Keynes, a smart fellow with no coherent (micro)economic theory, bordering on sophistry on almost every page

The title summarizes my impression of Keynes after reading 50 or so pages of his General Theory several years ago. Today, after watching Hayek talking about his impression of Keynes as an economist, I decided to look into the book again to see whether my assessment back then had been fair. I have to say that it was, indeed. In this post I will just discuss several quotes from just the first 7 pages of chapter 2 where Keynes demolishes a straw man that he built out of what he called ‘classical economic theory’ (which was actually a small subset of pre-Keynesian economics represented by Marshall and Pigou). I will let the readers judge after the analysis whether Keynes deserves being treated as a serious scholar. Those who think that I cherry-pick quotes may look into the text themselves.

He starts on page 12 in this PDF version of the book with the following claim:

The classical postulates do not admit of the possibility of the third category, which I shall define below as ‘involuntary’ unemployment.

And then almost immediately says this:

Subject to these qualifications, the volume of employed resources is duly determined, according to the classical theory, by the two postulates.

Then he continues talking about the unemployed labor. It was this that I immediately noticed when reading the book several years ago. Back then I could not even understand very well what Keynes was trying to say but I saw very well that he does not keep the meaning of his terms constant.

The same thing happens in even more outrageous fashion when Keynes talks about what it is that workers negotiate with their employers about. Initially, Keynes says that they do not negotiate for real wages but rather for the minimum money-wage:

In other words, it may be the case that within a certain range the demand of labour is for a minimum money-wage and not for a minimum real wage.

But sticking to this meaning would not be very interesting, so after several pages we get this without any justification:

Though the struggle over money-wages between individuals and groups is often believed to determine the general level of real-wages, it is, in fact, concerned with a different object. […] The effect of combination on the part of a group of workers is to protect their relative real wage.

But enough with changes of subject and terms. Maybe, despite lots of those things, the text contains some brilliant insights that make up for them. Here is what seems to me the key proposition in chapter 2 on which the theory of ‘involuntary unemployment’ is based:

Let us assume, for the moment, that labour is not prepared to work for a lower money-wage and that a reduction in the existing level of money-wages would lead, through strikes or otherwise, to a withdrawal from the labour market of labour which is now employed. Does it follow from this that the existing level of real wages accurately measures the marginal disutility of labour? Not necessarily. For, although a reduction in the existing money-wage would lead to a withdrawal of labour, it does not follow that a fall in the value of the existing money-wage in terms of wage-goods would do so, if it were due to a rise in the price of the latter. In other words, it may be the case that within a certain range the demand of labour is for a minimum money-wage and not for a minimum real wage.

This quote looks like a classical instance of a false dichotomy. The facts that Keynes mentions may also mean that people use money wage as an imperfect proxy for real wage. Thus, the dichotomy between voluntary and involuntary unemployment is false, as is the whole edifice built on it.

Actually, the facts mentioned by Keynes are easily explained in non-monetary terms. The disutility of labor is not absolute, it depends on what a worker can fill her leisure time with. To the extent that the latter depends on purchasing consumer goods in the market the rise in their prices will tend to reduce the value of leisure time. Not surprisingly, workers will not reduce their labor supply. The whole false problem seems to have arisen from the fact that the Marshallian economics (at least in Keynes’ summary of it) at that time has already detached itself far from the basic economic notions of individual choice, opportunity costs, etc. But even if Marshallians were as misguided in their thinking as Keynes claims. it is a duty of every theorist who criticizes some other theorists and offers his own alternative to also consider other possible ones. On this count Keynes fails miserably.

But this is not all yet with his discussion of real vs money-wages.

On the way, he makes another characteristic equivocation. First, he says:

The second postulate flows from the idea that the real wages of labour depend on the wage bargains which labour makes with the entrepreneurs.

And further he puts the same idea ‘slightly’ differently:

But the other, more fundamental, objection, which we shall develop in the ensuing chapters, flows from our disputing the assumption that the general level of real wages is directly determined by the character of the wage bargain.

The problem is that the second claim Keynes criticizes is not at all the same one that he was criticizing from the start. It is probably possible to theoretically separate various labor markets but there is no market for labor in general and no general level of real wages. However, Keynes continues as if what he said against the theory of negotiations for real wage is directly applicable to the aggregates.

The last thing I will mention in this post is Keynes’ definition of involuntary unemployment:

Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.

Even setting aside the violence perpetrated on the English language (because what on Earth is involuntary about what he is talking about?), this is pure sophistry. It is impossible for a rise in price for a good (rightly understood) to increase the demand for the good. So what Keynes means here must be something else entirely but he does not explain it, he just moves on.


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