The General Theory Chapter 3 (part five of seven parts)

More from Guest Blogger BF

Finally, in part 2 of Ch 3, we get a summary of the Keynesian model and it does sound a lot like the Keynesian Cross model of (older?) intro macro texts.  In his discussion, JMK assumes that money wages are held fixed, but he emphasizes that this is a simplifying assumption and that the essentials of the model hold when wages are flexible.  A bit later on in this section he says that a full statement of his model requires that the assumption of fixed money wages has to be relaxed.  So in JMK’s formulation, the Keynesian model is not, at its core, a fixed money wage model.

One part of the core is familiar: the fundamental psychological law which says that as income goes up, consumption spending goes up but by less than the increase in income.  I.e., the marginal propensity to consume is less than one.

Then we have an argument which seems to link back to JMK’s version of Say’s Law.  If employers in the consumer goods sector were, exogenously, to increase employment, so that aggregate income rose, consumption spending would go up but so too would savings, so that spending on consumer goods would go up by less than the increase in costs incurred by producers in the consumer goods sector and that sector would take a loss on the increased employment.  The slope of the AD curve is less than that of the AS curve and we’ve moved from a point of intersection between the two to a point where D is less than Z.  Presumably in Keynes’ version of a Say’s Law world consumption spending would go up by the same amount as factor costs in the consumer goods sector went up. In the world of the GT, there would be a gap between the increases in consumer expenditure and factor costs, which, if the new level of employment were to be sustainable, would have to be filled by investment spending.  So for a given propensity to consume, equilibrium employment will depend on investment spending and investment spending will depend on the marginal efficiency of capital (another of those terms dropped in here but not defined until later on) and “the complex of rates of interest on loans of various maturities and risks”.  That world of intro and intermediate macro texts in which there is but a single rate of interest is a simplification, not part of JMK’s original formulation.

Depending on the propensity to consume and the inducement to invest, then, any level of employment up to full employment could be an equilibrium level.  Full employment is just a special case of the general model, and there is nothing in the model which will ensure that the actual level of employment will equal the full employment level.  Even setting aside JMK’s version of Say’s Law, the assumption that the observed wage/employment point won’t, except by accident, lie on the labour supply curve, even in the absence of wage stickiness, puts paid to that.

Next in section 2, a bit of housekeeping.

BF