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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.
The result, as Hicks points out, is the false impression that Keynes assumed wages to be constant at any level of employment short of full employment. [33] He claimed that "Hicks' procedure is completely unnecessary". Keynes explicitly declares wages to be exogenous on p247.
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.
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 classical economists took the theory of the determinants of the level and growth of population as part of Political Economy. Since then, the theory of population has been seen as part of Demography. In contrast to the Classical theory, the following determinants of the neoclassical theory value are seen as exogenous to neoclassical economics:
The General Theory challenged the earlier neoclassical economic paradigm, which had held that provided it was unfettered by government interference, the market would naturally establish full employment equilibrium. In doing so Keynes was partly setting himself against his former teachers Marshall and Pigou.
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 ...
The pure income effect is shown as the movement from point A to point C in the next diagram. Consumption increases from Y A to Y C and – since the diagram assumes that leisure is a normal good – leisure time increases from X A to X C. (Employment time decreases by the same amount as leisure increases.)