CH. 20

THE EMPLOYMENT FUNCTION

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It is true that in a society liable to change such a policycannot be perfectly successful. But it does not followthat every small temporary departure from price stabil-ity necessarily sets up a cumulative disequilibrium.

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We have shown that when effective demand isdeficient there is under-employment of labour in thesense that there are men unemployed who would bewilling to work at less than the existing real wage.Consequently, as effective demand increases, employ-ment increases, though at a real wage equal to or lessthan the existing one, until a point comes at which thereis no surplus of labour available at the then existing realwage; i.e. no more men (or hours of labour) availableunless money-wages rise (from this point onwards)faster than prices. The next problem is to considerwhat will happen if, when this point has been reached,expenditure still continues to increase.

Up to this point the decreasing return from apply-ing more labour to a given capital equipment has beenoffset by the acquiescence of labour in a diminishingreal wage. But after this point a unit of labour wouldrequire the inducement of the equivalent of an increasedquantity of product, whereas the yield from applyinga further unit would be a diminished quantity of pro-duct. The conditions of strict equilibrium require,therefore, that wages and prices, and consequentlyprofits also, should all rise in the same proportion asexpenditure, the “real” position, including the volumeof output and employment, being left unchanged in allrespects. We have reached, that is to say, a situationin which the crude quantity theory of money (inter-preting “velocity” to mean “income-velocity”) is fullysatisfied; for output does not alter and prices rise inexact proportion to MV.

Nevertheless there are certain practical qualifica-

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