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General Theory of Employment - Essay Example

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The essay "General Theory of Employment" explores the main features of John Keynes’ General Theory of Employment. When discussing John Keynes’ theories on employment, they must be placed in their historical context. Keynes was looking for a reason for and a way out of the situation of mass unemployment…
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General Theory of Employment
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Download file to see previous pages He stated that "Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labor willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment". His definition of involuntary unemployment, based on response to an increase in aggregate demand, led to his definition that full employment is "a situation in which aggregate employment is inelastic in response to an increase in effective demand for its output" (Chapter 3).
In Keynesian theory, capitalism has no machinery to guarantee full employment. Keynes assumes that when aggregate demand is outweighed by aggregate supply, then the output will serve as the self-adjusting mechanism (Furstater, 2001, p. 4). There is "no self-adjusting mechanism which generates a level of effective or aggregate demand sufficient to ensure the full utilization of resources" (Pilling, 1986, p.5). This creates an environment where the possibility of unemployment always exists. This conclusion is repeated by Furstater (p. 10) who states that "capitalism is first and foremost a system that does not employ every person willing and able to work".
According to Keynes, the level of employment is directly related to the level of output which fluctuates based upon the level of effective demand. The two key components of effective demand are consumption and investment. Consumption refers to the money spent by individuals on consumer goods. As income increases, so does our demand for consumer goods, though not quite as much as our income, due to increased taxes and the possibility of our putting the money away in savings, and Keynes referred to this as the marginal propensity to consume. He developed an equation which expressed how much extra will be consumed with each additional unit of additional income:
Marginal propensity to consume = The amount consumption rises / The amount income rises;
mpc (marginal propensity to consume) = dCw / dYw. (Rodda, p. 2). ...Download file to see next pagesRead More
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