Prices and Real Wages

Abstract

The previous chapter examines the impact on employment of changes in money wages and prices that are not due in the first instance to changes in the level of effective demand. This chapter considers a separate issue: namely the changes in money wages, prices and real wages that are in response to variations in effective demand and output. The classical theory of money and prices is of little use in examining these responses, for it only applies to the special circumstances of a fully employed economy with effective demand assumed constant. In addition Keynes has severe reservations about the classical dichotomy between the theories of prices and value. In contrast Keynes’ General Theory model provides a generalised explanation of the response of money wages, prices and real wages to changes in effective demand. In doing this Keynes integrates the theories of value and prices, and this provides a springboard for his generalised analysis of prices and inflation.