159
going wage. Classical economists
believed that markets were flexible
enough to adjust and bring down
real wages. But Keynes suggested
that money wages might be
“sticky” (p.303) and would not
adjust: involuntary unemployment
would persist. Keynes argued that
workers were unable to price
themselves back into work by
accepting lower wages. He pointed
out that after a collapse in demand,
such as that seen in the Great
Depression, firms might be willing
to employ more workers at lower
real wages, but in reality they
cannot. This is because the
demand for output is constrained
by a lack of demand in the whole
economy for the goods they make.
Workers want to supply more, and
firms want to make more because
otherwise factories and machinery
lie idle. A lack of demand has
trapped workers and firms into
a vicious cycle of unemployment
and underproduction.The government’s role
Keynes saw that the solution
to the problem of involuntary
unemployment lay outside of the
control of both the workers and
the firms. He claimed that the
answer was for governments
to spend more in the economy
so that the overall demand for
products would rise. This would
encourage firms to take on more
workers, and as prices rose, real
wages would fall, returning the
economy to full employment. To
Keynes it did not matter how the
state spent more. He famously
said that “the treasury could
fill old bottles with banknotes and
bury them... and leave it to private
enterprise on well tried principlesof laissez-faire to dig the notes up
again.” As long as the government
injected demand into the economy,
the whole system would start
to recover.Real wages
The General Theory is not easy to
understand—even Keynes said he
found it “complex, ill-organized,
and sometimes obscure”—and
there is still considerable debate
about exactly what Keynes meant,
particularly by the difference
between involuntary and voluntary
unemployment. One explanation
for high unemployment being
involuntary is based on the idea
that a firm’s demand for labor
is determined by the real wage
that firms have to pay. Workers and
firms can only negotiate what the
money wage is for that job or that
industry—they have no control
over the price level in the wider,
general economy. In fact lower
wages will generally reduce both
the cost of production and
therefore the prices of goods as
well, meaning the real wage ❯❯WAR AND DEPRESSIONS
Men seek work in a Chicago job
agency in 1931. By 1933, more than 10
million Americans had lost their jobs.
The state responded with a stimulus
package named The New Deal.
GermanyBritainFrance1939
YEARUS1934192919241919250025025025025CanadaUNEMPLOYMENT PERCENTAGEThe unemployment rate in several
countries between 1919 and 1939 is
shown here. Most economies recovered
in the 1920s only to suffer soaring
unemployment with the onset of the
Great Depression in 1930.