It was recently said by James Galbraith that a model that includes a labour market is “anti-Keynesian”. This caused a little bit of fuss but I thought that it was a very good first approximation of what Keynes’ economics in the General Theory is all about.
We can give this a little more precision by examining what Keynes thought to be the orthodox theory he was attacking and what he thought his new theory to be. A good place to draw this argument from is Athanasios Asimakopulos’ seminal book Keynes’ General Theory and Accumulation. In this book Asimakopulos examines the lectures that Keynes undertook prior to the publication of the General Theory, draft chapters and other sources, to better understand what the ideas in the book were all about.
Asimakopulos draws on on draft chapter by Keynes to show how Keynes understood the orthodox theory. Asimakopulos writes,
With production conditions conducive to the existence of the competitive markets implicitly assumed by Keynes, the size and number of co-operative production units would be determined by the net marginal product of labour and the marginal disutility of labour. If the marginal product of labour was greater than its marginal disutility, then more labour would be employed in existing production units and/or new units would be established, until equality was obtained. In such an economy total output and employment, as well as the real-wage rate, would be determined in the labour market. All the employment, and thus output decisions, taken on the basis of conditions in the labour market, are then automatically validated in product markets by the payment of output shares to the factors of production. Keynes surmised that these special labour market conditions would also be fulfilled in an economy where production units are owned and operated by a class of entrepreneurs, as long as total expenditure is always sufficient to purchase, at expected prices, whatever total output is produced. He calls this second type of economy ‘a neutral entrepreneur economy, or a neutral economy for short.’ There is no explicit reference to a neutral economy in The General Theory, but it appears to underlie his view of classical theory. ‘The classical theory assumes, in other words, that the aggregate demand price (or proceeds) always accommodates itself to the aggregate supply price’. (pp19-20 — Emphasis Original)
Keynes’ conception of a ‘neutral economy’ is, of course, the familiar labour market of marginalist theory where the supply of labour is determined by the marginal disutility that workers associate with working and the demand for labour is determined by the marginal productivity of workers.
But Keynes saw his own theory as examining an entirely different system. Keynes did not believe that this ‘neutral economy’ was a good representative of the real world. Asimakopulos goes on to lay out Keynes’ own views clearly.
In contrast to the co-operative and neutral economies there is what ‘we will call a money-wage or entrepreneur economy‘. Here, production and employment decisions depend on the expectations of money proceeds relative to variable costs, and ‘it is in an entrepreneur economy that we actually live today’. It was this economy that provided the setting for the General Theory, and it is here that employment is determined by independent aggregate demand and supply functions for output, and not by conditions in the labour market. (p20)
Thus perhaps a better way of formulating Galbraith’s comment is to say that: any model in which the labour market is the key to determining the level of employment is an anti-Keynesian model. This is why models that assume wage and price rigidities are not true Keynesian models.
In his book Asimakopulos shows clearly that Keynes had ceased to focus on price changes after his Treatise on Money and turned to a wholly different conception of how the economy functioned that effectively ignored the labour market as a determinate of the level of employment. He also shows that Keynes got into a terrible muddle about all this because he was still working on effective marginalist microfoundations. But if you read the material it is clear that the argument Keynes was making was definitively that the labour market does not play a role in the determination of employment.
Update: I have just come across a fantastic quote in Asimakopulos’s book that shows beyond a shadow of a doubt that Keynes rejected the idea that the labour market determines the level of unemployment. In an early draft of the General Theory Keynes writes. “we may well discover empirically a correlation between employment and real wages. But this will occur, not because the one causes the other, but because they are both consequences of the same cause”. That cause, of course, is the level of effective demand.