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The central argument of The General Theory is that the level of employment is determined not by the price of labour, as in classical economics, but by the level of aggregate demand. If the total demand for goods at full employment is less than the total output, then the economy has to contract until equality is achieved.
Thus, full employment of labor corresponds to potential output. Whilst full employment is often an aim for an economy, most economists see it as more beneficial to have some level of unemployment, especially of the frictional sort. In theory, this keeps the labor market flexible, allowing room for new innovations and investment.
The ergodic axiom asserts that the future of the economy can be predicted based on the past and present market conditions. Without the ergodic assumption, agents are unable to form rational expectations, undermining new classical theory. [220] In a non-ergodic economy, predictions are very hard to make and decision-making is hampered by ...
Download as PDF; Printable version; In other projects ... automatically provide full employment, ... Keynes believed the classical theory was a "special case" that ...
John Hicks's 1937 paper Mr. Keynes and the "Classics"; a suggested interpretation is the most influential study of the views presented by J. M. Keynes in his General Theory of Employment, Interest, and Money of February 1936.
Keynes interprets the relation between output and employment as a causative relation between effective demand and employment. He discusses what happens at full employment [16] concluding that wages and prices will rise in proportion to any additional expenditure leaving the real economy unchanged. The money supply remains constant in wage units ...
The majority of the classical and neoclassical orthodoxy agree that Say's law allows for an economy to maintain full employment as the mechanisms of equilibrium within capitalism allow for equality of aggregate supply and demand. [19] However, both Marx and Keynes refute the viability of Say's law occurring within the economy.
In Keynesian economic theory, equilibrium is typically assumed to occur at less than full employment, an assumption that is justified by appealing to the empirical connection between employment and output known as Okun's law. Aggregate expenditure can be broken down into four component parts.