APPENDIX TO CHAPTER 19
Professor Pigou ’s “Theory of Unemployment”
Professor Pigou in his Theory of Unemployment makes thevolume of employment to depend on two fundamental factors,namely (1) the real rates of wages for which workpeople stipulate,and (2) the shape of the Real Demand Function for Labour.The central sections of his book are concerned with determiningthe shape of the latter function. The fact that workpeople infact stipulate, not for a real rate of wages, but for a money-rate,is not ignored ; but, in effect, it is assumed that the actual money-rate of wages divided by the price of wage-goods can be takento measure the real rate demanded.
The equations which, as he says, “form the starting pointof the enquiry” into the Real Demand Function for Labour aregiven in his Theory of Unemployment, p. 90. Since the tacitassumptions, which govern the application of his analysis, slip innear the outset of his argument, I will summarise his treatmentup to the crucial point.
Professor Pigou divides industries into those “engaged inmaking wage-goods at home and in making exports the sale ofwhich creates claims to wage-goods abroad” and the “other”industries: which it is convenient to call the wage-goods indus-tries and the non-wage-goods industries respectively. He sup-poses x men to be employed in the former andy men in the latter.The output in value of wage-goods of the x men he calls F(#);and the general rate of wages F'(*). This, though he does notstop to mention it, is tantamount to assuming that marginalwage-cost is equal to marginal prime cost. 1 Further, he assumes
1 The source of the fallacious practice of equating marginal wage-cost tomarginal prime cost may, perhaps, be found in an ambiguity in the meaningof marginal moage-cost. We might mean by it the cost of an additional unitof output if no additional cost is incurred except additional wage-cost; or wemight mean the additional wage-cost involved in producing an additionalunit of output in the most economical way with the help of the existingequipment and other unemployed factors. In the former case we are pre-
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