Involuntary unemployment: can an economy come to rest with men idle who would work at the going wage, and stay there?

John Maynard Keynes, answered from the texts and cited to the page.

The position in brief

The classical theory holds that supply creates its own demand, so that unemployment is either voluntary or a friction. It is neither. Output and employment are governed by aggregate effective demand; the rate of interest is a monetary phenomenon set by liquidity-preference and not by the supply of saving; and investment depends on the marginal efficiency of capital, which rests on long-term expectations formed where no calculable probability exists.

An economy may therefore settle at an equilibrium with heavy involuntary unemployment and remain there indefinitely. A cut in money-wages is not the remedy.¹²³⁴

Sources

1. We need to throw over the second postulate of the classical doctrine and to work out the behaviour of a system in which involuntary unemployment in the strict sense is possible. Vv In emphasising our point of departure from the classical system, we must not overlook an important point of agreement.

   The General Theory of Employment, Interest and Money, pp. 17–19

2. An alternative definition, which amounts, however, to the same thing, will be given in the next chapter (p. 26 below). It follows from this definition that the equality of the real wage to the marginal disutility of employment presupposed by the second postulate, realistically interpreted, corresponds to the absence of "involuntary" unemployment.

   The General Theory of Employment, Interest and Money, pp. 16–17

3. Every trade union will put up some resistance to a cut in money-wages, however small. But since no trade union would dream of striking on every occasion of a rise in the cost of living, they do not raise the obstacle to any increase in aggregate employment which is attributed to them by the classical school.

   The General Theory of Employment, Interest and Money, p. 15

4. It is held that it makes no material difference to this argument whether it is in terms of money-wages or of real wages. If we are thinking in terms of money-wages, we must, of course, correct for changes in the value of money; but this leaves the general tendency of the argument unchanged, since prices certainly do not change in exact proportion to changes in money-wages.

   The General Theory of Employment, Interest and Money, pp. 259–260

Where the argument is made

• The General Theory of Employment, Interest and Money (1936), especially bk. I chs. 2–3 (the postulates of the classical economics, and the principle of effective demand), bk. III on the propensity to consume, bk. IV chs. 11–12 (the marginal efficiency of capital, and the state of long-term expectation), bk. IV ch. 17 on the essential properties of interest and money, and ch. 24 ("Concluding Notes on the Social Philosophy")
• The Means to Prosperity (1933) for the multiplier stated as public argument

How the argument was received

The most influential economic argument of the century and the most fought-over. Contested on whether the underemployment equilibrium is a true equilibrium or a disequilibrium the textbooks mislabelled, and on whether the IS-LM rendering preserved the book or replaced it.