Keynes Ch. 20

The Employment Function, The Pandemic, Some Rambling

I have gotten pretty behind on these as things have been going on with Policy and it’s been no longer the pandemic. I also moved to Jersey City, so say hi if you’re nearby. I’m going to try to get the rest of the book finished in the first half of this year, but no promises. The posts might be a little bit shorter, but I want this project to be bookended in a nice way so that I can move on from it to other stuff.

On its face, this chapter gives an account of “The Employment Function,” which sounds at first like something so vague that there’s no way it can still be useful. It actually is though! For the whole book, we’ve been hearing that employment is a function of effective demand, as translated by the investment decisions of firms. This is the first place where he explains a little bit about how that function might plausibly work–not enough to write math papers about it, but enough to use it as an aid to thought. In this chapter, Keynes develops the idea of an employment function to show how it is in-principle possible to map the level and distribution of effective demand onto the physical capital goods and social and market-institutional arrangements of firms in a way that tells you something about how many workers will have jobs, and which sectors those jobs will be in. It’s a little bit IO (Industrial Organization) and a little bit I-O (Input-Output Economics). 

So, although Keynes has been telling us for the whole book that the level of effective demand drives the level of employment, it never really explained how it envisioned the causal structure of that functional relation. Here, Keynes makes a fairly simple point: the amount of employment that a given level of effective demand translates to is dependent on the physical and institutional structure of the economy as well as the allocation of that demand on the consumer side. However, at this level of conceptual complexity, it is difficult to give closed-form structural equations that describe how two kinds of things will “always” interact or think through general equilibrium. This is something that has historically made it relatively difficult to capture Keynes’ ideas in a handful of equations in a textbook model. It’s more like a method for making Sankey diagrams than anything else.