Chapter 2: From Keynes to Domar and Harrod: considering the capacity effect of investment and an attempt at dynamic theory
In The General Theory of Employment, Interest, and Money, John Maynard Keynes (1936) provided a general theory for the determination of the level of activity in a monetary production economy based on the principle of effective demand. For this purpose, he took as given the existing skill and quantity of labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer, the disutility of different intensities of labour and of the activities of supervision and organisation, as well as the social structure including the forces . . . which determine the distribution of national income. (Keynes 1936, p. 245) Neither growth nor distribution issues were thus in the focus of the General Theory. However, although not explicitly integrating distribution issues into his theory of effective demand, Keynes (1936, p. 262) was well aware that a transfer of income away from wage earners will have a dampening impact on the economy’s propensity to consume, and thus on aggregate demand, output and employment. Therefore, considering the aggregate demand effects of income and wealth distribution in Chapter 24, the final chapter, of the General Theory, he argues that ‘[t]he outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes’ (Keynes 1936, p. 372).
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