Prosperity and Depression.pdf

Ana!Jsis of TheoriesPart Iin its simple unmodified form. l A closer analysis of this chapterseems to suggest that there is no fundamental difference betweenMr. KEYNES' results and those reached by those more orthodoxwriters (such as Professor PIGOU in his Industrial Fluctuations)who pay attention to possible short-period repercussions of wagereductions. Since there is substantial agreement, except interminology, between Mr. KEYNES' analysis and the one givenin Chapter t 1, § 9, of the present book, only a few points will beraised in this connection.According to Mr. KEYNES, the" accepted explana..Reduction in tion" ofthe consequences ofa reduction ofmoneymoney-wageswages starts from the assumption that aggregateandag.~regate effective demand remains unchanged; then, naturally,deflJand. employment will rise. Mr. KEYNES points out(as was observed in the first edition of dus book 2 )that this assumption assumes away almost·the whole problem. Itmay be legitimate in a rigid equilibrium theory which deliberatelyargues under the simplifying assumption of constant aggregatedemand; but it is certainly illegitimate in business~cycle theory,and it is usually not made there.In. his view, a " reducti9n in money-wages will have no lastingtendency to increase employment except by virtue of its repercussionseither on the propensity to consume for the community as awhole, or on the schedule of marginal efficiencies of capital, or onthe rate ofinterest ". 3 This is true, because the three terms areso defined that any change in output and employment resultingfrom a fall in money-wages must be describable in terms ofone orthe other, or a. combination ofthe three magnitudes mentioned. If1 See, for example, Mr. A. P. Lerner: U Mr. Keynes' C General Theoryof Employment, Interest and Money''', International Labour Review,Vol. 34, 1936. Mr. Lerner there" proves" that prices must fall" injust the same proportion as wages " (pages 441 and 442). It is true thathe qualifies that statement by admitting " that a reduction of money..wages may have all sorts of indirect influences n_.. But this qualification isagain qualified, and the short paragraph devoted to the matter gives avery cursory summary of Mr. Keynes' analysis.2 See Chapter II, § 9, below.• General. Theory, page 262.