The Fallacy of Wage Cuts and Keynes's Involuntary Unemployment

Abstract

“the analysis I shall like to try to outline is not merely my own; it due to a young English economist, Mr. R. F. Kahn. I should like to put his point very shortly.”

–John Maynard Keynes (1931, p. 368)

“In this book even more perhaps than writing my Treatise on Money, I have depended on the constant advice and constructive criticism of Mr. R. F. Kahn. There is a great deal in this book that would not have taken the shape it has except at his suggestion.”

–John Maynard Keynes (1973a, p. 23)

“…we must record Keynes' acknowledgments of indebtedness… especially to Mr. R. F. Kahn, whose share in this historic achievement [the General Theory] cannot have fallen very far short of co-authorship.”

–John Schumpeter (1966, p. 1172)

Acknowledgments

I would like to thank N.E. “Gene” Savin, David Laidler, George Neumann, Charles Whiteman, and two anonymous referees. Without their many comments, suggestions, criticisms, and encouragement, this work would never have been completed. I would also like to thank the librarians at the Cambridge University Archives for their help. Mistakes are my own.

Notes

¹According to Donald Moggridge, Keynes's biographer and the editor of The Collected Writings of John Maynard Keynes, Keynes knew of “Kahn's formulation of the multiplier” by September 21, 1930 (1973a, p. 177).

²The exact timing is not clear. Kahn began working on the multiplier in August. Several letters, dated September 17 and 19, 1930, (L/K 31-4) show that Kahn sent Keynes “the first portion of my screed.” It is not clear that it was a draft of the multiplier article, though this seems likely. Certainly, Keynes had a copy of a rough draft of Kahn's article by September 21.

³Skidelsky (1995, pp. 65–66) claims that Keynes “did not make sufficiently clear” that this depended on having an open economy. I believe this to be incorrect, though Keynes admits that an open economy makes his case easier (see especially Keynes 1971a, p. 261).

⁴I am deeply indebted to an anonymous referee for referring me to Barens's paper, as its focus on the banana parable is very similar to mine. The primary difference lies in the importance we give to Kahn's work and the idea that the marginal propensity to consume is less than one.

⁵The draft has never been published, however copies are available through the Cambridge University Archives, Keynes Papers, EA/4.

⁶Examination of the role of the Circus in the evolution of Keynes's thought hardly begins with this paper. For more comprehensive first-person accounts of the Circus, see Richard Kahn (1984) and Austin Robinson (1946, 1964, 1977, 1994). For an interesting summary, see Aslanbeigui and Oakes (2002) and Marcuzzo (2002a, 2002b, 2002c).

⁷Patinkin has opposed Meade's and Austin Robinson's assertion. Patinkin claims that, even “though in retrospect we see that the theory of the multiplier can be formulated in a way which is logically equivalent to the theory of effective demand, I doubt very much if this equivalence was seen by the actors in our drama by 1931” (Patinkin 1979, p. 71). I take the view that the participants would know more than he. Patinkin has repeatedly discounted the role of the Circus in the development of Keynes's thought. On the other end of the spectrum lie papers such as this one, and others by Harcourt (1994) and Marcuzzo (2002a, 2002b, 2002c). See also the exchange between Patinkin (1994) and Dimand (1994).

⁸This assertion is not uncontroversial. I am indebted to David Laidler for pointing out to me that the concept of effective demand shows up in Hawtrey's book (1913, pp. 4, 78, 224). This does not, however, diminish the thesis of the present paper. Keynes should not have needed Kahn to reintroduce him to effective demand, but I take him at his word that it was so.

⁹The same result can be derived by combining Kahn's multiplier with Mr. Meade's relation (Meade 1993).

¹⁰This passage has been troublesome to Patinkin who wishes to date the moment of epiphany, as I call it, at 1933. In consequence, Patinkin (1977, p. 125) does not seem to think that the passage quoted means what we think it means, though he does not give a convincing alternative interpretation. My interpretation is standard and agrees closely with that of Marcuzzo (2002). See also Keynes (1982, p. 213) and Keynes (1973b, p. 380).

¹¹As mentioned earlier, this letter is problematic for Patinkin's case dating the discovery of effective demand to 1933. Nevertheless, Patinkin (1976, p. 69) grudgingly acknowledges that “there is a possibility that this letter may be related to a discussion which had appeared a few months before in Kahn's famous multiplier article.”

¹²Keynes, as quoted in Patinkin (1976, p. 66). Patinkin corrected a transcription error contained in Keynes (1972b, p. 85).

¹³For an interesting discussion of the role of Warming in Kahn's own thought, see Cain (1979).

¹⁴On the dating, see Moggridge's comments in Keynes (1973b, p. 380). Patinkin has repeatedly (1977; 1976, p. 71; 1980, pp. 14–15, 18–19) disputed the dating—toward the end of 1932—of this first draft of the General Theory. However, Keynes made a similar point on January 1, 1933, in an article in The Daily Mail, which supports Moggridge's, not Patinkin's, dating.

¹⁵Kohn (1986, p. 1204) and Ellis (1938, p. 111) make this same point. Kohn quotes Ellis in saying that “The real hall-mark of the new theorizing is its setting in general equilibrium analysis … Is the business cycle envisaged as a movement of ‘general equilibrium’ itself, or around equilibrium, or from one equilibrium to another? Formally, at least, we seem to have the first.” Yvan Lengwiler (2004, p. 3) makes a similar point when he says that Keynes “focused on the interdependence between different aggregate variables. In that sense, Keynes's model is a general equilibrium model, yet one in which the aggregate demand and supply functions are not developed from an individual optimization perspective.”

¹⁶Keynes, as quoted in Patinkin (1976, p. 66). Patinkin has corrected a transcript error contained in Keynes (1972b, p. 85).