P7: GT02 Keynesian Unemployment
from Asad Zaman
This 7th post in a series about re-reading Keynes, starts the discussion of Chapter 2 of General Theory, which deals with the Classical (and neoclassical) Postulates characterizing the Labor market. The astonishing fact is that Keynes central arguments regarding how the labor market can fail to be at equilibrium, despite flexible wages, were never understood. As a consequence, the theory of the labor market is taught today exactly as it was prior to Keynes, and completely disregards Keynesian objections, and the Keynesian alternative. This post makes a start on Chapter 2, and the analysis will be continued in later posts.
In this chapter, Keynes formulates and rebuts the (neo)-classical theory of the labor market and presents an alternative theory of employment. This chapter was apparently never understood by economists, who mis-interpreted it as stating that unemployment arises due to price rigidities. In fact, Keynes held this position earlier, but renounces it explicitly in this chapter. His theory of employment states that the real wage is an “emergent” phenomenon. That is micro level decisions and actions of laborers and firms are based on nominal wages, but the complex economic system itself determines the general level of prices which is not in control of individual agents. So the real wage is out of reach of individual actors, and even though all parties may try to reduce real wages, they may fail to do so, because prices may respond in un-anticipated ways.
Keynes starts out be stating the classical postulates for the labor market, which continue to be the basis of modern labor economics. read more