The General Theory Chapter 4 (part two of three parts)

Guest Blogger BF continues with chapter three

Before talking about the aggregate measures which Keynes is willing to use we need to make one thing clear – he’s not dismissing the importance of capital, of depreciation, of vintages and so on at the level of the firm – these are things individual businessmen have to take account of in their ordinary daily activities and the way they deal with issues arising from them at the firm level obviously plays a key role in how the economy as a whole – the macro-economy – evolves.  Keynes’ concern here is with whether there is any sensible way to define and measure capital and real output in the aggregate.  If not, then there’s no sense building an analytical framework around those concepts.

So what is measurable in the aggregate?  Money income for one, since all units of money are alike and therefore they can be added up in a sensible manner.  The fact that JMK doesn’t buy into the idea of measures of the general price level makes comparisons over time (not to mention place) tricky, but we’re working in the short run here.  The other measurable aggregate, interestingly enough, is labour.

Keynes is aware that there are different types of labour and that different workers will have different skills, but he (like Adam Smith) reckons that the labour market tells us all we need to know about that.  He assumes, that is, that the wages of different types of labour reflect the differences in productivity, or efficiency, among those workers.  Differences in market determined wages are accurate measures of differences in, say, labour skill.

Given that a worker who is twice as skillful will earn twice the wage a less skillful worker does, JMK can define wage-units and labour-units.  In essence, take a basic type of labour as our unit of labour for purposes of measuring employment.  The wage of that type of labour is our wage-unit.  Then find the total wage bill (total expenditure on labour) and divide it by the wage-unit and you’ve got the number of labour-units employed (N).  There will be more labour-units employed than there are bodies employed, and when an unemployed high skill worker finally finds a job the number of labour-units employed will go up by more than the number of people employed has gone up (i.e. N will go up by more than 1) but none of that raises fundamental problems like the ones JMK sees in measuring aggregate real output or capital.  And, if you think about it, when we count the number of people employed in modern macro, we’re ignoring differences in human capital, letting all of that be reflected in the notion of the average wage.  We assume that every worker hired, regardless of their skill level, raises the wage bill by an average of the wage of lower and higher skilled workers.  So we can probably live with JMK’s approach to tackling the same issue.

Incidentally, remember what we said above about the two Cambridges debating whether the quantity of capital could be measured in any meaningful sense independently of its price (or whether a change in the prices of different capital goods would change our measure of the aggregate quantity of capital even if the number of machines hasn’t changed)?  Same with JMK’s measure of labour.  There were never any really heated Cambridge labour theory debates, though.  Basic labour-units are easier to accept than basic capital-units would be.

BF