Chapter 2c

Involuntary Employment Icon

January 29, 2020

The struggle over money-wages is often believed to determine the general level of real wages.

Workers have an imperfect mobility. Wages do not tend to an exact equality of net advantage in different occupations. Anyone accepts lower money-wages relative to others, will get lower real wages. This makes workers resist it.

On the other hand, it would be impracticable to resist every reduction of real wages, due to inflation. Workers do not resist this unless the inflation is extreme.

A resistance against lower money-wages does affect an increase in aggregate employment as a resistance against lower real wages does.

In other words, the struggle on money-wages primarily affects the distribution of the aggregate real wage between different labour-groups. It not its average amount per unit of employment, which depends, as we shall see, on a different set of forces.

The effect of combination on the part of a group of workers is to protect their relative real wage. The general level of real wages depends on the other forces of the economic system.

It is fortunate that workers are instinctively more reasonable economists than the classical school because:

  • workers resist reductions of money-wages
  • workers do not resist reductions of real wages from increases in aggregate employment

Every trade union will resist a cut in money-wages. But no trade union would go on strike for every rise in the cost of living*. They thus do not create an obstacle to any increase in aggregate employment which is attributed to them by the classical school.

*Superphysics Note= This is actually the weakness of working class that is subtly exploited by the profit and rent earning class

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‘Involuntary’ unemployment does not mean the mere existence of an unexhausted capacity to work. ‘Frictional’ unemployment is not ‘involuntary’ unemployment.

‘Involuntary’ unemployment is when inflation causes both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.

This means that the second postulate means:

  • ‘full’ employment, and
  • an absence of ‘involuntary’ unemployment.

Therefore, apparent unemployment is the result of temporary loss of:

  • work of the ‘between jobs’ type or
  • intermittent demand for highly specialised resources or
  • the employment of free labour from the effect of a trade union ‘closed shop’

Thus Classical economists concluded that apparent unemployment is caused by a refusal by the unemployed to accept a reward* which corresponds to their marginal productivity.

*Superphysics Note= In a depression, real wages become slave wages due to the reduced total economic activity.

A classical economist may sympathise with workers refusing to accept lower money-wages. But such a condition is temporary. Scientific integrity forces him to declare that this refusal is the cause of the problem.

If the classical theory is only applicable to the case of full employment, it is wrong to apply it to the problems of involuntary unemploymen if there be such a thing.

The classical theorists resemble Euclidean geometers in a non-Euclidean world. They discover parallel lines often meet. They rebuke the lines for not keeping straight. But the real remedy is to throw away* the axiom of parallels and to work out a non-Euclidean geometry.

*Superphysics Note= Here Keynes blames Classical theory for staying with non-profit maximizing, non-monetary paradigm. He urges it to go with the current corrupted reality.

Something similar is required today in economics. We need to throw over the second postulate of the classical doctrine and to work out a system where involuntary unemployment is possible.

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We keep the first Classical postulate

Real wages and the volume of output (and hence of employment) are uniquely correlated.

An increase in employment can only occur to the accompaniment of a decline in the rate of real wages.

The real wage earned by a unit of labour has a unique inverse correlation with the volume of employment.

  • If employment increases in a short time, the reward per unit of labour in terms of wage-goods declines and profits increase.[8]

This is simply the obverse of the familiar proposition that industry is normally working subject to decreasing returns in the short period during which equipment etc. is assumed to be constant; so that the marginal product in the wage-good industries (which governs real wages) necessarily diminishes as employment is increased.

As long as this proposition holds, any means of increasing employment must also reduce the marginal product and the wages measured in terms of this product.

But we deleted the second postulate which says that a decline in employment is due to workers demanding more wage-goods.

Reducing money-wages is not necessarily a remedy for unemployment. The theory of wages in relation to employment is fully explained in Chapter 19 and its Appendix.

From the time of Say and Ricardo, the classical economists have taught that supply creates its own demand. All the costs of production must necessarily be spent in the aggregate on buying the product.

J. S. Mill’s Principles of Political Economy explains this doctrine:

The means of payment for commodities is simply commodities. Each person pays for the productions of other people with his own. All sellers are inevitably buyers.

If we could suddenly double the country’s productivity, we would double the supply of commodities in every market. We would also double the purchasing power. Everybody would bring a double demand as well as supply. Everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange. [Principles of Political Economy, Book III, Chap. 14]

Any individual act of abstaining from consumption causes the labour and commodities to be diverted from supplying consumption into the investment in the production of capital wealth.

Marshall’s Pure Theory of Domestic Values[9] illustrates the traditional approach:

The whole of a man’s income is expended in the purchase of services and of commodities. A man spends some portion of his income and saves another.

But it is a familiar economic axiom that a man purchases labour and commodities with that portion of his income which he saves just as much as he does with that he is said to spend. He spends when he seeks to obtain present enjoyment from the services and commodities which he purchases. He saves when he causes the labour and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.

It is not easy to compare Marshall’s later work[10] with Edgeworth or Pigou.

The doctrine is never stated today in this crude form. Nevertheless it still underlies the whole classical theory, which would collapse without it.

Contemporary economists accept Mill’s conclusions which require Mill’s doctrine as their premise.

Pigou believes:

  • that money makes no real difference except frictionally and
  • that the theory of production and employment can be worked out (like Mill’s) as being based on ‘real’ exchanges with money introduced perfunctorily in a later chapter, is the modern version of the classical tradition.

Contemporary thought is still deeply steeped in the notion that if people do not spend their money in one way they will spend it in another.[11] Post-war economists seldom succeed in maintaining this standpoint consistently*.

*Superphysics Note= This is due to growth in the doctrine of profit maximization which did not exist during the time of Mill or Ricardo

The Classical conclusion is that the costs of output are always covered in the aggregate by the sale-proceeds resulting from demand.

Another Classical idea is that income derived in the aggregate by all the elements in society concerned in a productive activity necessarily has a value exactly equal to the value of the output.

The first conclusion has great plausibility because it is difficult to distinguish it from the latter idea.

Similarly, it is natural to suppose that a man who enriches himself, without taking anything from anyone else, must also enrich the community as a whole. In this way, an act of individual saving inevitably leads to a parallel act of investment*.

*Superphysics Note= Yes, because there is no profit maximization to hinder investments at low profits

The assumptions of classical theory are:

  1. The real wage is equal to the marginal disutility of the existing employment [workers not working]

  2. There is no such thing as involuntary unemployment

  3. Supply creates its own demand in the sense that the aggregate demand price is equal to the aggregate supply price for all levels of output and employment

These stand and fall together*.

*Superphysics Note= Yes they fall if you convert real value (based on goods) into nominal value (based on cash and money). That would then lead to a gambling or speculative economy which is totally arbitrary.

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