Prosperity and Depression.pdf

AnalYsis of TheoriesPart I'J1;'illing to work for the current money-wage and the aggregate demand for ifat that wage would be greater than the existing volume of emplqyment."1This is a new definition. The incompatibilityFree of involuntary unemployment in this sense withcompetition classical equilibrium has therefore never beenin the labour explicitly denied. Is such a definition implicitin themarket and traditional position? The traditional view isunemplqyment. generally taken to be that, under free competitionin the labour market, unemployment is incompatiblewith equilibrium· because, with free competition, money-wageswill be flexible. Only if money-wages are rigid in the.downwarddirection, if they are prevented from falling either by tradition,by trade-union pressure, or by Government action, can unemploymentexist in equilibrium. This position does not, however,exclude the existence ofinvoluntary unemployment in Mr. KEYNES'sense. Suppose there is unemployment and wages are rigidin the downward direction. Few classical writers will deny thatemployment may and will rise when aggregate demand and pricesare raised by a revival of investment financed by new bank creditor by dishoarding. As there was then previously involuntaryunemployment, its compatibility with· equilibrium is not implicitlydenied by the traditional view.A difference of opinion can and does exist only in respect of theconsequences and desirability of free competition in the labourmarket, which would ensure a complete flexibility of wages.However, the following two propositions would presumably beaccepted both by Mr. KEYNES and by the cla&Sical. school.First, if there is free competition in the labour market, moneywageswill fall continuously, so long 'as there is unemployment.A situation in which wages fall continuously can hardly be calledan equilibrium position. 2 Secondly, in point of fact wages are,1 Geneyal TheOf'y, page IS. Italics in the original. An extensivediscussion of this definition will be found in J. Robinson, Essays·in tkeTheory 01 Employment, London, 1937, Part 1. See also Viner's criticism,Quarterly journal oj Ecofwmics, Vol. SI, 1936, pages 147et seq.• Compare the following statement by Mr. J. E. Meade, U A SimplifiedModel of Mr. Keynes' System " (Review 01 Economic Studies, Vol. IV,page 99) : U If we suppose that the money-wage rate would fall so long