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.

Chapter 2’s not an easy chapter to read, for the same reason much of the GT is difficult to read.  Keynes is trying to develop a way of analyzing the economy in aggregate – the macroeconomy – without the (Keynesian) concepts and tools which we take for granted today.  Much of the difficulty in reading GT comes from Keynes attempts to define those tools – especially in cases where modern Keynesian economics has adopted tools different from those which JMK used.  There’s also the problem that he uses terms which were part of the vocabulary of economics in his day but which we no longer use.  So what do we do with statements to the effect that, one of the four ways by which employment can be increased in the classical model is by:

“an increase in the price of non-wage goods compared with the price of wage-goods, associated with a shift in the expenditure of non-wage-earners from wage-goods to non-wage-goods”

Well, for the moment we leave it aside (but doesn’t it bring to mind golden oldies like “workers spend what they earn and capitalists earn what they spend”?).  We’ll come back to it in a bit.

Keynes starts Chapter 2 by saying that most economic analysis is concerned with the distribution of resources among various uses, and not with the determination of actual, total resource employment.  He acknowledges that there have been discussions of fluctuations in employment (he doesn’t mention it, but in Wealth of Nations  Adam Smith refers to people being thrown out of work in bad years) but argues that the theory of the determination of the aggregate level of employment is seriously underdeveloped.  He cites Pigou as acknowledging, in his Economics of Welfare, that he (Pigou) is ignoring the fact that “some resources are generally unemployed against the will of their the owners” and notes that Pigou argues that this doesn’t affect the thrust of his (Pigou’s) argument.  Keynes generally takes A.C. Pigou as an exemplar of classical economics – a bit unfairly, since Pigou joined with Keynes in signing a letter calling for public works spending to tackle British unemployment.  Pigou was not pleased.