ABSTRACT
Introduction The wage-employment relationship is one of the central and most controversial issues in the General Theory. At the beginning Keynes makes the assumption of a given money wage as a preliminary working hypothesis. “But this simplification, with which we shall dispense later, is introduced solely to facilitate the exposition. The essential character of the argument is precisely the same whether or not money-wages, etc., are liable to change” (JMK, CW VII, p. 27). Despite this clear statement Keynes has often been interpreted to have assumed rigid wages. Due to the complex interdependencies between the different markets in the economy it takes until Chapter 19 that Keynes dispenses with his preliminary assumption. Here Keynes argues against the “classical doctrine” that a downward flexibility of money wages will systematically lead to full employment. On the contrary, lower nominal wages would nurture deflation, lead to higher bankruptcies and thereby would make things worse. Although Keynes states clearly that his analysis of the unemployment problem and the main conclusions of the General Theory, in contrast to the theory of his “classical” predecessors and contemporaries, do not depend on the assumption of rigid money wages, Haberler in a widespread retrospective assessment of Keynes’s famous work could state as the dominant interpretation in 1962 without hardly any opposition:
It is now almost generally recognized that the Keynesian theoretical system proper . . . depends on the assumption of wage rigidity. If that assumption is not made, the Keynesian system simply breaks down or, to put it differently, it loses its distinctive and differentiating quality which sets it apart from what is loosely called the “classical” system.
