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The Fallacy of Wage Cuts and Keynes's Involuntary Unemployment

Published online by Cambridge University Press:  11 June 2009

John Levendis
John Levendis
Affiliation:
Loyola University, 6363 St. Charles Avenue, Box 15, New Orleans, LA 70118.
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Extract

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.

Type
Research Article
Information
Journal of the History of Economic Thought , Volume 29 , Issue 3 , September 2007 , pp. 309 - 329
Copyright
Copyright © The History of Economics Society 2007

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