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The Fallacy of Wage Cuts and Keynes's Involuntary Unemployment

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  • Levendis, John

Abstract

The lingering economic problem for economists in the 1920s and 1930s was unemployment. What caused it? More importantly, what could cure it? John Maynard Keynes's work offered new insights regarding both the reasons for, and the cures of, lingering and massive unemployment—what Keynes called “involuntary unemployment.” Keynes's definition of the term evolved as he gradually came to realize the role of the fallacy of composition in explaining why nominal wage rate adjustments might not induce full employment. I argue that it was Richard Kahn's multiplier article, more than anything, which guided Keynes's own understanding of the phenomenon. This paper, then, is a narrative history of how Keynes came to grips with the unprecedented level of unemployment in the 1920s and '30s interpreted through the lens of the Kahnian multiplier.

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  • Levendis, John, 2007. "The Fallacy of Wage Cuts and Keynes's Involuntary Unemployment," Journal of the History of Economic Thought, Cambridge University Press, vol. 29(3), pages 309-329, September.
    • Handle: RePEc:cup:jhisec:v:29:y:2007:i:03:p:309-329_00
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    Cited by:

    1. Bruce E. Kaufman, 2012. "Wage Theory, New Deal Labor Policy, and the Great Depression: Were Government and Unions to Blame?," ILR Review, Cornell University, ILR School, vol. 65(3), pages 501-532, July.

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