Blogging the General Theory: Chapter 2, post 4.

 All of that is JMK’s take on the classical theory of the labour market.  Next (we’re up to part II of Ch. 2) we have his comments on it.  And his first comment is that, in the real world of 1936, there were more people willing to work at going wages than there were jobs for them.  The classical school, he argues, explain this by saying that the problem is that real wages are too high, and labour won’t let them fall to the equilibrium level, making the unemployment voluntary, not involuntary.  JMK obviously isn’t likely to agree with this, and he makes two observations.

Blogging the General Theory: Chapter 2, post 3.

Remember that bit from a couple of posts ago about wage-goods and non-wage-goods?  This is where it shows up in the GT: as one of a list of four ways employment can be increased in the classical model, as JMK sees it.  

The first of the four is a improvement in labour market institutions, which reduces frictional unemployment.  No problems there.

The second is a reduction in the disutility of labour and a downward (or rightward) shift of the labour supply curve giving a drop in the supply price of labour.  (Remember, this is JMK on the classical model).

Blogging the General Theory: Chapter 2, post 2.

So what does Keynes object to in classical theory?  He starts with the classical theory of the labour market.  This, he says, is based on two fundamental postulates.  The first is that the wage is equal to the marginal product of labour.  He defines this as the value which would be lost if employment were to be reduced by one unit, and from his terminology he seems to be referring to the nominal wage.  On the demand for labour curve front, JMK is pretty classical – we seem here to be looking at the thing we would call the value of the marginal product, meaning, in a competitive economy (which JMK for the most part assumes) price times the marginal physical product curve of labour.  No problems here – it’s the second postulate which JMK objects to.

Blogging the General Theory: Chapter 2, post 1.

Chapter 2 is more substantive than Chapter 1, so we’ll subdivide it into several posts.  It’s one of the most important chapters in the GT, since it’s here that Keynes sets out what he sees as the key postulates of Classical Economics (we’ll stick to his terminology, debatable though it is) and lays out his disagreements with those postulates.  To understand where he’s going we’ve got to have a reasonable understanding of his starting point.

Blogging Keynes’ General Theory: Chapter 1

It’s really unnecessary to say that there’s been a revival of interest in John Maynard Keynes' General Theory of Employment, Interest and Money in recent days.  The trouble is that the level of public discourse on Keynes has basically been something along the lines of “Keynes wrote about bad times, we’re in bad times, so Keynes’ theories must be right”.  The revived Keynesianism often seems to amount to no more than a blanket call for government spending, in many cases a call made by people who always seem to be able to find some reason or other for governments to spend more.  In bad times it’s to pull us out of recession, in good times it’s to stimulate growth and ensure social justice (especially if accompanied by taxes on dis-favoured groups).  In any event, this seems like a good time to take a look at what Keynes actually said in the General Theory, if only because there seems to be a certain disconnect between what some people think he said and what he actually said.