BK. V

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APPENDIX TO CHAPTER 19

that in this case the assumption that more labour is not availableexcept at a greater real wage, which is fundamental to most ofthe argument, breaks down. For example, Professor Pigou rejects {op. cit. p. 75) the theory of the multiplier by assumingthat the rate of real wages is given, i.e. that, there being alreadyfull employment, no additional labour is forthcoming at a lowerreal wage. Subject to this assumption, the argument is, ofcourse, correct. But in this passage Professor Pigou is criticisinga proposal relating to practical policy; and it is fantastically farremoved from the facts to assume, at a time when statisticalunemployment in Great Britain exceeded 2,000,000 {i.e. whenthere were 2,000,000 men willing to work at the existingmoney-wage), that any rise in the cost of living, howevermoderate, relatively to the money-wage would cause the with-drawal from the labour market of more than the equivalent ofall these 2,000,000 men.

It is important to emphasise that the whole of ProfessorPigou ’s book is written on the assumption that any rise in thecost of living, however moderate, relatively to the money-wage willcause the withdrawal from the labour market of a number ofworkers greater than that of all the existing unemployed.

Moreover, Professor Pigou does not notice in this passage{op. cit. p. 75) that the argument, which he advances against“secondary” employment as a result of public works, is, on thesame assumptions, equally fatal to increased “primary” employ-ment from the same policy. For if the real rate of wages rulingin the wage-goods industries is given, no increased employmentwhatever is possible—except, indeed, as a result of non-wage-earners reducing their consumption of wage-goods. For thosenewly engaged in the primary employment will presumablyincrease their consumption of wage-goods which will reduce thereal wage and hence (on his assumptions) lead to a withdrawal oflabour previously employed elsewhere. Yet Professor Pigou accepts, apparently, the possibility of increased primary employ-ment. The line between primary and secondary employmentseems to be the critical psychological point at which his goodcommon sense ceases to overbear his bad theory.

The difference in the conclusions to which the abovedifferences in assumptions and in analysis lead can be shown bythe following important passage in which Professor Pigou sumsup his point of view: “With perfectly free competition amongworkpeople and labour perfectly mobile, the nature of the rela-tion {i.e. between the real wage-rates for which people stipulate