'Relative Movements of Real Wages and Output' – How Does Keynes's 1939 Essay Relate to His Principle of Effective Demand?
KOF Working Papers No. 355
38 Pages Posted: 27 Mar 2014
Date Written: March 26, 2014
Abstract
Keynes’s essay “Relative Movements of Real Wages and Output” is widely believed to be an important amendment to his General Theory because, in this essay, Keynes relaxed his core assumption of decreasing marginal returns to labour. Non-decreasing marginal returns, however, do not sit comfortably with the prime innovation of the General Theory: the Principle of Effective Demand. This will be demonstrated by performing – for the first time in the literature – numerical simulations with Keynes’s Aggregate-Demand-Aggregate-Supply (D/Z) model. The view that Keynes’s 1939 essay constitutes an important amendment to his General Theory thus has to be put into perspective.
Keywords: Keynes, effective demand, D/Z model, marginal returns to labour
JEL Classification: B31, E12
Suggested Citation: Suggested Citation