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ignoratio elenchi
. For, whilst no one would
wish to deny the proposition that a reduction in money-wages
accompanied by the same aggregate
effective demand as before
will be associated with an increase in employment, the precise question
at issue is whether the reduction in money-wages will or will not be accompanied by the same
aggregate effective demand as before measured in money, or, at any rate, by an aggregate effective
demand which is not reduced in full proportion to the reduction in money-wages (i.e. which is
somewhat greater measured in wage-units). But if the classical theory is not allowed to extend by
analogy its conclusions in respect of a particular industry to industry as a whole, it is wholly unable
to answer the question what effect on employment a reduction in money-wages will have. For it has
no method of analysis wherewith to tackle the problem. Professor Pigou's
Theory of Unemployment
seems to me to get out of the classical theory all that can be got out of it; with the result that the
book becomes a striking demonstration that this theory has nothing to offer, when it is applied to
the problem of what determines the volume of actual employment as a whole.
II
129
Let us, then, apply our own method of analysis to answering the problem. It falls into two parts. (i)
Does a reduction in money-wages have a direct tendency,
cet. par
., to increase employment, '
cet.
par
.' being taken to mean that the propensity to consume, the schedule of the marginal efficiency of
capital and the rate of interest are the same as before for the community as a whole? And (2) does a
reduction in money-wages have a certain or probable.tendency to affect employment in a particular
direction through its certain or probable repercussions on these three factors?
The first question we have already answered in the negative in the preceding chapters. For we have
shown that the volume of employment is uniquely correlated with the volume ofeffective demand
measured in wage-units, and that the effective demand, being the sum of the expected consumption
and the expected investment, cannot change, if the propensity to consume, the schedule of marginal
efficiency of capital and the rate of interest are all unchanged. If, without any change in these
factors, the entrepreneurs were to increase employment as a whole, their proceeds will necessarily
fall short of their supply-price.
Perhaps it will help to rebut the crude conclusion that a reduction in money-wages will increase
employment 'because it reduces the cost of production', if we follow up the course of events on the
hypothesis most favourable to this view, namely that at the outset entrepreneurs
expect
the
reduction in money-wages to have this effect. It is indeed not unlikely that the individual
entrepreneur, seeing his own costs reduced, will overlook at the outset the repercussions on the
demand for his product and will act on the assumption that he will be able to sell at a profit a larger
output than before. If, then, entrepreneurs generally act on this expectation, will they in fact succeed
in increasing their profits? Only if the community's marginal propensity to consume is equal to
unity, so that there is no gap between the increment of income and the increment of consumption; or
if there is an increase in investment, corresponding to the gap between the increment of income and
the increment of consumption, which will only occur if the schedule of marginal efficiencies of
capital has increased relatively to the rate of interest. Thus the proceeds realised from the increased
output will disappoint the entrepreneurs and employment will fall back again to its previous figure,
unless the marginal propensity to consume is equal to unity or the reduction in money-wages has
had the effect of increasing the schedule of marginal efficiencies of capital relatively to the rate of
interest and hence the amount of investment. For if entrepreneurs offer employment on a scale
which, if they could sell their output at the expected price, would provide the public with incomes
out of which they would save more than the amount of current investment, entrepreneurs are bound
to make a loss equal to the difference; and this will be the case absolutely irrespective of the level of
money-wages. At the best, the date of their disappointment can only be delayed for the interval
during which their own investment in increased working capital is filling the gap.
Thus the reduction in money-wages will have no lasting tendency to increase employment except
by virtue of its repercussion either on the propensity to consume for the community as a whole, or
on the schedule of marginal efficiencies of capital, or on the rate of interest. There is no method of
analysing the effect of a reduction in money-wages, except by following up its possible effects on
these three factors.
The most important repercussions on these factors are likely, in practice, to be the following:
(1) A reduction of money-wages will somewhat reduce prices. It will, therefore, involve some
redistribution of real income (a) from wage-earners to other factors entering into marginal prime
130
cost whose remuneration has not been reduced, and (b) from entrepreneurs to rentiers to whom a
certain income fixed in terms of money has been guaranteed.
What will be the effect of this redistribution on the propensity to consume for the community as a
whole? The transfer from wage-earners to other factors is likely to diminish the propensity to
consume. The effect of the transfer from entrepreneurs to rentiers is more open to doubt. But if
rentiers represent on the whole the richer section of the community and those whose standard of life
is least flexible, then the effect of this also will be unfavourable. What the net result will be on a
balance of considerations, we can only guess. Probably it is more likely to be adverse than
favourable.
(2) If we are dealing with an unclosed system, and the reduction of money-wages is a
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