The General Theory of Employment, Interest, and Money summary

In his critique of traditional economic theory, Keynes dissected a couple of core assumptions of classical economics. Let’s dive deeper into his arguments:

First, classical economists argue that a worker’s wage reflects the value they contribute to a business. They believe that if a company decides not to employ someone, the company’s loss is equal to the wage that the worker would have been paid. In other words, they think that a worker’s contribution to a company’s value is directly tied to their wage.

The second assumption of classical economics is that a worker’s wage is the lowest amount at which they’d be willing to work. This is often seen as an equilibrium point where the demand for labor meets the supply.

But Keynes took issue with these assumptions because he saw that they failed to account for a significant real-world phenomenon: involuntary unemployment.

Keynes pointed out that there are situations where workers are both willing and able to work at the current wage, but they’re unable to find employment. Traditional economists typically argue that this is actually a form of voluntary unemployment because they assume that workers are simply refusing to work for lower wages. They believe that high unemployment during economic downturns is due to workers’ refusal to accept wage cuts.

Keynes challenged this view, arguing that the unemployment rate can fluctuate significantly without any corresponding changes in workers’ wage demands or productivity. This indicates that there are other factors at play influencing the unemployment rate, factors that the classical theory doesn’t fully consider.

He believed that the classical theory’s assumptions didn’t accurately reflect the complexities of the real world, particularly in relation to involuntary unemployment and workers’ attitudes toward wages. His critique sought to expose these inadequacies and offer a more nuanced understanding of employment and wages.