Thursday, October 4, 2012
Have to go from effective demand to employment
Determine output to see what employment gives you
If you increase demand for output then you increase demand for labor
Chapter 21: The Theory of Prices
Micro price determination vs. Q Theory price determination. Escape from this
General price level, like individual, depends partly on remuneration of factors and
partly on scale of output.
Scale of output affects price through productivity
At less than full employment, output responds to rises in M; at full employment,
L shapes relationship between output and prices
“The object of our analysis is, not to provide a machine, or method of blind
manipulation, which will furnish an infallible answer, but to provide ourselves with
an organized and orderly method of thinking out particular problems; and, after we
have reached a provisional conclusion by isolating the complicating factors one by
one, we then have to go back on ourselves and allow, as well as we can, for the
probable interactions of the factors amongst themselves. This is the nature of
Vicious attack on “mathematical” economics.
Back then it wasn’t very mathematical
Qualifications to points made in III: 1.Main influence of M on D is through r. Ratio between the two is V, though it can
2.If wages don’t change with output or if some part of equipment has greater cost
per unit of output, then prices may rise as employment increases.
3.Bottlenecks reached successively. Sharp rises in certain commodity prices. Exact
effect depends on speed of growth.
4.Succession of points at which wages will rise even before full employment. Semi-
5. Marginal user cost may fluctuate differently and more widely than wages.
True inflation: No further increase in employment, only prices rise.
Asymmetry in the effect of changes in effective demand on output. Results from
resistance to reductions in W. If not, there would be pure deflation, too.
“We must have some factor, the value of which in terms of money is, if not fixed, at
least sticky, to give us any stability of values in a monetary system.” (So sticky wages
are the problem, or at least the identifying characteristic of a monetary economy?)
Compare with “the nominal anchor.”
Formalize and “exhibit the extreme complexity of the relationship between prices
and the quantity of money.”
Is there a long-run relation between money and prices? “...a question for historical
generalization rather than for pure theory...”
“...when money is relatively scarce, some means is found to increase the effective
quantity of money...” So prices tend to rise over time.
19 thcentury: gilt-edge rates of 3 to 3.5 per cent were consistent with investment
that kept “an average of employment which was not intolerably low...” At most a 50
per cent change in prices. Due to a balance of forces. (“The average level of
employment was, of course, substantially below full employment, but not so
intolerably below it as to provoke revolutionary changes.”) 193