The General Theory of Employment, Interest, and Money

laissez-faire
, is 
the opposite of the truth. It is only in a highly authoritarian society, where sudden, substantial, all-
round changes could be decreed that a flexible wage policy could function with success. One can 
imagine it in operation in Italy, Germany or Russia, but not in France, the United States or Great 
Britain. 
If, as in Australia, an attempt were made to fix real wages by legislation, then there would be a 
certain level of employment corresponding to that level of real wages; and the actual level of 
employment would, in a closed system, oscillate violently between that level and no employment at 
all, according as the rate of investment was or was not below the rate compatible with that level; 
whilst prices would be in unstable equilibrium when investment was at the critical level, racing to 
zero whenever investment was below it, and to infinity whenever it was above it. The element of 
stability would have to be found, if at all, in the factors controlling the quantity of money being so 

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determined that there always existed some level of money-wages at which the quantity of money 
would be such as to establish a relation between the rate of interest and the marginal efficiency of 
capital which would maintain investment at the critical level. In this event employment would be 
constant (at the level appropriate to the legal real wage) with money-wages and prices fluctuating 
rapidly in the degree just necessary to maintain this rate of investment at the appropriate figure. In 
the actual case of Australia, the escape was found, partly of course in the inevitable inefficacy of the 
legislation to achieve its object, and partly in Australia not being a closed system, so that the level 
of money-wages was itself a determinant of the level of foreign investment and hence of total 
investment, whilst the terms of trade were an important influence on real wages. 
In the light of these considerations I am now of the opinion that the maintenance of a stable general 
level of money-wages is, on a balance of considerations, the most advisable policy for a closed 
system; whilst the same conclusion will hold good for an open system, provided that equilibrium 
with the rest of the world can be secured by means of fluctuating exchanges. There are advantages 
in some degree of flexibility in the wages of particular industries so as to expedite transfers from 
those which are relatively declining to those which are relatively expanding. But the money-wage 
level as a whole should be maintained as stable as possible, at any rate in the short period. 
This policy will result in a fair degree of stability in the price-level;—greater stability, at least, than 
with a flexible wage policy. Apart from 'administered' or monopoly prices, the price-level will only 
change in the short period in response to the extent that changes in the volume of employment 
affect marginal prime costs; whilst in the long period they will only change in response to changes 
in the cost of production due to new techniques and new or increased equipment. 
It is true that, if there are, nevertheless, large fluctuations in employment, substantial fluctuations in 
the price-level will accompany them. But the fluctuations will be less, as I have said above, than 
with a flexible wage policy. 
Thus with a rigid wage policy the stability of prices will be bound up in the short period with the 
avoidance of fluctuations in employment. In the long period, on the other hand, we are still left with 
the choice between a policy of allowing prices to fall slowly with the progress of technique and 
equipment whilst keeping wages stable, or of allowing wages to rise slowly whilst keeping prices 
stable. On the whole my preference is for the latter alternative, on account of the fact that it is easier 
with an expectation of higher wages in future to keep the actual level of employment within a given 
range of full employment than with an expectation of lower wages in future, and on account also of 
the social advantages of gradually diminishing the burden of debt, the greater ease of adjustment 
from decaying to growing industries, and the psychological encouragement likely to be felt from a 
moderate tendency for money-wages to increase. But no essential point of principle is involved, and 
it would lead me beyond the scope of my present purpose to develop in detail the arguments on 
either side.