Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

554 Money, Bank Credit, and Economic Cyclesthe price of consumer goods and services begins to rise fasterthan wages. 6868 It is interesting to remember how Keynes defines “involuntary”unemployment:Men are involuntarily unemployed if, in the event of a smallrise in the price of wage-goods relative to the money-wage,both the aggregate supply of labour willing to work for thecurrent money-wage and the aggregate demand for it at thatwage would be greater than the existing volume of employment.(Keynes, The General Theory, p. 15; italics deleted)By this convoluted definition, Keynes simply means that “involuntary”unemployment exists whenever a drop in relative wages would giverise to an increase in employment. However there are two possibleroutes to a relative reduction in wages: either a worker may acceptlower nominal wages, or he may agree to work in an environmentwhere nominal wages remain unchanged, but the prices of consumergoods rise. The latter is the more indirect route. In neither case is unemploymentinvoluntary: it is purely voluntary in both. In the first, aworker remains unemployed because he voluntarily chooses not towork for a lower nominal wage. In the second, he only agrees to workif he has deceived himself, since his real wages fall even though hisnominal wages remain the same. (In other words, in the second case heagrees to work in an environment in which the prices of consumergoods and services increase faster than wages). In fact most of Keynes’spolicy prescriptions amount to an attempt to reduce unemployment bylowering real wages via the indirect route of increasing inflation, andthus the prices of consumer goods, while maintaining nominal wagesconstant. This remedy has failed, not only because workers are nolonger fooled by the money illusion and demand nominal wageincreases which at least compensate for decreases in the purchasingpower of money, but also because the proposed “medicine,” apart frombeing ineffective, entails the enormous social cost of the economic crisesand recessions credit expansion provokes. Furthermore we must realizethat to a great extent, Keynes’s own prescriptions, which consist ofboosting effective demand through fiscal and monetary measures, arethe main culprits in keeping labor markets rigid and even in makingthem gradually more so, since economic agents, specifically workersand unions, have come to believe that adjustments in real wages mustalways take the form of increases in the general price level. Hence Keynesiandoctrine, rather than a “remedy” for the disease, has become anaggravating factor which worsens it. It will take much time and effortfor economic agents to again become accustomed to living in a stableenvironment where the price system can again operate without the