点击下载App，搜索"General Theory of Employment，Interest and Money",免费读到尾

　　THEORYOFEMPLOYMENT

　　changesinmoney-wagesandchangesinrealwages。Inthecaseofachangepeculiartoaparticularindustryonewouldexpectthechangeinrealwagestobeinthesamedirectionasthechangeinmoney-wages。Butinthecaseofchangesinthegenerallevelofwages，itwillbefound，Ithink，thatthechangeinrealwagesassociatedwithachangeinmoney-wages，sofarfrombeingusuallyinthesamedirection，isalmostalwaysintheoppositedirection。Whenmoney-wagesarerising，thatistosay，itwillbefoundthatrealwagesarefalling；andwhenmoney-wagesarefalling，realwagesarerising。Thisisbecause，intheshortperiod，fallingmoney-wagesandrisingrealwagesareeach，forindependentreasons，likelytoaccompanydecreasingemployment；labourbeingreadiertoacceptwage-cutswhenemploymentisfallingoff，yetrealwagesinevitablyrisinginthesamecircumstancesonaccountoftheincreasingmarginalreturntoagivencapitalequipmentwhenoutputisdiminished。

　　If，indeed，itweretruethattheexistingrealwageisaminimumbelowwhichmorelabourthanisnowemployedwillnotbeforthcominginanycircumstances，involuntaryunemployment，apartfromfrictionalunemployment，wouldbenon-existent。Buttosupposethatthisisinvariablythecasewouldbeabsurd。Formorelabourthanisatpresentemployedisusuallyavailableattheexistingmoney-wage，eventhoughthepriceofwage-goodsisrisingand，consequently，therealwagefalling。Ifthisistrue，thewage-goodsequivalentoftheexistingmoney-wageisnotanaccurateindicationofthemarginaldisutilityoflabour，andthesecondpostulatedoesnotholdgood。

　　Butthereisamorefundamentalobjection。Thesecondpostulateflowsfromtheideathattherealwagesoflabourdependonthewagebargainswhichlabourmakeswiththeentrepreneurs。Itisadmitted，ofcourse，thatthebargainsareactuallymadeintermsofmoney，andeventhattherealwagesacceptabletolabourare[Page11]POSTULATES

　　OFTHECLASSICALECONOMICS

　　notaltogetherindependentofwhatthecorrespondingmoney-wagehappenstobe。Neverthelessitisthemoney-wagethusarrivedatwhichisheldtodeterminetherealwage。Thustheclassicaltheoryassumesthatitisalwaysopentolabourtoreduceitsrealwagebyacceptingareductioninitsmoney-wage。Thepostulatethatthereisatendencyfortherealwagetocometoequalitywiththemarginaldisutilityoflabourclearlypresumesthatlabouritselfisinapositiontodecidetherealwageforwhichitworks，thoughnotthequantityofemploymentforthcomingatthiswage。

　　Thetraditionaltheorymaintains，inshort，thatthewagebargainsbetweentheentrepreneursandtheworkersdeterminetherealwage；

　　sothat，assumingfreecompetitionamongstemployersandnorestrictivecombinationamongstworkers，thelattercan，iftheywish，bringtheirrealwagesintoconformitywiththemarginaldisutilityoftheamountofemploymentofferedbytheemployersatthatwage。Ifthisisnottrue，thenthereisnolongeranyreasontoexpectatendencytowardsequalitybetweentherealwageandthemarginaldisutilityoflabour。

　　Theclassicalconclusionsareintended，itmustberemembered，toapplytothewholebodyoflabouranddonotmeanmerelythatasingleindividualcangetemploymentbyacceptingacutinmoney-wageswhichhisfellowsrefuse。Theyaresupposedtobeequallyapplicabletoaclosedsystemastoanopensystem，andarenotdependentonthecharacteristicsofanopensystemorontheeffectsofareductionofmoney-wagesinasinglecountryonitsforeigntrade，whichlie，ofcourse，entirelyoutsidethefieldofthisdiscussion。Noraretheybasedonindirecteffectsduetoalowerwages-billintermsofmoneyhavingcertainreactionsonthebankingsystemandthestateofcredit，effectswhichweshallexamineindetailinchapter19。Theyarebasedonthebeliefthatinaclosedsystemareduction[Page12]THEGENERAL

　　THEORYOFEMPLOYMENT

　　inthegenerallevelofmoney-wageswillbeaccompanied，atanyrateintheshortperiodandsubjectonlytominorqualifications，bysome，thoughnotalwaysaproportionate，reductioninrealwages。

　　Nowtheassumptionthatthegenerallevelofrealwagesdependsonthemoney-wagebargainsbetweentheemployersandtheworkersisnotobviouslytrue。Indeeditisstrangethatsolittleattemptshouldhavebeenmadetoproveortorefuteit。Foritisfarfrombeingconsistentwiththegeneraltenoroftheclassicaltheory，whichhastaughtustobelievethatpricesaregovernedbymarginalprimecostintermsofmoneyandthatmoney-wageslargelygovernmarginalprimecost。Thusifmoney-wageschange，onewouldhaveexpectedtheclassicalschooltoarguethatpriceswouldchangeinalmostthesameproportion，leavingtherealwageandthelevelofunemploymentpracticallythesameasbefore，anysmallgainorlosstolabourbeingattheexpenseorprofitofotherelementsofmarginalcostwhichhavebeenleftunaltered。[23]Theyseem，however，tohavebeendivertedfromthislineofthought，partlybythesettledconvictionthatlabourisinapositiontodetermineitsownrealwageandpartly，perhaps，bypreoccupationwiththeideathatpricesdependonthequantityofmoney。Andthebeliefinthepropositionthatlabourisalwaysinapositiontodetermineitsownrealwage，onceadopted，hasbeenina~ntainedbyitsbeingconfusedwiththepropositionthatlabourisalwaysinapositiontodeterminewhatrealwageshallcorrespondtofullemployment，i。e。themaximumquantityofemploymentwhichiscompatiblewithagivenrealwage。

　　Tosumup:therearetwoobjectionstothesecondpostulateoftheclassicaltheory。Thefirstrelatestotheactualbehaviouroflabour。Afallinrealwagesdue[Page13]POSTULATES

　　OFTHECLASSICALECONOMICS

　　toariseinprices，withmoney-wagesunaltered，doesnot，asarule，causethesupplyofavailablelabouronofferatthecurrentwagetofallbelowtheamountactuallyemployedpriortotheriseofprices。Tosthatitdoesistosupposethatallthosewhoarenowunemployedthoughwillingtoworkatthecurrentwagewillwithdrawtheofferoftheirlabourintheeventofevenasmallriseinthecostofliving。YetthisstrangesuppositionapparentlyunderliesProfessorPigou\'sTheoryofUnemployment，[24]anditiswhatallmembersoftheorthodoxschoolaretacitlyassuming。

　　Buttheother，morefundamental，objection，whichweshalldevelopintheensuingchapters，flowsfromourdisputingtheassumptionthatthegenerallevelofrealwagesisdirectlydeterminedbythecharacterofthewagebargain。Inassumingthatthewagebargaindeterminestherealwagetheclassicalschoolhavesliptinanillicitassumption。Fortheremaybenomethodavailabletolabourasawholewherebyitcanbringthewage-goodsequivalentofthegenerallevelofmoneywagesintoconformitywiththemarginaldisutilityofthecurrentvolumeofemployment。Theremayexistnoexpedientbywhichlabourasawholecanreduceitsrealwagetoagivenfigurebymakingrevisedmoneybargainswiththeentrepreneurs。

　　Thiswillbeourcontention。Weshallendeavourtoshowthatprimarilyitiscertainotherforceswhichdeterminethegenerallevelofrealwages。

　　Theattempttoelucidatethisproblemwillbeoneofourmainthemes。Weshallarguethattherehasbeenafundamentalmisunderstandingofhowinthisrespecttheeconomyinwhichweliveactuallyworks。

　　III

　　Thoughthestruggleovermoney-wagesbetweenindividualsandgroupsisoftenbelievedtodetermine[Page14]THEGENERAL

　　THEORYOFEMPLOYMENT

　　thegenerallevelofreal-wages，itis，infact，concernedwithadifferentobject。Sincethereisimperfectmobilityoflabour，andwagesdonottendtoanexactequalityofnetadvantageindifferentoccupations，anyindividualorgroupofindividuals，whoconsenttoareductionofmoney-wagesrelativelytoothers，willsufferarelativereductioninrealwages，whichisasufficientjustificationforthemtoresistit。Ontheotherhanditwouldbeimpracticabletoresisteveryreductionofrealwages，duetoachangeinthepurchasing-powerofmoneywhichaffectsallworkersalike；andinfactreductionsofrealwagesarisinginthiswayarenot，asarule，resistedunlesstheyproceedtoanextremedegree。Moreover，aresistancetoreductionsinmoney-wagesapplyingtoparticularindustriesdoesnotraisethesameinsuperablebartoanincreaseinaggregateemploymentwhichwouldresultfromasimilarresistancetoeveryreductioninrealwages。

　　Inotherwords，thestruggleaboutmoney-wagesprimarilyaffectsthedistributionoftheaggregaterealwagebetweendifferentlabour-groups，andnotitsaverageamountperunitofemployment，whichdepends，asweshallsee，onadifferentsetofforces。Theeffectofcombinationonthepartofagroupofworkersistoprotecttheirrelativerealwage。Thegenerallevelofrealwagesdependsontheotherforcesoftheeconomicsystem。

　　Thusitisfortunatethattheworkers，thoughunconsciously，areinstinctivelymorereasonableeconomiststhantheclassicalschool，inasmuchastheyresistreductionsofmoney-wages，whichareseldomorneverofanall-roundcharacter，eventhoughtheexistingrealequivalentofthesewagesexceedsthemarginaldisutilityoftheexistingemployment；whereastheydonotresistreductionsofrealwages，whichareassociatedwithincreasesinaggregateemploymentandleaverelativemoney-wagesunchanged，unlessthereductionproceedssofarastothreatenareductionofthereal[Page15]POSTULATES

　　OFTHECLASSICALECONOMICS

　　wagebelowthemarginaldisutilityoftheexistingvolumeofemployment。

　　Everytradeunionwillputupsomeresistancetoacutinmoney-wages，howeversmall。Butsincenotradeunionwoulddreamofstrikingoneveryoccasionofariseinthecostofliving，theydonotraisetheobstacletoanyincreaseinaggregateemploymentwhichisattributedtothembytheclassicalschool。

　　IV

　　Wemustnowdefinethethirdcategoryofunemployment，namely\'involuntary\'

　　unemploymentinthestrictsense，thepossibilityofwhichtheclassicaltheorydoesnotadmit。

　　Clearlywedonotmeanby\'involuntary\'unemploymentthemereexistenceofanunexhaustedcapacitytowork。Aneight-hourdaydoesnotconstituteunemploymentbecauseitisnotbeyondhumancapacitytoworktenhours。

　　Norshouldweregardas\'involuntary\'unemploymentthewithdrawaloftheirlabourbyabodyofworkersbecausetheydonotchoosetoworkforlessthanacertainrealreward。Furthermore，itwillbeconvenienttoexclude\'frictional\'unemploymentfromourdefinitionof\'involuntary\'unemployment。

　　Mydefinitionis，therefore，asfollows:MenareinvoluntarilyunemployedIf，intheeventofasmallriseinthepriceofwage-goodsrelativelytothemoney-wage，boththeaggregatesupplyoflabourwillingtoworkforthecurrentmoney-wageandtheaggregatedemandforitatthatwagewouldbegreaterthantheexistingvolumeofemployment。Analternativedefinition，whichamounts，however，tothesamething，willbegiveninthenextchapterp。26below。

　　Itfollowsfromthisdefinitionthattheequalityoftherealwagetothemarginaldisutilityofemploymentpresupposedbythesecondpostulate，realisticallyinterpreted，correspondstotheabsenceof\'involuntary\'

　　unemployment。Thisstateofaffairsweshalldescribe[Page16]THEGENERAL

　　THEORYOFEMPLOYMENT

　　as\'full\'employment，both\'frictional\'and\'voluntary\'unemploymentbeingconsistentwith\'full\'employmentthusdefined。Thisfitsin，weshallfind，withothercharacteristicsoftheclassicaltheory，whichisbestregardedasatheoryofdistributioninconditionsoffullemployment。

　　Solongastheclassicalpostulatesholdgood，unemployment，whichisintheabovesenseinvoluntary，cannotoccur。Apparentunemploymentmust，therefore，betheresulteitheroftemporarylossofworkofthe\'betweenjobs\'typeorofintermittentdemandforhighlyspecialisedresourcesoroftheeffectofatradeunion\'closedshop\'ontheemploymentoffreelabour。Thuswritersintheclassicaltradition，overlookingthespecialassumptionunderlyingtheirtheory，havebeendriveninevitablytotheconclusion，perfectlylogicalontheirassumption，thatapparentunemploymentapartfromtheadmittedexceptionsmustbedueatbottomtoarefusalbytheunemployedfactorstoacceptarewardwhichcorrespondstotheirmarginalproductivity。Aclassicaleconomistmaysympathisewithlabourinrefusingtoacceptacutinitsmoney-wage，andhewilladmitthatitmaynotbewisetomakeittomeetconditionswhicharetemporary；butscientificintegrityforceshimtodeclarethatthisrefusalis，nevertheless，atthebottomofthetrouble。

　　Obviously，however，iftheclassicaltheoryisonlyapplicabletothecaseoffullemployment，itisfallacioustoapplyittotheproblemsofinvoluntaryunemployment&frac34；iftherebesuchathingandwhowilldenyit？。TheclassicaltheoristsresembleEuclideangeometersinanon-Euclideanworldwho，discoveringthatinexperiencestraightlinesapparentlyparalleloftenmeet，rebukethelinesfornotkeepingstraight&frac34；astheonlyremedyfortheunfortunatecollisionswhichareoccurring。Yet，intruth，thereisnoremedyexcepttothrowovertheaxiomofparallelsandtoworkoutanon-Euclideangeometry。Somethingsimilarisrequiredto-dayineconomics。

　　Weneedtothrowover[Page17]POSTULATES

　　OFTHECLASSICALECONOMICS

　　thesecondpostulateoftheclassicaldoctrineandtoworkoutthebehaviourofasysteminwhichinvoluntaryunemploymentinthestrictsenseispossible。

　　V

　　Inemphasisingourpointofdeparturefromtheclassicalsystem，wemustnotoverlookanimportantpointofagreement。Forweshallmaintainthefirstpostulateasheretofore，subjectonlytothesamequalificationsasintheclassicaltheory；andwemustpause，foramoment，toconsiderwhatthisinvolves。

　　Itmeansthat，withagivenorganisation，equipmentandtechnique，realwagesandthevolumeofoutputandhenceofemploymentareuniquelycorrelated，sothat，ingeneral，anincreaseinemploymentcanonlyoccurtotheaccompanimentofadeclineintherateofrealwages。ThusIamnotdisputingthisvitalfactwhichtheclassicaleconomistshaverightlyassertedasindefeasible。

　　Inagivenstateoforganisation，equipmentandtechnique，therealwageearnedbyaunitoflabourhasauniqueinversecorrelationwiththevolumeofemployment。Thusifemploymentincreases，then，intheshortperiod，therewardperunitoflabourintermsofwage-goodsmust，ingeneral，declineandprofitsincrease。[25]Thisissimplytheobverseofthefamiliarpropositionthatindustryisnormallyworkingsubjecttodecreasingreturnsintheshortperiodduringwhichequipmentetc。isassumedtobeconstant；sothatthemarginalproductinthewage-goodindustrieswhichgovernsrealwagesneces-

　　[Page18]THEGENERAL

　　THEORYOFEMPLOYMENT

　　sarilydiminishesasemploymentisincreased。Solong，indeed，asthispropositionholds，anymeansofincreasingemploymentmustleadatthesametimetoadiminutionofthemarginalproductandhenceoftherateofwagesmeasuredintermsofthisproduct。

　　Butwhenwehavethrownoverthesecondpostulate，adeclineinemployment，althoughnecessarilyassociatedwithlabour\'sreceivingawageequalinvaluetoalargerquantityofwage-goods，isnotnecessarilyduetolabour\'sdemandingalargerquantityofwage-goods；andawillingnessonthepartoflabourtoacceptlowermoney-wagesisnotnecessarilyaremedyforunemployment。

　　Thetheoryofwagesinrelationtoemployment，towhichwearehereleadingup，cannotbefullyelucidated，however，untilchapter19anditsAppendixhavebeenreached。

　　VI

　　FromthetimeofSayandRicardotheclassicaleconomistshavetaughtthatsupplycreatesitsowndemand；&frac34；meaningbythisinsomesignificant，butnotclearlydefined，sensethatthewholeofthecostsofproductionmustnecessarilybespentintheaggregate，directlyorindirectly，onpurchasingtheproduct。

　　InJ。S。Mill\'sPrinciplesofPoliticalEconomythedoctrineisexpresslysetforth:Whatconstitutesthemeansofpaymentforcommoditiesissimplycommodities。Eachperson\'smeansofpayingfortheproductionsofotherpeopleconsistofthosewhichhehimselfpossesses。Allsellersareinevitably，andbythemeaningoftheword，buyers。Couldwesuddenlydoubletheproductivepowersofthecountry，weshoulddoublethesupplyofcommoditiesineverymarket；butweshould，bythesamestroke，doublethepurchasingpower。

　　Everybodywouldbringadoubledemandaswellassupply；everybodywouldbeabletobuytwiceasmuch，becauseeveryonewouldhavetwiceasmuchtoofferinexchange。[26]

　　[Page19]POSTULATES

　　OFTHECLASSICALECONOMICS

　　Asacorollaryofthesamedoctrine，ithasbeensupposedthatanyindividualactofabstainingfromconsumptionnecessarilyleadsto，andamountstothesamethingas，causingthelabourandcommoditiesthusreleasedfromsupplyingconsumptiontobeinvestedintheproductionofcapitalwealth。

　　ThefollowingpassagefromMarshall\'sPureTheoryofDomesticValues[27]illustratesthetraditionalapproach:Thewholeofaman\'sincomeisexpendedinthepurchaseofservicesandofcommodities。Itisindeedcommonlysaidthatamanspendssomeportionofhisincomeandsavesanother。Butitisafamiliareconomicaxiomthatamanpurchaseslabourandcommoditieswiththatportionofhisincomewhichhesavesjustasmuchashedoeswiththatheissaidtospend。Heissaidtospendwhenheseekstoobtainpresentenjoymentfromtheservicesandcommoditieswhichhepurchases。Heissaidtosavewhenhecausesthelabourandthecommoditieswhichhepurchasestobedevotedtotheproductionofwealthfromwhichheexpectstoderivethemeansofenjoymentinthefuture。ItistruethatitwouldnotbeeasytoquotecomparablepassagesfromMarshall\'slaterwork[28]orfromEdgeworthorProfessorPigou。Thedoctrineisneverstatedto-dayinthiscrudeform。Neverthelessitstillunderliesthewholeclassicaltheory，whichwouldcollapsewithoutit。

　　Contemporaryeconomists，whomighthesitatetoagreewithMill，donothesitatetoacceptconclusionswhichrequireMill\'sdoctrineastheirpremiss。

　　Theconviction，whichruns，forexample，throughalmostallProfessorPigou\'swork，thatmoneymakesnorealdifferenceexceptfrictionallyandthatthetheoryofproductionandemploymentcanbe[Page20]THEGENERAL

　　THEORYOFEMPLOYMENT

　　workedoutlikeMill\'sasbeingbasedon\'real\'exchangeswithmoneyintroducedperfunctorilyinalaterchapter，isthemodernversionoftheclassicaltradition。Contemporarythoughtisstilldeeplysteepedinthenotionthatifpeopledonotspendtheirmoneyinonewaytheywillspenditinanother。[29]Post-wareconomistsseldom，indeed，succeedinmaintainingthisstandpointconsistently；fortheirthoughtto-dayistoomuchpermeatedwiththecontrarytendencyandwithfactsofexperiencetooobviouslyinconsistentwiththeirformerview。[30]Buttheyhavenotdrawnsufficientlyfar-reachingconsequences；andhavenotrevisedtheirfundamentaltheory。

　　Inthefirstinstance，theseconclusionsmayhavebeenappliedtothekindofeconomyinwhichweactuallylivebyfalseanalogyfromsomekindofnon-exchangeRobinsonCrusoeeconomy，inwhichtheincomewhichindividualsconsumeorretainasaresultoftheirproductiveactivityis，actuallyandexclusively，theoutputinspecieofthatactivity。But，apartfromthis，theconclusionthatthecostsofoutputarealwayscoveredintheaggregatebythesale-proceedsresultingfromdemand，hasgreatplausibility，becauseitisdifficulttodistinguishitfromanother，similar-lookingpropositionwhichisindubitable，namelythattheincomederivedintheaggregatebyalltheelementsinthecommunityconcernedinaproductiveactivitynecessarilyhasavalueexactlyequaltothevalueoftheoutput。

　　Similarlyitisnaturaltosupposethattheactof[Page21]POSTULATES

　　OFTHECLASSICALECONOMICS

　　anindividual，bywhichheenricheshimselfwithoutapparentlytakinganythingfromanyoneelse，mustalsoenrichthecommunityasawhole；sothatasinthepassagejustquotedfromMarshallanactofindividualsavinginevitablyleadstoaparallelactofinvestment。For，oncemore，itisindubitablethatthesumofthenetincrementsofthewealthofindividualsmustbeexactlyequaltotheaggregatenetincrementofthewealthofthecommunity。

　　Thosewhothinkinthiswayaredeceived，nevertheless，byanopticalillusion，whichmakestwoessentiallydifferentactivitiesappeartobethesame。Theyarefallaciouslysupposingthatthereisanexuswhichunitesdecisionstoabstainfrompresentconsumptionwithdecisionstoprovideforfutureconsumption；whereasthemotiveswhichdeterminethelatterarenotlinkedinanysimplewaywiththemotiveswhichdeterminetheformer。

　　Itis，then，theassumptionofequalitybetweenthedemandpriceofoutputasawholeanditssupplypricewhichistoberegardedastheclassicaltheory\'s\'axiomofparallels\'。Grantedthis，alltherestfollows&frac34；thesocialadvantagesofprivateandnationalthrift，thetraditionalattitudetowardstherateofinterest，theclassicaltheoryofunemployment，thequantitytheoryofmoney，theunqualifiedadvantagesoflaissez-faireinrespectofforeigntradeandmuchelsewhichweshallhavetoquestion。

　　VII

　　Atdifferentpointsinthischapterwehavemadetheclassicaltheorytodependinsuccessionontheassumptions:1thattherealwageisequaltothemarginaldisutilityoftheexistingemployment；

　　2thatthereisnosuchthingasinvoluntaryunemploymentinthestrictsense；

　　3thatsupplycreatesitsowndemandinthesense[Page22]THEGENERAL

　　THEORYOFEMPLOYMENTthattheaggregatedemandpriceisequaltotheaggregatesupplypriceforalllevelsofoutputandemployment。Thesethreeassumptions，however，allamounttothesamethinginthesensethattheyallstandandfalltogether，anyoneofthemlogicallyinvolvingtheothertwo。

　　ThePrincipleofEffectiveDemand[Page23]

　　Chapter3

　　THEPRINCIPLEOFEFFECTIVEDEMAND

　　I

　　Weneed，tostartwith，afewtermswhichwillbedefinedpreciselylater。Inagivenstateoftechnique，resourcesandcosts，theemploymentofagivenvolumeoflabourbyanentrepreneurinvolveshimintwokindsofexpense:firstofall，theamountswhichhepaysouttothefactorsofproductionexclusiveofotherentrepreneursfortheircurrentservices，whichweshallcallthefactorcostoftheemploymentinquestion；

　　andsecondly，theamountswhichhepaysouttootherentrepreneursforwhathehastopurchasefromthemtogetherwiththesacrificewhichheincursbyemployingtheequipmentinsteadofleavingitidle，whichweshallcalltheusercostoftheemploymentinquestion。[31]Theexcessofthevalueoftheresultingoutputoverthesumofitsfactorcostanditsusercostistheprofitor，asweshallcallit，theincomeoftheentrepreneur。Thefactorcostis，ofcourse，thesamething，lookedatfromthepointofviewoftheentrepreneur，aswhatthefactorsofproductionregardastheirincome。Thusthefactorcostandtheentrepreneur\'sprofitmakeup，betweenthem，whatweshalldefineasthetotalincomeresultingfromtheemploymentgivenbytheentrepreneur。Theentrepreneur\'sprofitthusdefinedis，asitshouldbe，thequantitywhichheendeavourstomaximisewhenheisdecidingwhatamountofemploy-

　　[Page24]THEGENERAL

　　THEORYOFEMPLOYMENT

　　menttooffer。Itissometimesconvenient，whenwearelookingatitfromtheentrepreneur\'sstandpoint，tocalltheaggregateincomei。e。

　　factorcostplusprofitresultingfromagivenamountofemploymenttheproceedsofthatemployment。Ontheotherhand，theaggregatesupplyprice[32]oftheoutputofagivenamountofemploymentistheexpectationofproceedswhichwilljustmakeitworththewhileoftheentrepreneurstogivethatemployment。[33]

　　Itfollowsthatinagivensituationoftechnique，resourcesandfactorcostperunitofemployment，theamountofemployment，bothineachindividualfirmandindustryandintheaggregate，dependsontheamountoftheproceedswhichtheentrepreneursexpecttoreceivefromthecorrespondingoutput。

　　[34]Forentrepreneurswillendeavourtofixtheamountofemploy-

　　[Page25]THEPRINCIPLE

　　OFEFFECTIVEDEMAND

　　mentatthelevelwhichtheyexpecttomaximisetheexcessoftheproceedsoverthefactorcost。

　　LetZbetheaggregatesupplypriceoftheoutputfromemployingNmen，therelationshipbetweenZandNbeingwrittenZ=fN，whichcanbecalledtheaggregatesupplyfunction。[35]Similarly，letDbetheproceedswhichentrepreneursexpecttoreceivefromtheemploymentofNmen，therelationshipbetweenDandNbeingwrittenD=fN，whichcanbecalledtheaggregatedemandfunction。

　　NowifforagivenvalueofNtheexpectedproceedsaregreaterthantheaggregatesupplyprice，i。e。ifDisgreaterthanZ，therewillbeanincentivetoentrepreneurstoincreaseemploymentbeyondNand，ifnecessary，toraisecostsbycompetingwithoneanotherforthefactorsofproduction，uptothevalueofNforwhichZhasbecomeequaltoD。Thusthevolumeofemploymentisgivenbythepointofintersectionbetweentheaggregatedemandfunctionandtheaggregatesupplyfunction；foritisatthispointthattheentrepreneurs\'

　　expectationofprofitswillbemaximised。ThevalueofDatthepointoftheaggregatedemandfunction，whereitisintersectedbytheaggregatesupplyfunction，willbecalledtheeffectivedemand。

　　SincethisisthesubstanceoftheGeneralTheoryofEmployment，whichitwillbeourobjecttoexpound，thesucceedingchapterswillbelargelyoccupiedwithexaminingthevariousfactorsuponwhichthesetwofunctionsdepend。

　　Theclassicaldoctrine，ontheotherhand，whichusedtobeexpressedcategoricallyinthestatementthat\'SupplycreatesitsownDemand\'andcontinuestounderlieallorthodoxeconomictheory，involvesaspecialassumptionastotherelationshipbetweenthesetwofunctions。For\'SupplycreatesitsownDemand\'mustmeanthatfNandfN

　　areequalforallvalues[Page26]THEGENERAL

　　THEORYOFEMPLOYMENT

　　ofN，i。e。foralllevelsofoutputandemployment；andthatwhenthereisanincreaseinZ=fN

　　correspondingtoanincreaseinN，D=fN

　　necessarilyincreasesbythesameamountasZ。Theclassicaltheoryassumes，inotherwords，thattheaggregatedemandpriceorproceeds

　　alwaysaccommodatesitselftotheaggregatesupplyprice；sothat，whateverthevalueofNmaybe，theproceedsDassumeavalueequaltotheaggregatesupplypriceZwhichcorrespondstoN。Thatistosay，effectivedemand，insteadofhavingauniqueequilibriumvalue，isaninfiniterangeofvaluesallequallyadmissible；andtheamountofemploymentisindeterminateexceptinsofarasthemarginaldisutilityoflaboursetsanupperlimit。

　　Ifthisweretrue，competitionbetweenentrepreneurswouldalwaysleadtoanexpansionofemploymentuptothepointatwhichthesupplyofoutputasawholeceasestobeelastic，i。e。whereafurtherincreaseinthevalueoftheeffectivedemandwillnolongerbeaccompaniedbyanyincreaseinoutput。Evidentlythisamountstothesamethingasfullemployment。Inthepreviouschapterwehavegivenadefinitionoffullemploymentintermsofthebehaviouroflabour。Analternative，thoughequivalent，criterionisthatatwhichwehavenowarrived，namelyasituationinwhichaggregateemploymentisinelasticinresponsetoanincreaseintheeffectivedemandforitsoutput。ThusSay\'slaw，thattheaggregatedemandpriceofoutputasawholeisequaltoitsaggregatesupplypriceforallvolumesofoutput，isequivalenttothepropositionthatthereisnoobstacletofullemployment。

　　If，however，thisisnotthetruelawrelatingtheaggregatedemandandsupplyfunctions，thereisavitallyimportantchapterofeconomictheorywhichremainstobewrittenandwithoutwhichalldiscussionsconcerningthevolumeofaggregateemploymentarefutile。

　　[Page27]THEPRINCIPLE

　　OFEFFECTIVEDEMAND

　　II

　　Abriefsummaryofthetheoryofemploymenttobeworkedoutinthecourseofthefollowingchaptersmay，perhaps，helpthereaderatthisstage，eventhoughitmaynotbefullyintelligible。Thetermsinvolvedwillbemorecarefullydefinedinduecourse。Inthissummaryweshallassumethatthemoney-wageandotherfactorcostsareconstantperunitoflabouremployed。Butthissimplification，withwhichweshalldispenselater，isintroducedsolelytofacilitatetheexposition。Theessentialcharacteroftheargumentispreciselythesamewhetherornotmoney-wages，etc。，areliabletochange。

　　Theoutlineofourtheorycanbeexpressedasfollows。Whenemploymentincreases，aggregaterealincomeisincreased。Thepsychologyofthecommunityissuchthatwhenaggregaterealincomeisincreasedaggregateconsumptionisincreased，butnotbysomuchasincome。Henceemployerswouldmakealossifthewholeoftheincreasedemploymentweretobedevotedtosatisfyingtheincreaseddemandforimmediateconsumption。Thus，tojustifyanygivenamountofemploymenttheremustbeanamountofcurrentinvestmentsufficienttoabsorbtheexcessoftotaloutputoverwhatthecommunitychoosestoconsumewhenemploymentisatthegivenlevel。Forunlessthereisthisamountofinvestment，thereceiptsoftheentrepreneurswillbelessthanisrequiredtoinducethemtoofferthegivenamountofemployment。Itfollows，therefore，that，givenwhatweshallcallthecommunity\'spropensitytoconsume，theequilibriumlevelofemployment，i。e。thelevelatwhichthereisnoinducementtoemployersasawholeeithertoexpandortocontractemployment，willdependontheamountofcurrentinvestment。Theamountofcurrentinvestmentwilldepend，inturn，onwhatweshallcalltheinducementtoinvest；andtheinducementtoinvestwill[Page28]THEGENERAL

　　THEORYOFEMPLOYMENT

　　befoundtodependontherelationbetweenthescheduleofthemarginalefficiencyofcapitalandthecomplexofratesofinterestonloansofvariousmaturitiesandrisks。

　　Thus，giventhepropensitytoconsumeandtherateofnewinvestment，therewillbeonlyonelevelofemploymentconsistentwithequilibrium；

　　sinceanyotherlevelwillleadtoinequalitybetweentheaggregatesupplypriceofoutputasawholeanditsaggregatedemandprice。Thislevelcannotbegreaterthanfullemployment，i。e。therealwagecannotbelessthanthemarginaldisutilityoflabour。Butthereisnoreasoningeneralforexpectingittobeequaltofullemployment。Theeffectivedemandassociatedwithfullemploymentisaspecialcase，onlyrealisedwhenthepropensitytoconsumeandtheinducementtoinveststandinaparticularrelationshiptooneanother。Thisparticularrelationship，whichcorrespondstotheassumptionsoftheclassicaltheory，isinasenseanoptimumrelationship。

　　Butitcanonlyexistwhen，byaccidentordesign，currentinvestmentprovidesanamountofdemandjustequaltotheexcessoftheaggregatesupplypriceoftheoutputresultingfromfullemploymentoverwhatthecommunitywillchoosetospendonconsurnptionwhenitisfullyemployed。

　　Thistheorycanbesummedupinthefollowingpropositions:

　　1Inagivensituationoftechnique，resourcesandcosts，incomebothmoney-incomeandrealincomedependsonthevolumeofemploymentN。

　　2Therelationshipbetweenthecommunity\'sincomeandwhatitcanbeexpectedtospendonconsumption，designatedbyD1，willdependonthepsychologicalcharacteristicofthecommunity，whichweshallcallitspropensitytoconsume。Thatistosay，consumptionwilldependonthelevelofaggregateincomeand，therefore，onthelevelofemploymentN，exceptwhenthereissomechangeinthepropensitytoconsume。

　　[Page29]THEPRINCIPLE

　　OFEFFECTIVEDEMAND

　　3TheamountoflabourNwhichtheentrepreneursdecidetoemploydependsonthesumDoftwoquantities，namelyD1，theamountwhichthecommunityisexpectedtospendonconsumption，andD2，theamountwhichitisexpectedtodevotetonewinvestment。Diswhatwehavecalledabovetheeffectivedemand。

　　4SinceD1D2=D=fN，whereistheaggregatesupplyfunction，andsince，aswehaveseenin2above，D1isafunctionofN，whichwemaywritecN，dependingonthepropensitytoconsume，itfollowsthatfN-cN

　　=D2。

　　5Hencethevolumeofemploymentinequilibriumdependsoni

　　theaggregatesupplyfunction，，iithepropensitytoconsume，，andiiithevolumeofinvestment，D2。ThisistheessenceoftheGeneralTheoryofEmployment。

　　6ForeveryvalueofNthereisacorrespondingmarginalproductivityoflabourinthewage-goodsindustries；anditisthiswhichdeterminestherealwage。5is，therefore，subjecttotheconditionthatNcannotexceedthevaluewhichreducestherealwagetoequalitywiththemarginaldisutilityoflabour。ThismeansthatnotallchangesinDarecompatiblewithourtemporaryassumptionthatmoney-wagesareconstant。Thusitwillbeessentialtoafullstatementofourtheorytodispensewiththisassumption。

　　7Ontheclassicaltheory，accordingtowhichD

　　=fNforallvaluesofN，thevolumeofemploymentisinneutralequilibriumforallvaluesofNlessthanitsmaximumvalue；sothattheforcesofcompetitionbetweenentrepreneursmaybeexpectedtopushittothismaximumvalue。Onlyatthispoint，ontheclassicaltheory，cantherebestableequilibrium。

　　8Whenemploymentincreases，D1willincrease，butnotbysomuchasD；sincewhenourincomeincreasesourconsumptionincreasesalso，butnotbysomuch。Thekeytoourpracticalproblemistobefoundinthis[Page30]THEGENERAL

　　THEORYOFEMPLOYMENT

　　psychologicallaw。ForitfollowsfromthisthatthegreaterthevolumeofemploymentthegreaterwillbethegapbetweentheaggregatesupplypriceZofthecorrespondingoutputandthesumD1

　　whichtheentrepreneurscanexpecttogetbackoutoftheexpenditureofconsumers。Hence，ifthereisnochangeinthepropensitytoconsume，employmentcannotincrease，unlessatthesametimeD2isincreasingsoastofilltheincreasinggapbetweenZandD1。

　　Thus&frac34；exceptonthespecialassumptionsoftheclassicaltheoryaccordingtowhichthereissomeforceinoperationwhich，whenemploymentincreases，alwayscausesD2toincreasesufficientlytofillthewideninggapbetweenZandD1&frac34；theeconomicsystemmayfinditselfinstableequilibriumwithNatalevelbelowfullemployment，namelyatthelevelgivenbytheintersectionoftheaggregatedemandfunctionwiththeaggregatesupplyfunction。

　　Thusthevolumeofemploymentisnotdeterminedbythemarginaldisutilityoflabourmeasuredintermsofrealwages，exceptinsofarasthesupplyoflabouravailableatagivenrealwagesetsamaximumleveltoemployment。

　　Thepropensitytoconsumeandtherateofnewinvestmentdeterminebetweenthemthevolumeofemployment，andthevolumeofemploymentisuniquelyrelatedtoagivenlevelofrealwages&frac34；nottheotherwayround。Ifthepropensitytoconsumeandtherateofnewinvestmentresultinadeficienteffectivedemand，theactuallevelofemploymentwillfallshortofthesupplyoflabourpotentiallyavailableattheexistingrealwage，andtheequilibriumrealwagewillbegreaterthanthemarginaldisutilityoftheequilibriumlevelofemployment。

　　Thisanalysissuppliesuswithanexplanationoftheparadoxofpovertyinthemidstofplenty。Forthemereexistenceofaninsufficiencyofeffectivedemandmay，andoftenwill，bringtheincreaseofemploymenttoastandstillbeforealeveloffullemploy[Page31]THEPRINCIPLE

　　OFEFFECTIVEDEMAND

　　menthasbeenreached。Theinsufficiencyofeffectivedemandwillinhibittheprocessofproductioninspiteofthefactthatthemarginalproductoflabourstillexceedsinvaluethemarginaldisutilityofemployment。

　　Moreoverthericherthecommunity，thewiderwilltendtobethegapbetweenitsactualanditspotentialproduction；andthereforethemoreobviousandoutrageousthedefectsoftheeconomicsystem。Forapoorcommunitywillbepronetoconsumebyfarthegreaterpartofitsoutput，sothataverymodestmeasureofinvestmentwillbesufficienttoprovidefullemployment；whereasawealthycommunitywillhavetodiscovermuchampleropportunitiesforinvestmentifthesavingpropensitiesofitswealthiermembersaretobecompatiblewiththeemploymentofitspoorermembers。

　　Ifinapotentiallywealthycommunitytheinducementtoinvestisweak，then，inspiteofitspotentialwealth，theworkingoftheprincipleofeffectivedemandwillcompelittoreduceitsactualoutput，until，inspiteofitspotentialwealth，ithasbecomesopoorthatitssurplusoveritsconsumptionissufficientlydiminishedtocorrespondtotheweaknessoftheinducementtoinvest。

　　Butworsestill。Notonlyisthemarginalpropensitytoconsume[36

　　]weakerinawealthycommunity，but，owingtoitsaccumulationofcapitalbeingalreadylarger，theopportunitiesforfurtherinvestmentarelessattractiveunlesstherateofinterestfallsatasufficientlyrapidrate；

　　which\'bringsustothetheoryoftherateofinterestandtothereasonswhyitdoesnotautomaticallyfalltotheappropriatelevel，whichwilloccupyBookIV。

　　Thustheanalysisofthepropensitytoconsume，thedefinitionofthemarginalefficiencyofcapitalandthetheoryoftherateofinterestarethethreemaingapsinourexistingknowledgewhichitwillbenecessarytofill。Whenthishasbeenaccomplished，[Page32]THEGENERAL

　　THEORYOFEMPLOYMENT

　　weshallfindthatthetheoryofpricesfallsintoitsproperplaceasamatterwhichissubsidiarytoourgeneraltheory。Weshalldiscover，however，thatmoneyplaysanessentialpartinourtheoryoftherateofinterest；andweshallattempttodisentanglethepeculiarcharacteristicsofmoneywhichdistinguishitfromotherthings。

　　III

　　TheideathatwecansafelyneglecttheaggregatedemandfunctionisfundamentaltotheRicardianeconomics，whichunderliewhatwehavebeentaughtformorethanacentury。Malthus，indeed，hadvehementlyopposedRicardo\'sdoctrinethatitwasimpossibleforeffectivedemandtobedeficient；

　　butvainly。For，sinceMalthuswasunabletoexplainclearlyapartfromanappealtothefactsofcommonobservationhowandwhyeffectivedemandcouldbedeficientorexcessive，hefailedtofurnishanalternativeconstruction；

　　andRicardoconqueredEnglandascompletelyastheHolyInquisitionconqueredSpain。Notonlywashistheoryacceptedbythecity，bystatesmenandbytheacademicworld。Butcontroversyceased；theotherpointofviewcompletelydisappeared；itceasedtobediscussed。ThegreatpuzzleofeffectivedemandwithwhichMalthushadwrestledvanishedfromeconomicliterature。YouwillnotfinditmentionedevenonceinthewholeworksofMarshall，EdgeworthandProfessorPigou，fromwhosehandstheclassicaltheoryhasreceiveditsmostmatureembodiment。Itcouldonlyliveonfurtively，belowthesurface，intheunderworldsofKarlMarx，SilvioGesellorMajorDouglas。

　　ThecompletenessoftheRicardianvictoryissomethingofacuriosityandamystery。Itmusthavebeenduetoacomplexofsuitabilitiesinthedoctrinetotheenvironmentintowhichitwasprojected。Thatit[Page33]THEPRINCIPLE

　　OFEFFECTIVEDEMAND

　　reachedconclusionsquitedifferentfromwhattheordinaryuninstructedpersonwouldexpect，added，Isuppose，toitsintellectualprestige。Thatitsteaching，translatedintopractice，wasaustereandoftenunpalatable，lentitvirtue。Thatitwasadaptedtocarryavastandconsistentlogicalsuperstructure，gaveitbeauty。Thatitcouldexplainmuchsocialinjusticeandapparentcrueltyasaninevitableincidentintheschemeofprogress，andtheattempttochangesuchthingsaslikelyonthewholetodomoreharmthangood，commendedittoauthority。Thatitaffordedameasureofjustificationtothefreeactivitiesoftheindividualcapitalist，attractedtoitthesupportofthedominantsocialforcebehindauthority。

　　Butalthoughthedoctrineitselfhasremainedunquestionedbyorthodoxeconomistsuptoalatedate，itssignalfailureforpurposesofscientificpredictionhasgreatlyimpaired，inthecourseoftime，theprestigeofitspractitioners。Forprofessionaleconomists，afterMalthus，wereapparentlyunmovedbythelackofcorrespondencebetweentheresultsoftheirtheoryandthefactsofobservation；&frac34；adiscrepancywhichtheordinarymanhasnotfailedtoobserve，withtheresultofhisgrowingunwillingnesstoaccordtoeconomiststhatmeasureofrespectwhichhegivestoothergroupsofscientistswhosetheoreticalresultsareconfirmedbyobservationwhentheyareappliedtothefacts。

　　Thecelebratedoptimismoftraditionaleconomictheory，whichhasledtoeconomistsbeinglookeduponasCandides，who，havingleftthisworldforthecultivationoftheirgardens，teachthatallisforthebestinthebestofallpossibleworldsprovidedwewillletwellalone，isalsotobetraced，Ithink，totheirhavingneglectedtotakeaccountofthedragonprosperitywhichcanbeexercisedbyaninsufficiencyofeffectivedemand。Fortherewouldobviouslybeanaturaltendencytowardstheoptimumemploymentofresourcesinasocietywhichwasfunctioningafterthe[Page34]THEGENERAL

　　THEORYOFEMPLOYMENT

　　manneroftheclassicalpostulates。Itmaywellbethattheclassicaltheoryrepresentsthewayinwhichweshouldlikeoureconomytobehave。

　　Buttoassumethatitactuallydoessoistoassumeourdifficultiesaway。

　　TheChoiceofUnits[Page37]

　　Chapter4

　　THECHOICEOFUNITS

　　I

　　Inthisandthenextthreechaptersweshallbeoccupiedwithanattempttoclearupcertainperplexitieswhichhavenopeculiarorexclusiverelevancetotheproblemswhichitisourspecialpurposetoexamine。Thusthesechaptersareinthenatureofadigression，whichwillpreventusforatimefrompursulngourmaintheme。Theirsubject-matterisonlydiscussedherebecauseitdoesnothappentohavebeenalreadytreatedelsewhereinawaywhichIfindadequatetotheneedsofmyownparticularenquiry。

　　Thethreeperplexitieswhichmostimpededmyprogressinwritingthisbook，sothatIcouldnotexpressmyselfconvenientlyuntilIhadfoundsomesolutionforthem，are:firstly，thechoiceoftheunitsofquantityappropriatetotheproblemsoftheeconomicsystemasawhole；secondly，thepartplayedbyexpectationineconomicanalysis；and，thirdly，thedefinitionofincome。

　　II

　　Thattheunits，intermsofwhicheconomistscommonlywork，areunsatisfactorycanbeillustratedbytheconceptsofthenationaldividend，thestockofrealcapitalandthegeneralprice-level:

　　iThenationaldividend，asdefinedbyMarshall[Page38]THEGENERAL

　　THEORYOFEMPLOYMENT

　　andProfessorPigou，[37]measuresthevolumeofcurrentoutputorrealincomeandnotthevalueofoutputormoney-income。[38]Furthermore，itdepends，insomesense，onnetoutput；&frac34；onthenetaddition，thatistosay，totheresourcesofthecommunityavailableforconsumptionorforretentionascapitalstock，duetotheeconomicactivitiesandsacrificesofthecurrentperiod，afterallowingforthewastageofthestockofrealcapitalexistingatthecommencementoftheperiod。Onthisbasisanattemptismadetoerectaquantitativescience。

　　Butitisagraveobjectiontothisdefinitionforsuchapurposethatthecommunity\'soutputofgoodsandservicesisanon-homogeneouscomplexwhichcannotbemeasured，strictlyspeaking，exceptincertainspecialcases，asforexamplewhenalltheitemsofoneoutputareincludedinthesameproportionsinanotheroutput。

　　iiThedifficultyisevengreaterwhen，inordertocalculatenetoutput，wetrytomeasurethenetadditiontocapitalequipment；forwehavetofindsomebasisforaquantitativecomparisonbetweenthenewitemsofequipmentproducedduringtheperiodandtheolditemswhichhaveperishedbywastage。Inordertoarriveatthenetnationaldividend，ProfessorPigou[39]deductssuchobsolescence，etc。，\'asmayfairlybecalled\"normal\"；andthepracticaltestofnormalityisthatthedepletionissufficientlyregulartobeforeseen，ifnotindetail，atleastinthelarge\'。But，sincethisdeductionisnotadeductionintermsofmoney，heisinvolvedinassumingthattherecanbeachangeinphysicalquantity，althoughtherehasbeennophysicalchange；i。e。heiscovertlyintroducingchangesinvalue。

　　[Page39]THECHOICE

　　OFUNITS

　　Moreover，heisunabletodeviseanysatisfactoryformula[40]toevaluatenewequipmentagainstoldwhen，owingtochangesintechnique，thetwoarenotidentical。IbelievethattheconceptatwhichProfessorPigouisaimingistherightandappropriateconceptforeconomicanalysis。

　　But，untilasatisfactorysystemofunitshasbeenadopted，itsprecisedefinitionisanimpossibletask。Theproblemofcomparingonerealoutputwithanotherandofthencalculatingnetoutputbysettingoffnewitemsofequipmentagainstthewastageofolditemspresentsconundrumswhichpermit，onecanconfidentlysay，ofnosolution。

　　iiiThirdly，thewell-known，butunavoidable，elementofvaguenesswhichadmittedlyattendstheconceptofthegeneralprice-levelmakesthistermveryunsatisfactoryforthepurposesofacausalanalysis，whichoughttobeexact。

　　Neverthelessthesedifficultiesarerightlyregardedas\'conundrums\'。

　　Theyare\'purelytheoretical\'inthesensethattheyneverperplex，orindeedenterinanywayinto，businessdecisionsandhavenorelevancetothecausalsequenceofeconomicevents，whichareclear-cutanddeterminateinspiteofthequantitativeindeterminacyoftheseconcepts。Itisnatural，therefore，toconcludethattheynotonlylackprecisionbutareunnecessary。

　　Obviouslyourquantitativeanalysismustbeexpressedwithoutusinganyquantitativelyvagueexpressions。And，indeed，assoonasonemakestheattempt，itbecomesclear，asIhopetoshow，thatonecangetonmuchbetterwithoutthem。

　　Thefactthattwoincommensurablecollectionsofmiscellaneousobjectscannotinthemselvesprovidethematerialforaquantitativeanalysisneednot，ofcourse，preventusfrommakingapproximatestatisticalcomparisons，dependingonsomebroadelementofjudgmentratherthanofstrictcalculation，whichmaypossesssignificanceandvaliditywithincertainlimits。

　　[Page40]THEGENERAL

　　THEORYOFEMPLOYMENT

　　Buttheproperplaceforsuchthingsasnetrealoutputandthegenerallevelofpriceslieswithinthefieldofhistoricalandstatisticaldescription，andtheirpurposeshouldbetosatisfyhistoricalorsocialcuriosity，apurposeforwhichperfectprecision&frac34；suchasourcausalanalysisrequires，whetherornotourknowledgeoftheactualvaluesoftherelevantquantitiesiscompleteorexact&frac34；isneitherusualnornecessary。Tosaythatnetoutputto-dayisgreater，buttheprice-levellower，thantenyearsagooroneyearago，isapropositionofasimilarcharactertothestatementthatQueenVictoriawasabetterqueenbutnotahappierwomanthanQueenElizabeth&frac34；apropositionnotwithoutmeaningandnotwithoutinterest，butunsuitableasmaterialforthedifferentialcalculus。Ourprecisionwillbeamockprecisionifwetrytousesuchpartlyvagueandnon-quantitativeconceptsasthebasisofaquantitativeanalysis。

　　III

　　Oneveryparticularoccasion，letitberemembered，anentrepreneurisconcernedwithdecisionsastothescaleonwhichtoworkagivencapitalequipment；andwhenwesaythattheexpectationofanincreaseddemand，i。e。araisingoftheaggregatedemandfunction，willleadtoanincreaseinaggregateoutput，wereallymeanthatthefirms，whichownthecapitalequipment，willbeinducedtoassociatewithitagreateraggregateemploymentoflabour。Inthecaseofanindividualfirmorindustryproducingahomogeneousproductwecanspeaklegitimately，ifwewish，ofincreasesordecreasesofoutput。Butwhenweareaggregatingtheactivitiesofallfirms，wecannotspeakaccuratelyexceptintermsofquantitiesofemploymentappliedtoagivenequipment。Theconceptsofoutputasawholeanditsprice-levelarenotrequiredinthiscontext，sincewehavenoneedofanabsolute[Page41]THECHOICE

　　OFUNITS

　　measureofcurrentaggregateoutput，suchaswouldenableustocompareitsamountwiththeamountwhichwouldresultfromtheassociationofadifferentcapitalequipmentwithadifferentquantityofemployment。When，forpurposesofdescriptionorroughcomparison，wewishtospeakofanincreaseofoutput，wemustrelyonthegeneralpresumptionthattheamountofemploymentassociatedwithagivencapitalequipmentwillbeasatisfactoryindexoftheamountofresultantoutput；&frac34；thetwobeingpresumedtoincreaseanddecreasetogether，thoughnotinadefinitenumericalproportion。

　　IndealingwiththetheoryofemploymentIpropose，therefore，tomakeuseofonlytwofundamentalunitsofquantity，namely，quantitiesofmoney-valueandquantitiesofemployment。Thefirstoftheseisstrictlyhomogeneous，andthesecondcanbemadeso。For，insofarasdifferentgradesandkindsoflabourandsalariedassistanceenjoyamoreorlessfixedrelativeremuneration，thequantityofemploymentcanbesufficientlydefinedforourpurposebytakinganhour\'semploymentofordinarylabourasourunitandweightinganhour\'semploymentofspeciallabourinproportiontoitsremuneration；

　　i。e。anhourofspeciallabourremuneratedatdoubleordinaryrateswillcountastwounits。Weshallcalltheunitinwhichthequantityofemploymentismeasuredthelabour-unit；andthemoney-wageofalabour-unitweshallcallthewage-unit。[41]Thus，ifEisthewagesandsalaries

　　bill，Wthewage-unit，andNthequantityofemployment，E=N&times；W。

　　Thisassumptionofhomogeneityinthesupplyoflabourisnotupsetbytheobviousfactofgreatdifferencesinthespecialisedskillofindividualworkersandintheirsuitabilityfordifferentoccupations。For，[Page42]THEGENERAL

　　THEORYOFEMPLOYMENT

　　iftheremunerationoftheworkersisproportionaltotheirefficiency，thedifferencesaredealtwithbyourhavingregardedindividualsascontributingtothesupplyoflabourinproportiontotheirremuneration；whilstif，asoutputincreases，agivenfirmhastobringinlabourwhichislessandlessefficientforitsspecialpurposesperwage-unitpaidtoit，thisismerelyonefactoramongothersleadingtoadiminishingreturnfromthecapitalequipmentintermsofoutputasmorelabourisemployedonit。Wesubsume，sotospeak，thenon-homogeneityofequallyremuneratedlabourunitsintheequipment，whichweregardaslessandlessadaptedtoemploytheavailablelabourunitsasoutputincreases，insteadofregardingtheavailablelabourunitsaslessandlessadaptedtouseahomogeneouscapitalequipment。Thusifthereisnosurplusofspecialisedorpractisedlabourandtheuseoflesssuitablelabourinvolvesahigherlabourcostperunitofoutput，thismeansthattherateatwhichthereturnfromtheequipmentdiminishesasemploymentincreasesismorerapidthanitwouldbeifthereweresuchasurplus。[42]Eveninthelimitingcasewheredifferentlabourunitsweresohighlyspecialisedastobealtogetherincapableofbeingsubstitutedforoneanother，thereisnoawkwardness；forthismerelymeansthattheelasticityofsupplyofoutputfromaparticulartypeofcapitalequipmentfallssuddenlytozerowhenalltheavailablelabourspecialisedtoitsuseisalreadyemployed。[43]Thusourassumptionofahomo-

　　[Page43]THECHOICE

　　OFUNITS

　　geneousunitoflabourinvolvesnodifficultiesunlessthereisgreatinstabilityintherelativeremunerationofdifferentlabour-units；andeventhisdifficultycanbedealtwith，ifitarises，bysupposingarapidliabilitytochangeinthesupplyoflabourandtheshapeoftheaggregatesupplyfunction。

　　Itismybeliefthatmuchunnecessaryperplexitycanbeavoidedifwelimitourselvesstrictlytothetwounits，moneyandlabour，whenwearedealingwiththebehaviouroftheeconomicsystemasawhole；reservingtheuseofunitsofparticularoutputsandequipmentstotheoccasionswhenweareanalysingtheoutputofindividualfirmsorindustriesinisolation；

　　andtheuseofvagueconcepts，suchasthequantityofoutputasawhole，thequantityofcapitalequipmentasawholeandthegenerallevelofprices，totheoccasionswhenweareattemptingsomehistoricalcomparisonwhichiswithincertainperhapsfairlywidelimitsavowedlyunpreciseandapproximate。

　　[Page44]THEGENERAL

　　THEORYOFEMPLOYMENT

　　Itfollowsthatweshallmeasurechangesincurrentoutputbyreferencetothenumberofhoursoflabourpaidforwhethertosatisfyconsumersortoproducefreshcapitalequipmentontheexistingcapitalequipment，hoursofskilledlabourbeingweightedinproportiontotheirremuneration。

　　Wehavenoneedofaquantitativecomparisonbetweenthisoutputandtheoutputwhichwouldresultfromassociatingadifferentsetofworkerswithadifferentcapitalequipment。Topredicthowentrepreneurspossessingagivenequipmentwillrespondtoashiftintheaggregatedemandfunctionitisnotnecessarytoknowhowthequantityoftheresultingoutput，thestandardoflifeandthegenerallevelofpriceswouldcomparewithwhattheywereatadifferentdateorinanothercountry。

　　IV

　　Itiseasilyshownthattheconditionsofsupply，suchasareusuallyexpressedintermsofthesupplycurve，andtheelasticityofsupplyrelatingoutputtoprice，canbehandledintermsofourtwochosenunitsbymeansoftheaggregatesupplyfunction，withoutreferencetoquantitiesofoutput，whetherweareconcernedwithaparticularfirmorindustryorwitheconomicactivityasawhole。FortheaggregatesupplyfunctionforagivenfirmandsimilarlyforagivenindustryorforindustryasawholeisgivenbyZr=frNr，whereZristheproceedsnetofusercosttheexpectationofwhichwillinducealevelofemploymentNr。If，therefore，therelationbetweenemploymentandoutputissuchthatanemploymentNrresultsinanoutputOr，whereOr=yrNr，itfollowsthatZrUrNrfrNrUrNr

　　p=&frac34；&frac34；&frac34；&frac34；&frac34；&frac34；&frac34；

　　=&frac34；&frac34；&frac34；&frac34；&frac34；&frac34；&frac34；&frac34；&frac34；

　　OryrNr

　　[Page45]THECHOICE

　　OFUNITS

　　istheordinarysupplycurve，whereUrNr

　　istheexpectedusercostcorrespondingtoalevelofemploymentNr。

　　Thusinthecaseofeachhomogeneouscommodity，forwhichOr=yrNr

　　hasadefinitemeaning，wecanevaluateZr=frNrintheordinaryway；butwecanthenaggregatetheNr\'sinawayinwhichwecannotaggregatetheOr\'s，sinceSOrisnotanumericalquantity。Moreover，ifwecanassumethat，inagivenenvironment，agivenaggregateemploymentwillbedistributedinauniquewaybetweendifferentindustries，sothatNrisafunctionofN，furthersimplificationsarepossible。

　　ExpectationandEmployment[Page46]

　　Chapter5

　　EXPECTATIONASDETERMINING

　　OUTPUTANDEMPLOYMENT

　　I

　　Allproductionisforthepurposeofultimatelysatisfyingaconsumer。

　　Timeusuallyelapses，however&frac34；andsometimesmuchtime&frac34；betweentheincurringofcostsbytheproducerwiththeconsumerinviewandthepurchaseoftheoutputbytheultimateconsumer。Meanwhiletheentrepreneurincludingboththeproducerandtheinvestorinthisdescriptionhastoformthebestexpectations[44]hecanastowhattheconsumerswillbepreparedtopaywhenheisreadytosupplythemdirectlyorindirectlyaftertheelapseofwhatmaybealengthyperiod；andhehasnochoicebuttobeguidedbytheseexpectations，ifheistoproduceatallbyprocesseswhichoccupytime。

　　Theseexpectations，uponwhichbusinessdecisionsdepend，fallintotwogroups，certainindividualsorfirmsbeingspecialisedinthebusinessofframingthefirsttypeofexpectationandothersinthebusinessofframingthesecond。Thefirsttypeisconcernedwiththepricewhichamanufacturercanexpecttogetforhis\'finished\'outputatthetimewhenhecommitshimselftostartingtheprocesswhichwillproduceit；outputbeing\'finished\'fromthepointofviewofthemanufacturerwhenitisreadytobeusedortobesoldtoasecondparty。The[Page47]EXPECTATION

　　ANDEMPLOYMENT

　　secondtypeisconcernedwithwhattheentrepreneurcanhopetoearnintheshapeoffuturereturnsifhepurchasesor，perhaps，manufactures

　　\'finished\'outputasanadditiontohiscapitalequipment。Wemaycalltheformershort-termexpectationandthelatterlong-termexpectation。

　　Thusthebehaviourofeachindividualfirmindecidingitsdaily[45

　　]outputwillbedeterminedbyitsshort-termexpectations&frac34；expectationsastothecostofoutputonvariouspossiblescalesandexpectationsastothesale-proceedsofthisoutput；though，inthecaseofadditionstocapitalequipmentandevenofsalestodistributors，theseshort-termexpectationswilllargelydependonthelong-termormedium-termexpectationsofotherparties。Itisuponthesevariousexpectationsthattheamountofemploymentwhichthefirmsofferwilldepend。Theactuallyrealisedresultsoftheproductionandsaleofoutputwillonlyberelevanttoemploymentinsofarastheycauseamodificationofsubsequentexpectations。Nor，ontheotherhand，aretheoriginalexpectationsrelevant，whichledthefirmtoacquirethecapitalequipmentandthestockofintermediateproductsandhalf-finishedmaterialswithwhichitfindsitselfatthetimewhenithastodecidethenextday\'soutput。Thus，oneachandeveryoccasionofsuchadecision，thedecisionwillbemade，withreferenceindeedtothisequipmentandstock，butinthelightofthecurrentexpectationsofprospectivecostsandsale-proceeds。

　　Now，ingeneral，achangeinexpectationswhethershort-termorlong-termwillonlyproduceitsfulleffectonemploymentoveraconsiderableperiod。Thechangeinemploymentduetoachangeinexpectationswillnotbethesameontheseconddayafterthechangeasonthefirst，orthesameonthe[Page48]THEGENERAL