Money Wages are Completely Flexible in Chapters 19, 20 and 21 of the General Theory
22 Pages Posted: 27 Nov 2017
Date Written: November 22, 2017
Chapter 19 of the General Theory gives Keynes’s literary presentation of why perfectly flexible money wages can’t eliminate involuntary unemployment. Chapters 20 and 21 provide the mathematical analysis showing why perfectly flexible money wages can’t eliminate involuntary unemployment. One of the reasons Keynes divides through by w in his D-Z-Y model (Dw, Zw, Yw) was because changes in w, be they instantaneous, slow, sticky,etc., merely shift the Aggregate Supply Curve (ASC), a locus of all the expected Z-D equilibriums that satisfy the necessary and sufficient first and second order conditions for an expected profit maximum. The ASC is a locus of multiple equilibria. Only one of this set of all expected multiple equilibria will be consistent with market clearing in the Labor Market. All other D-Z equilibriums will result in a disequilibrium occurring in the labor market which can’t be impacted because all such points on the ASC are relative optima that are profit maximizing for the entrepreneur with respect to his profit expectations in a model of purely competitive firms. The ASC is Keynes’s primary mathematical result in Footnote 2 on pp.55-56 of the General Theory,a result which Keynes duplicated in far more greater detail on pp.283-284 of the General Theory and in footnotes 1 and 2 on p.283 of the General Theory.It is the failure to recognize that chapter 3 of the General Theory is not the central chapter because the central chapters are 20 and 21. Further, Keynes is not a Marshallian in these chapters, but a Pigouvian.
Therefore, Keynes’s analysis shows that it is the expected real wage that equals the marginal productivity of labor and not the actual real wage. The neoclassical model considers the existence of only one equilibrium in a perfectly competitive model, as done by Modigliani in 1944, where the optimality result occurs where the actual real wage equals the marginal productivity of labor.
Once the mathematics of Keynes’s construction of the ASC is mastered, then it is obvious that money wage changes can have no impact until the full employment level of output is reached on the boundary of the Production Possibilities curve.
Keywords: chapters 20 and 21, Aggregate Supply Curve, D Z Y money wages
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation