Section I: Keynes uses the first section to outline the purpose of the next four chapters; which comprise Book II: Definitions and Ideas. It is "an attempt to clear up certain perplexities which have no peculiar or exclusive relevance to the problems which it is our special purpose to examine." I am not entirely sure why Keynes felt the need to devote four chapters to issues which are not integral to the General Theory, but hopefully they will not be completely void of use. The rest of Chapter four is devoted to the choice of units in economic analysis.
Section II: Keynes begins by claiming “the units, in terms of which economists commonly work, are unsatisfactory,” and this “can be illustrated by the concepts of National Dividend, the stock of real capital and the general price level.” Keynes breaks down his analysis of each of the three concepts, so I will do the same:
(1) The National Dividend, according to Marshall and Pigou, measures the volume of current output or real income and not the value of output or money income. Keynes argues that it would be fallacious to use the National Dividend to erect a quantitative science, “it is a grave objection to this definition for such a purpose that the community’s output of goods and services is a non-homogeneous complex which cannot be measured.” I have no quarrel with Keynes’ argument here, as I too believe the National Dividend is not quantifiable, and should not be used in economic analysis.
(2) Keynes continues that it is even more difficult to calculate the stock of capital equipment, “for we have to find some basis for a quantitative comparison between the new items of equipment produced during the period and the old items which have perished.” This is a reasonable disagreement, because not only does a firm change their stock of capital but as the equipment wears down it can become less productive. He continues to critique Pigou’s argument for using net addition to capital equipment to determine National Dividend, by claiming – correctly – that “since this deduction is not a deduction in terms of money, he is involved in assuming that there can be a change in physical quantity, although there has been no physical change; i.e. he is covertly introducing changes in value .” Keynes’ critique receives bonus points when he cites Hayek’s criticism of Pigou’s argument.
(3) The last concept is the general price level, which Keynes attacks in similar fashion to the previous two. Keynes, when describing the “conundrums” caused by these concepts, makes a particularly fine point when he writes, they “have no relevance to the casual sequence of economic events, which are clear-cut and determinate in spite of the quantitative indeterminacy of these concepts. It is natural, therefore, to conclude that they not only lack precision but are unnecessary.” He goes on to say that the proper place for such concepts as National Dividend or the price level is statistical and historical analysis.
Section III: In this section, Keynes attempts to justify the use of two units when developing his general theory: quantities of money-value and quantities of employment. Keynes argues that on every occasion, entrepreneurs are concerned with how much they should work their given stock of capital equipment. My qualm with this statement is that capital is not fixed for an entrepreneur; they have the choice of increasing their stock of capital equipment through saving and investment. Obviously in the immediate future capital will be fixed, but it is dangerous to assume this is the only decision entrepreneurs are concerned with. From this claim, Keynes continues that when there is an increase in aggregate output, this must be due to firms employing more labor to work their given stock of capital equipment. Thus, Keynes avoids using National Dividend to represent output by claiming, “for purposes of description or rough comparison, we wish to speak of an increase of output, we must rely on the general presumption that the amount of employment associated with a given capital equipment will be a satisfactory index if the amount of resultant output.” This is an interesting statement, for in critiques above Keynes would have taken Pigou to task for relying on “general presumptions” and a “satisfactory index.” Furthermore, we know that economics as a subdivision of praxeology derives economic analysis from certain axioms, not general presumptions.
Section IV: This section is a maze of mathematical equations and functions which Keynes attempts to use to rewrite his aggregate supply function in terms of employment and money, his fundamental units. He comes to the conclusion that:
The ordinary supply curve, p = (Zr + Ur(Nr))/Or = (φr(Nr) + Ur(Nr)) /ψr(Nr)
Where,
φr(Nr) = the expected proceeds (net of user cost), depending on some employment level, Nr
Ur(Nr) = the expected user cost, depending on some level of employment, Nr
ψr(Nr) = the level of output, depending on some level of employment, Nr
Keynes entire reasoning for this complex and confusing equation is so that, “we can aggregate the Nr’s in a way in which we cannot aggregate the Or’s, since ∑Or is not numerical quantity.” Essentially, Keynes used Section II to refute the argument that net output can be used in economic analysis, but then claims here that if you use a mathematical formula dependent on employment that represents net output, everything is fine. This is unfortunate because not only are the Greek symbols and equations confusing, they focus on the aggregate when all economic action is taken by individuals.
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Thus, Keynes avoids using National Dividend to represent output by claiming, “for purposes of description or rough comparison, we wish to speak of an increase of output, we must rely on the general presumption that the amount of employment associated with a given capital equipment will be a satisfactory index if the amount of resultant output.”
As you point out, Keynes's criticism of Pigou is spot on: one cannot treat non-homogeneous goods as homogeneous simply because it is convenient. Yet labor is equally non-homogeneous; it is perhaps even less so than capital. Even if we concern ourselves with rudimentary tasks, individual laborers will perform these tasks differently.
This leads us to Keynes's second great error in this section: he introduces the labor theory of value. Even supposing that we can come up with some sort of unit of labor which usage allows us to compare disparate laborers, this gets us no closer to deciding whence comes value.
Even Marx, who built his system on this fallacy, realized that mere labor would be insufficient to impute value; it was necessary that this labor be utilized to produce a good for which demand existed.
This is unfortunate because not only are the Greek symbols and equations confusing, they focus on the aggregate when all economic action is taken by individuals.
Well said. As long as Keynes's continues to aggregate different entities, his equations are of absolutely no utility.
Two other points from this section. We now use GDP in place of Pigou's National Dividend. Yet this figure, as Keynes rightly points out, is not of much use to anyone seeking to gauge the health of the economy. Hence GDP decreased after WWII--since G dropped at the end of the war--but the economy itself was in far better shape. Likewise, the small increase in GDP--again, due to the G component--during this recession has done little, if anything, to aid the recovery.
Unemployment figures are similarly problematic. Obviously an increase in employment is generally good, but the figure is unable to tell us if people are employed well. We could pay people money to build pyramids--something Keynes recommends later--but while this increase employment, it does so without assisting the economy appreciably. In fact, as these resources are removed from the productive sector, such stimulus is often a large drain on the economy.
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