Prosperity and Depression.pdf

Chap. 8Recent Discussions on the Trade CycleThe cumulative nature ofa process ofexpansion and contractionafter it has once started cannot be deduced from Mr. KEYNES'theory. It requires additional assumptions ofa dynamic character,as we find them in various business-cycles theories. Thesedynamic. relationships can, however, be formulated in his terms.Assume, for instance, that the marginal efficiency of capital drops(rises) when income falls (rises) or that liquidity-preference proper(propensity to hoard) rises (falls) when activity contracts (expands).So far, we have detected a number of termino­Voltmtary and logical differences between 1fr. KEYNES' theory andinvoltmtary .the traditional views as represented by, say, Professorunemployment. PIGOU'S IndustrialFItlCtuations, Professor ROBERTSON'Swritings or the synthesis attempted in Part II ofthe first edition of this book, which is reproduced" with slightchanges, in the present edition. In addition, we have suggested(if. pages 209 and 2.18 above) that Mr. KEYNES has made animportant contribution by his insistence on the relationshipbetween" hoarding" and the rate of interest. Apart from this,we .have not as yet discovered any essential differences betweenMr. KEYNEs' theory and that of the other recognised authorities.According to Mr. KEYNES, however, there is a fundamentaldiscrepancy between the two, inasmuch as the " classical " theorycannot conceive at all of an equilibrium with less than fullemployment. "The classical theory is only applicable to the caseof full employment." 1 More precisely, it is involuntary unemploymentwhich is, according to Mr. KEYNES, incompatible withclassical equilibrium; voluntary unemployment may, of course,exist in equiUbrium; that is to say, if some people prefer not towork at the prevailing wage, they are not counted as unemployed;or " an eight-hour day does not constitute unemployment becauseit is not beyond human capacity to work ten hours " (page IS).Involuntary unemployment, which classical theory is accused ofhavwg overlooked, or being unable to explain, is defined as follows:" Men are involuntarilY unemployedif, in the eventofa smallrise in thepriaof wage-goods relativelY to the money-wage [we could also say: in theevent of a fall in real wages], both the aggregate supPlY of labour1 Ge,,,erat Theo'Y'YJ page 16.