Unemployment Theory and Practice

In Keynes’ view, the rate of growth ensured that there was full or less than full employment. If the rate of economic growth were less than that of the underlying rate of population growth, then unemployment increased. the converse was also true.Keynes posited that economic growth was due to demand increases. Demand for Keynes was defined as the total amount of resources devoted to buying goods. in his model, all demand was equal. If, for example, the private sphere increased personal consumption, that added to growth. The same was true for industry: if they increased investment or expenses, then their increases in spending promoted growth. During the Depression, Keynes proposed that increasing government spending would also increase growth—and therefore government provided an important counterbalance during times when private or industrial demand dipped. Although Keynes acknowledged that there may be long-term instabilities related to growth, he felt that those instabilities were less important than the need to keep employment (and therefore consumer demand) high. Keynes dismissed the longer-term consequences by famously saying “in the long run, we’re all dead.”From a microeconomic point of view, Keynes failed to acknowledge the impact of “rent,” which is the pernicious effect that increases in government spending have on growth in the rest of the economy. The government can decide to fund increases in spending through increasing borrowing, increasing taxes, or both. If borrowing goes up, private and industrial borrowers must pay more for their borrowed money, and they invest in fewer projects, houses and cars as a result. If the government chooses to increase tax revenues to pay for increased spending, the subsequent effect on consumer spending (regardless of whether the taxes come directly from consumers or industry) will be decline. The amount of government “take” is less than the overall brake on the economy, as the negative effect at the margin—on the incremental ‘final dollar’ earned by workers and corporations, is greater than the value of that dollar to the government.