Aggregate Demand, Employment and Equilibrium with Marginal Productivity: Keynesian Adjustment in the Craft Economy

Abstract

Most Post-Keynesians have approached the idea that marginal productivity accounted for the demand for labor with scepticism. None of them have thought that supply and demand for labor determined employment and real wages. All agree that Keynes' approach recast the argument in money rather than real terms. But if the market operates with money wages, how exactly does the real wage adjust to the marginal product? If the real wage adjusts in the labor market, why is full employment not established? When there is unemployment in "equilibrium", why is it so deep and persistent? The argument will be that Keynes was thinking in terms of fluctuations in aggregate demand, and asking how a Marshallian economy would respond. Keynes can be interpreted as demonstrating that a multiplier is consistent with flexible prices based on profit-maximizing under diminishing returns - so that the real wage equals the marginal product of labor. However, the Marshallian perspective has to be amended, as the economy moved towards Mass Production. In this paper, we will first examine the accepted account of the labor market, then go on to Marshallian technology and the price mechanism, showing how the economy would adjust to changes in aggregate demand. Then we will consider the consequences of a movement from a craft technology to Mass Production, and finally we will look at the Keynesian questions in fully developed Mass Production.