The Economics Book

160 DEPRESSIONS AND UNEMPLOYMENT

will not fall by the level required
to remove the unemployment.
In this way the unemployment
is involuntary because workers
are powerless to do anything
about it. There is a commonly
held view that trade unions can
resist the adjustment of wages
to the level required for full
employment through the process
of collective action, so that those
who are unemployed are prevented
from getting work. Keynes placed
this type of unemployment in the
voluntary category, arguing that
workers as a whole are agreeing
openly, or tacitly, not to work
for less than the current wage.
Keynes’ reasoning was different
from that of later economics,
which became dominated by
mathematical modeling. Much of
macroeconomics in the post-war
period was about clarifying what

Keynes said and framing it in terms

of more formal models and

equations. British economist John

Hicks (p.165) formulated Keynesian

ideas in terms of a financial model

known as the ISLM model. After

the war this became the standard

macroeconomic model, and it is

still one of the first things taught

to economics students.

New interpretations

Modern considerations of

Keynes’ work suggest that

what workers are most concerned

with is their wage relative to other

workers. Workers have an idea of

their position in a theoretical

“league table” of pay and will

fiercely fight any wage reductions

that would push them further down

the table. It is interesting to note

that a general increase in the price

level through inflation, which would

also cause a reduction in real wages,

is resisted less strongly because it

affects all workers equally.

Economic theories known as

efficiency wages models (p.302)

ask why firms don’t cut wages to

increase profits and suggest that

firms are reluctant to do so because

a wage cut would demotivate the

existing workers, who would see

their relative position in the league

table undermined. The net effect

of cutting wages would in fact

be a loss in profits because the

benefit of lower wages is more

than offset by the reduction in

productivity that results from

low morale or skilled workers

leaving. In this way workers cannot

choose to price themselves into

work. Related “New Keynesian”

models of wage determination

provide other explanations for

rigid wages (p.303).

President Franklin D. Roosevelt

invested in vast new infrastructure

projects, such as the Hoover Dam

on the Colorado River. Even so, the

government was not pursuing

Keynesian policies.

If by a regularization

of national demand we

prevent... the involuntary

idleness of unemployed

men, we make a real

addition to the

national product.

Sidney Webb

Beatrice Webb