule of United States appear to confirm, labor with respectto real wages is, for part of its range at could least, negativelyinclined,the volume of employment conceivablybe much greaterwhen therewas "involuntary" and than whentherewas "full" employment, unemployment mightbe met at an employment of Keynes' conditions "full" indefinite numberof levels of employment. rarely occurs, accordingto Keynes, "Full" e