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In The General Theory of Employment, Interest and Money, Chapter 2: The postulates of the classical economics, John Maynard Keynes says:

It would follow from this that there are only four possible means of increasing employment:

(a) An improvement in organisation or in foresight which diminishes 'frictional' unemployment;

(b) a decrease in the marginal disutility of labour, as expressed by the real wage for which additional labour is available, so as to diminish 'voluntary' unemployment;

(c) an increase in the marginal physical productivity of labour in the wage-goods industries (to use Professor Pigou's convenient term for goods upon the price of which the utility of the money-wage depends);

or (d) an increase in the price of non-wage-goods compared with the price of wage-goods, associated with a shift in the expenditure of non-wage-earners from wage-goods to non-wage-goods.

I understood how (a) and (b) can increasing employment but I don't sure if I have understood (c) and I completely sure I don't understood (d).

I think (c) means that If in the wage-goods industries are more productive then wage-goods will be cheaper and then disutility of labour decrease because of with lower wages you can buy the same, so (c) is follow by (b). Is that what Keynes want to say? Also, I don`t understood if "marginal physical productivity" means something different than "marginal productivity".

And, as I said, I completely sure I don't understood (d). How (d) increasing employment?

santos82h
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  • Related: https://economics.stackexchange.com/questions/13338/how-does-an-increase-in-the-price-of-non-wage-goods-increase-employment – Henry Jul 23 '23 at 19:19

1 Answers1

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I think (c) means that If in the wage-goods industries are more productive then wage-goods will be cheaper and then disutility of labour decrease because of with lower wages you can buy the same, so (c) is follow by (b). Is that what Keynes want to say?

No, b) is distinct from c). b) deals with the 'supply side' of labor market, whereas c) clearly deals with the 'demand side' of labor market. What he is saying is that when workers are more productive firms will want to employ more workers.

This is also well known result from classical or more modern neo-classical models of firm behavior under perfect competition.

Also, I don`t understood if "marginal physical productivity" means something different than "marginal productivity".

Marginal productivity is the most broadest term that would apply to any factor of production. Marginal physical productivity, in the modern usage, is marginal productivity of workers producing physical goods. However, I am bit unsure about this point on reflection it is also possible that the word had different broader meaning in a past because excluding these does not seem to make that much sense.

How (d) increasing employment?

Through substitution. This will take some time to explain because its quite arcane Neo-Ricardian classical theory developed by Pigou and other classical economists that is no longer taught.

Wage/non-wage goods is a Neo-Ricardian dichotomy that splits the 'goods fund' into wage goods (i.e. goods that can be payed as wages) and non-wage goods (i.e. those that cannot). This terminology was introduced by Pigou in Wealth and Welfare.

In his magnus opum Pigou argued that once "we pass behind the distorting veil of money" (i.e. analyze economy stripping away money as an pure exchange economy), all resources are either:

  • used by capitalist for consumption (although note he did not used consumption in the same sense as we now use it)
  • saved
  • paid to workers for their labor

The total national income would be called 'wage fund' (now we would call it GDP), and wage goods would be those goods that are given to labor as wages in exchange for their supply of labor.

Hence if non-wage goods get more expensive and entrepreneurs have to spend more on maintaining capital they will substitute labor for capital.

At least that is how I understand it. A problem with older works such as Pigou's Wealth and Welfare or Unemployment, or with Keynes's General Theory is that since at the time economics did not used mathematics the writings are less precise and little bit left to an interpretation.

1muflon1
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  • Thank, it is more clear now, but I still confused about (c) Why (c) is not simply "an increase in the marginal productivity of labour"?. I mean, if the key is "when workers are more productive firms will want to employ more workers" what matter if that workes are in wage-goods industries or other kinds of industries? what matter if that workes are producing physical goods or they are working in service sector? Increase productivity in no physical goods or no wage-goods industries should not increasing employment also? – santos82h Jul 23 '23 at 21:05
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    @santos82h 1. I am not sure why he only focused on physical goods, perhaps he had similar idea to Balassa-Samuelson idea where productivity occurs primarily in industries producing physical goods. Possibly maybe I am misinterpreting there old use of language, nowadays if someone would say physical marginal productivity, at least in an usage I have seen they would mean something tangible but its possible at a time the word had broader meaning as well . 2. Regarding the wage good industries that comes to the dichotomy from Pigou where non-wage good industries would be domains of capitalists – 1muflon1 Jul 23 '23 at 21:34