12 THE GENERAL THEORY OF EMPLOYMENT BK. I

in the general level of money-wages will be accompanied,at any rate in the short period and subject only to minorqualifications, by some, though not always a pro-portionate, reduction in real wages.

Now the assumption that the general level of realwages depends on the money-wage bargains betweenthe employers and the workers is not obviously true.Indeed it is strange that so little attempt should havebeen made to prove or to refute it. For it is far frombeing consistent with the general tenor of the classicaltheory, which has taught us to believe that prices aregoverned by marginal prime cost in terms of moneyand that money-wages largely govern marginal primecost. Thus if money-wages change, one would haveexpected the classical school to argue that prices wouldchange in almost the same proportion, leaving the realwage and the level of unemployment practically thesame as before, any small gain or loss to labour beingat the expense or profit of other elements of marginal costwhich have been left unaltered .1 They seem, however,to have been diverted from this line of thought, partlyby the settled conviction that labour is in a position todetermine its own real wage and partly, perhaps, bypreoccupation with the idea that prices depend on thequantity of money. And the belief in the propositionthat labour is always in a position to determine its ownreal wage, once adopted, has been maintained by itsbeing confused with the proposition that labour isalways in a position to determine what real wage shallcorrespond to full employment, i.e. the maximumquantity of employment which is compatible with agiven real wage.

To sum up: there are two objections to the secondpostulate of the classical theory. The first relates to theactual behaviour of labour. A fall in real wages due

1 This argument would, indeed, contain, to my thinking, a large elementof truth, though the complete results of a change in money-wages are morecomplex, as we shall show in Chapter 19 below.