Review: Mr. Keynes on the Causes of Unemployment Author(s): Jacob Viner Source: The Quarterly Journal of Economics, Vol. 51, No. 1 (Nov., 1936), pp. 147-167 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/1882505 . Accessed: 12/06/2011 11:43 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=oup. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to The Quarterly Journal of Economics. http://www.jstor.org MR. KEYNES ON THE CAUSES OF UNEMPLOYMENT' The indebtednessof economiststo Mr. Keynes has been greatlyincreased by this latest addition to his series of bril- liant, original,and provocativebooks, whose contributionto our enlightenmentwill prove, I am sure, to have been even greaterin the long than in the short run. This book deals with almost everything,but the causes of and the future prospects of unemployment,cyclical and secular, are its centraltheme. It bringsmuch new light,but its display of dialecticalskill is so overwhelmingthat it will have probably morepersuasive power than it deserves,and a concentration on the pointswhere I thinkI can detect defectsin the argu- ment,tho it would be unfairif presentedas an appraisal of the meritsof the book as a whole,may be more usefulthan would a catalogue -which would have to be long to be complete- of its points of outstandingintellectual achieve- ment. Writtentho it is by a stylistof the firstorder, the book is not easy to read, to master, or to appraise. An extremely wide range of problems,none of them simple ones, are dealt with in an unnecessarilysmall number of pages. Had the book been made longer,the time requiredfor reading it with a fair degree of understandingwould have been shorter,for the argumentoften proceeds at breakneckspeed and repeated rereadingsare necessarybefore it can be grasped. The book, moreover,breaks with traditionalmodes of approach to its problemsat a numberof points- at the greatestpossible numberof points,one suspects- and no old termfor an old concept is used when a new one can be coined, and if old termsare used new meaningsare generallyassigned to them. The definitionsprovided, moreover, are sometimesof unbe- lievable complexity. The old-fashionedeconomist must, therefore,struggle not onlywith new ideas and new methods 1. John Maynard Keynes, The General Theory of Employment Interestand Money,Macmillan and Co., London,1936. 147 148 QUARTERLY JOURNAL OF ECONOMICS of manipulatingthem, but also with a new language. There is ample reward,however, for the expenditureof time and attentionnecessary for even partialmastery of the argument. 1. " INVOLUNTARY" UNEMPLOYMENT Mr. Keynes claims that the "classical"2 economistsrecog- nized the possibilityonly of "frictional"and of "voluntary" unemployment,and that a vitally important chapter of economictheory remains to be writtenabout a thirdclass of unemployment,for which there was no place in the "classical" scheme of things, namely, "involuntary" unemployment. The concept of "frictional" unemploymentrelates to the inevitable loss of time between jobs, and presentsno diffi- culties. "Voluntary" unemploymentis definedas the unem- ployment"due to the refusalor inabilityof a unit of labor ... to accept a reward correspondingto the value of the product attributableto its marginal productivity,"but is used in such manneras to requirethe additionto this defini- tion of the provisothat the moneywage offeredmust not be below what the laborerregards as a properminimum rate of moneywages. If laborersrefuse available employmentat a money rate below this minimum,or if employed laborers refuseto permita prevailingmoney rate to be loweredand unemploymentresults for themselves or forothers from this refusal,Keynes would apparentlyregard it as "involuntary" unemployment,but deny its possibilityor probability. He defines"involuntary" unemployment as follows:"Men are involuntarilyunemployed if, in the event of a small rise in the price of wage-goodsrelatively to the moneywage, both the aggregatesupply of labor willingto workfor the current money-wageand the aggregatedemand for it at that wage would be greaterthan the existingvolume of employment." (p. 15). What he seems to mean by this is that any unem- ploymentwhich would disappear if real wages were to be reducedby a rise in the prices of wage-goods,money wages remainingthe same or risingin less proportion,but not falling, 2. Used by him to mean the later economists, such as J. S. Mill, Marshall, Edgeworth, Pigou, who in the main were adherents of the Ricardian tradition; a usage which I shall followhere. CAUSES OF UNEMPLOYMENT 149 would be involuntary. It is with "involuntary"unemploy- mentso understood,its causes and its remedies,that Keynes' analysisof unemploymentis primarily-and almost solely- concerned. In Keynes' classificationof unemploymentby its causes, unemploymentdue to downward-rigidityof money-wages, which for the "classical" economistswas the chief type of cyclical unemploymentand the only important type of secular or persistentunemployment, therefore finds no place. As will be seen later,it is excluded on the groundthat resist- ance to reductionsin money wage-ratesgenerally does not involve a reductionin the volume of employmentand is, if anything,favorable to employmentrather than the reverse. The omissioncharged against the "classical" economists is theirfailure to note the lesserresistance of labor to reductions in real wages if unassociatedwith reductions in moneywages per se, and theirfailure to recognizethe existenceof a large volumeof unemployment for which the formeris an available and practicableremedy, but not the latter. Keynes' reason- ing points obviously to the superiorityof inflationary remediesfor unemployment over money-wagereductions. In a world organizedin accordance with Keynes' specifications therewould be a constantrace betweenthe printingpress and the businessagents of the trade unions,with the problemof unemploymentlargely solved ifthe printingpress could main- tain a constant lead and if only volume of employment, irrespectiveof quality, is consideredimportant. The only clash here between Keynes' position and the orthodoxone is in his denial that reductionof money wage rates is a remedyfor unemployment.Keynes even follows the classical doctrine too closely when he concedes that "with a given organization,equipment and technique,real wages and the volume of output (and hence of employment) are uniquely correlated,so that, in general, an increase in employmentcan onlyoccur to the accompanimentof a decline in the rate of real wages" (p. 17). This conclusion results fromtoo unqualifiedan application of law-of-diminishing- returnsanalysis, and needs to be modifiedfor cyclical unem- 150 QUARTERLY JOURNAL OF ECONOMICS ployment,as well as for the possibilitythat the prices of wage-goodsand of other goods may have divergentmove- ments. If a plant geared to workat say 80 per cent of rated capacity is being operated at say only 30 per cent, both the per capita and the marginaloutput of labor may well be lower at the low rate of operationsthan at the higherrate, the law of diminishingreturns notwithstanding. There is the further emDirical considerationthat if employersoperate in their wage policy in accordance with marginalcost analysis, it is done only imperfectlyand unconsciously,and the level of wages they can be persuaded to establish is stronglyinflu- enced by the profitabilityof theiroperations as a whole,and not solely if at all - by calculationsof the marginalcon- tributionsof labor to output. Keynes uses the term "full employment"to signifythe absence of any involuntary unemployment(p. 16). He describesit also as the conditionwhich would prevail "when output has risento a level at whichthe marginalreturn from a representativeunit of the factorsof productionhas fallen to the minimumfigure at which a quantity of the factors sufficientto producethis output is available" (p. 303). There are impliedhere several questionablepropositions. The con- cept of diminishingmarginal productivity is generallyused in economics in a partial differentialsense to indicate the diminishingincrements of output which would result when some particularfactor or groupof factors was beingincreased, the remainderof the workingcombination being held con- stant. If all the factorsare being increased simultaneously and in uniformproportions, it requiressome such assumption as that of the general prevalence of external technical dis- economiesfrom increased