1. Keynes Seminar 19 November 2008
Michel De Vroey
Université catholique de Louvain
Keynes, Marshall and The General Theory
© PKSG 2008
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2. What are the implications for the robustness of Keynes’s theory of anchoring it more firmly in Marshallian analysis?
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3. Unemployment theory between Marshall and Keynes
PLAN
Marshall
Unemployment theory between Marshall and Keynes
Keynes as a Marshallian economist
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4. Part 1. Marshall Marshall’s time framework
The lack of any rationing (and hence unemployment) in Marshall’s theory of value
The firm’s equilibrium in the short period
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5. The functioning of the market
The driving force allowing for the realization of market equilibrium is agents’s perfect information about market conditions. This allows them to correctly conjecture the shape of the market supply and demand function, and hence the equilibrium price and quantity.
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6. In Marshallian theory, market clearing (the matching of market supply and demand) is always realized. Any rationing result is excluded.
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7. Three additional remarks
An implication of adopting the perfect information assumption is that the duration of the formation of market equilibrium is of no theoretical importance. It can as well be considered as taking place in logical time.
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8. Three additional remarks
2. In the Marshallian framework, market clearing is not a guarantee of equilibrium. For equilibrium to exist market equilibrium values ought to coincide with normal equilibrium values.
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9. 18/11/2018 p1,2 p3 p0 MS 0,1,2 MS 3 ND 1,2,3 ND 0 NS A C B q0,1,2 q3 q

10. If frictions are considered as synonymous to slow adjustment we see that they can be present as far as the adjustment towards normal equilibrium is concerned. But they are absent from the formation of market equilibrium.
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11. Three additional remarks
3. Can the above conclusion be extended to the labour market?
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12. Marshall has not been fully silent on the issue of unemployment
Marshall has not been fully silent on the issue of unemployment. It was just that he had little interest in it.
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13. “The social problem that disturbed his conscience was poverty; and poverty might have a number of causes, of which unemployment was only one” (Matthews 1990: 33).
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14. “Cyclical unemployment was par excellence a ‘Vol
“Cyclical unemployment was par excellence a ‘Vol. II’ subject, along with business cycles generally. It does get some treatment in the Principles, but to a large extent Marshall’s views have to be pieced together from his various writings. Those are often fragmentary or aphoristic” (Matthews 1990: 35).
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15. The firm’s equilibrium in the short period
To calculate their optimal production decisions, firms need to conjecture market outcomes in the input markets before their opening.
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16. The fact that Marshall’s jumps at once from the individual equilibrium (optimal planning) to the interactive equilibrium (the industry equilibrium) means that he implicitly assumes that these conjectures are right.
It ought to be concluded that the wage rate, which firms have integrated in the calculation of their optimal planning is the market-clearing wage rate.

17. Part 2. Unemployment theory between Marshall and Keynes
Beveridge: Unemployment (1912)
Hicks: The Theory of Wages (1932)
Pigou: Theory of Unemployment (1933)
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18. Beveridge: Unemployment (1912)
He criticizes standard theory for its neglect of unemployment.
The latter’s frictional character is taken for granted.
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19. A wealth of data and fine institutional account but no theory.
His explanation is rather short: frictional unemployment results from the plurality of labour markets. It would not arise if the market was centralized.
A wealth of data and fine institutional account but no theory.
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20. Hicks: The theory of wages 1932
Pure theory is inadequate to describe what happens in real-world labour markets
Three types of unemployment: (a) the existence of the unemployable, (b) frictional unemployment, (c) the existence of trade unions
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21. three-pronged viewpoint: (a) pure theory has little room for unemployment; (b) unemployment is nonetheless an undeniable fact of life; (c) to explain unemployment, we need mainly to resort to factors relating to the interstices between them.
This amounts to foregoing giving unemployment a theoretical explanation.
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22. Pigou: Theory of Unemployment (1933)
In his analysis, an excess of supply is postulated rather than explained.
He assumes that firms decide the level of employment unilaterally!
Although this is not explicitly stated, most commentators agree that Pigou examined a case of fixed real wages.
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23. Two-third of the book are devoted to a painstaking analysis of the factors affecting the demand for labour and of its elasticity.
The issue of unemployment is addressed only at the end of the book, and in too elementary a way.
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24. “In stable conditions everybody is employed
“In stable conditions everybody is employed. The implication is that such unemployment as exists at any time is due wholly to the fact that changes in demand conditions are continually taking place and that frictional resistances prevent the appropriate wage adjustment from being made instantaneously” (Pigou 1933: 252).
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25. Part 3. Keynes’s General Theory
Reconstructing Keynes’s programme
Different kinds of employment
Effective demand à la Keynes versus effective demand à la Marshall
The time framework of Keynes’s analysis
Chapter 19 of the General Theory
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26. Reconstructing Keynes’ Programme
(1) Demonstrating the existence of involuntary unemployment;
(2) demonstrating that wage rigidity can be exonerated from being its cause;
(3) giving a general equilibrium or interdependency explanation of the phenomenon while adopting a perfect competition framework;
(4) demonstrating that demand stimulation rather than wage deflation is the proper remedy for the problem.
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27. Effective demand à la Keynes versus effective demand à la Marshall
An extrapolation of Marshall’s analysis of the firm’s short-period production decision.
As in Marshall, the equilibrium is formed first as a thought experiment in entrepreneurs’ minds to become reality in a second stage. Perfect information is the linchpin of its formation.
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28. The difference between the Keynesian and the Marshallian process is that in firms conjecture false wages in the former and equilibrium wages in the latter.
The reason for unemployment lies in the labor market. The existence of unemployment logically precedes the determination of effective demand rather than the other way round.

29. Why on earth did Keynes make the nominal wage rigidity assumption if it plays no role?
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30. The time framework of Keynes’analysis
It is declared that Keynes’s theory of effective demand is a short-period analysis. If by the short period we mean a short-lived sequence of market days, this statement is incorrect.
The study of the emergence of involuntary unemployment ought to be concerned with a given market day, the very market day where it has emerged.
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31. Chapter 19 of The General Theory
Does Keynes keep his promise to remove the wage rigidity assumption?
My answer is ‘No’.
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32. Removing this assumption is a matter of replacing market-day rigidity with market-day flexibility. Keynes addresses a different question: whether intertemporal rigidity is better than intertemporal flexibility, leaving the market day wage formation process unchanged i.e. keeping the market-day rigidity assumption.
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