Hawtrey on the Keynesian Explanation of Unemployment

Here is a tidbit I just found the end of R. G. Hawtrey’s long chapter on the General Theory in his volume Capital and Employment, (second edition, 1952) pp. 218-19.

Unemployment in Great Britain seemed at the time [1935 when Keynes finished writing the General Theory] to be chronic: the number of unemployed had never fallen below a million since 1921. Keynes was looking for an explanation of chronic unemployment, but it was hardly plausible to attribute it to the low long-term rate of interest [i.e., to a liquidity trap]. The yield of Government securities had been exceptionally high till the Conversion of 1932.

And in reality there is no school of thought for which the explanation of unemployment presents any difficulty. If wages are too high for full employment, and resist reduction, unemployment is bound to result. Adam Smith held that for a growing population a corresponding growth of capital was essential to maintain wages at or above subsistence level; the penalty for the failure of capital to grow was unemployment as well as starvation. For his successors it was self-evident that the employment afforded by the “wage fund” was inversely proportional to the rate of wages, and, when the theory of the wage fund was superseded by that of the marginal yield of labour, it was no less self-evident that a wage-level held above marginal yield would prevent full employment. Say’s loi des debouches declared that production generated its own demand; but if for any reason production was below capacity and there was unemployment, the demand generated would be no more than sufficient to absorb output at that level.

What I find especially interesting in the passage is Hawtrey’s correct understanding of Say’s Law, so that it constitutes not, as Keynes supposed, an assertion that unemployment is impossible, but an explanation of how aggregate demand is itself just the flip side of aggregate supply. Contractions of supply can be cumulative. It’s not just Keynesians who forget this essential point. RBC theorists and others who model the business cycle as a general-equilibrium phenomenon miss an essential feature of what constitutes the business cycle.


14 Responses to “Hawtrey on the Keynesian Explanation of Unemployment”

  1. 1 Blue Aurora July 11, 2013 at 10:48 pm

    David Glasner: Regarding Hawtrey’s statement…did you read Book V of The General Theory properly? Book V consists of Chapter 19, the appendix to Chapter 19, Chapter 20, and Chapter 21. Nominal wage rigidity is only one component of the entire picture that J.M. Keynes makes. Also, you ought to compare and contrast the equations in Part II, Chapters 8 to 10 of A.C. Pigou’s 1933 book, The Theory of Unemployment, to J.M. Keynes’s equations in Book V of The General Theory. But as for the definition of Say’s Law, I think J.M. Keynes’s argument was that Say’s Law was really a description of a special case and particular situation. In that sense, he is correct.

    Sorry to go off-topic, but are you going to start responding to comments again? I’m still waiting for a response to this question:



  2. 2 Greg Hill July 11, 2013 at 11:58 pm

    Hi David,

    You write, “What I find especially interesting in the passage is Hawtrey’s correct understanding of Say’s Law, so that it constitutes not, as Keynes supposed, an assertion that unemployment is impossible, but an explanation of how aggregate demand is itself just the flip side of aggregate supply.”

    But aggregate demand is not “just the flip side of aggregate supply.” Suppose each firm chooses the level of employment that will maximize its expected profits. Next, suppose actual sales revenue turns out to be less than expected revenue because income recipients, in the aggregate, spend a smaller fraction of their income than is consistent with firms’ total revenue expectations. Does it make sense to say that aggregate demand is “just the flip side of aggregate supply” in this case? And if expenditure in the aggregate falls short of firms’ revenue expectations in the aggregate, then unemployment is a likely outcome, is it not?


  3. 3 Daniel Kuehn July 12, 2013 at 5:59 am

    To clarify: quantity supplied is the flip side of quantity demanded. Surely aggregate supply is not the flip side of aggregate demand, right?


  4. 4 greghill1000 July 12, 2013 at 12:01 pm


    “To clarify: quantity supplied is the flip side of quantity demanded. Surely aggregate supply is not the flip side of aggregate demand, right?”

    This doesn’t clarify it for me. Roughly speaking, the upshot of Say’s law is that the payments made to those who produce output become the means of purchasing this output. I suppose you can characterize this relationship by saying that “aggregate supply and demand are the ‘flip side’ of one another.” But if you do, you’re apt to miss two of the main points at issue: 1) the amount of saving out of these factor payments may turn out to be greater or less than the amount of investment undertaken by firms; and 2) aggregate expenditure depends not only on the payments made in the production of aggregate output, but also on the expansion or contraction of credit by the banking system. Say’s Law may have been a plausible proposition before the advent of modern banking system, but not after it.


  5. 5 Tas von Gleichen July 12, 2013 at 8:27 pm

    Unemployment one of the most written topics in economics. Always interesting to read more about it.


  6. 6 dhpattison July 13, 2013 at 7:38 am

    Daniel –
    See the post on Say’s Law linked to by Glasner above: “A cumulative process can be viewed as either a supply-side process (Say’s Law) or a demand-side process (the Keynesian multiplier), but they are really just two sides of the same coin.”


  7. 7 Ray Newton July 13, 2013 at 8:50 am


    Not nitpicking but……..

    The subject heading does not adequately cover the topic that invites meaningful comment for, as it stands, it is too simplistic, and, in itself, rather meaningless; Otherwise, both the answer, and Keynes explanatory account could have been contained in one sentence.

    From the contributing answers, we can see that what is being invoked is –
    What are the causes of unemployment? (And perhaps we could add – and its potential remedies – or something along that line)

    Yet here again, the topic, especially as it is one where much response is invited, and for which, when not more clearly defined, can have more than enough answers – some which would be wide of the mark, in consequence.

    This is more important today, than in Keynes’ day, for he would have viewed things from a purely capitalistic point of view, and we have, now, a ‘new kid on the block’ which is impacting the world economic scene, and, yet, has not by any means adopted, fully, the capitalistic ideology, and perhaps never will..

    I hear, echoing in the background the words of a famous BBC Radio ‘professor’ of yesteryear, who was part of a panel on a program called ‘The Brains Trust’ and would always respond to a question with – “It all depends on what you mean by………” In other words, clarity of question is important.

    There, I am giving my age away, or perhaps I watched, just recently, a television social history channel that covered that particular era. We just cannot assume anything without sufficient factual knowledge, especially, today.

    I enjoy your articles, and feedback comments, Thanks


  8. 8 David Glasner July 14, 2013 at 8:55 pm

    Blue Aurora, Just curious, were you expecting me to answer that I did not read Book V of the General Theory properly? It is entirely possible that I did not read Book V properly, but for me to know that I did not read it properly, wouldn’t I have had to have read it properly? Do you see my problem?

    I have a similar problem with your question about whether I am going to start responding to comments again. I could hardly answer “no” to that question without contradicting myself, could I? Unless, I suppose, I have not read your question properly.

    I think Keynes missed something important in his attack on Say’s Law, and Hawtrey very succinctly identified what he missed, which is why I was thought it worthwhile to share the passage with readers of the blog. But you are free to draw your own conclusions.

    Finally, I followed the link to your comment, but don’t see a question. However, I do thank you for the reference to the paper by Dimand and Betancourt which is extremely informative.

    Greg, The problem that I have with your thought experiment is that you don’t specify why “income recipients, in the aggregate, spend a smaller fraction of their income than is consistent with firms’ total revenue expectations.” What are income recipients doing with the unspent fraction of their income? Are they trying to increase their holdings of cash? If so, there is, at least potentially, a market mechanism that can supply the additional cash without the necessity of either a reduction in consumption or a falling price level. If they are not trying to build up their cash balances, then what are they trying to do with the unspent income?

    When I say aggregate supply is the flip side of aggregate demand, I mean that if there are markets in disequilibrium, the amount actually supplied in those markets will be reduced, but that reduction in supply will also cause a reduction in demand. The failure of some markets to equilibrate, causing supply to be restricted, will cause corresponding reductions in demand, which will tend to be cumulative (a multiplier effect) so that the aggregate reduction in income will be greater than the initial disturbance.

    Daniel, When I refer to aggregate demand and aggregate supply as flip sides of each other, I am not referring to the aggregate demand curve and aggregate supply curve of standard macro theory, which are really reduced forms of pairs of market equilibrium curves.

    Greg, See my point above about the market mechanism by which an increase in the demand for money causes an increase in the quantity of money supplied by the banking system. That is Say’s Law in action. That is the market missing from all the standard GE monetary models, such as Patinkin’s, in which the monetary sector consists of a single market. Actually there are two markets, because banks exchange deposits for IOUs supplied by the public. See Earl Thompson’s 1974 paper “The Theory of Money and Income Consistent with Orthodox Value Theory,” on his webpage at the UCLA econ department.

    Tas, Thanks, glad you found it interesting.

    Ray, I didn’t mean to suggest that the passage that I quoted from Hawtrey provides an adequate explanation of unemployment, just that he identified one important consideration that Keynes misunderstood. I agree that there is a danger whenever we try to oversimplify complex social interactions, but if we didn’t try to simplify things at all, we would never make any progress toward understanding. But we should always be skeptical of our theories because they inevitably leave something out, and often what is left out is important. Thanks for your kind words.


  9. 9 greghill1000 July 14, 2013 at 11:16 pm


    Thanks for your usual thoughtful reply. You ask why income recipients would reduce their expenditure and suggest that, if they aim to increase their cash holdings, the market can supply the additional cash without “either a reduction in consumption or a falling price level.”

    To answer you first question, suppose income recipients want to avoid becoming “overextended” in the event of a job loss or other calamity. By reducing their expenditure, they can reduce their debt-to-equity ratio, or, more generally, their “obligations-to-available resources ratio,” in hopes of being in a better position to cope with the calamity if comes. Granted, people can increase their cash holdings without reducing their consumption by taking out a loan; but this puts them in a deeper hole in the event the calamity comes. And what happens when lots of people try to reduce their debts by reducing their spending (and/or by selling their assets)?


  10. 10 Ray Newton July 15, 2013 at 2:49 am

    David I thank you for your response. It seems, perhaps, I did not make my first point clear. However, will let that go, but reiterate a further point I made.

    First, though, I do agree that keeping something ‘simple’, while maintaining clarity, in most economic topics within the constraints imposed by time and space, alone, in forums or blogs is nigh impossible.

    The ‘other point’ I refer to infers as to whether any of Keynes theories have much relevance today, at least where they warrant much, if any, time spent on in-depth debate.

    Sun Tzu’s ‘theories’ on the art of war hold good to today, because he avoids equating the subject with any ‘scientific approach’ analogies, or references. He keeps it to behavioural, mind-set, doctrine. which is based on partly countering the influences of the inerrant seven great weaknesses of man and referred to as the seven deadly sins, and which have never changed over millenniums.

    Our world is in constant change, and the technology advances this along at an alarming pace. Today, methods, and theories based on how battles were fought with sailing ships, or without tanks, and nuclear weapons change. Yet the mind set of what gets us in, and out, of such situations and even the behaviour of the participants when in them changes little if any.

    Keynes theories were based on, at least in his earlier days, what appeared a highly successful capitalistic society, the flaws of which were only just starting to appear, and/or accepted, towards his end. The only opposing ideology, as practised by Russia, had revealed its weaknesses and was proving no contender.

    But now we have China with a total alien, and opposite, concept that so far has been remarkable in moving its population out of years of poverty and decline in standards. The concept can be in simple terms described as pursuing in all human dealings a ‘win/win’ condition. This opposes the Western ‘winner takes all’ ideology, or again as it always turns out, in simple terms – war/war.

    You see, it is behavioural approach to an objective that is the key. It is the ‘ism’s that become judged by how they are practised, rather than their underlying principles. For example (and I believe we are seeing some early attempts to make change) there is no reason why ‘capitalism’ could not seek a ‘win/win’ approach both in employer/employee relations, and with trading partners etc. Also in politics, it would help greatly social cohesion.

    Regrettably, the questions posed by unemployment, and how to solve it, are going to increase, dramatically.. It is unavoidable (without some, unthinkable, drastic population cull measure) to become a far greater concern for our world than ‘global warming’.

    The world population is increasing, we are finding ways to prolong life, and its expectancy, while at the same time bringing in technology at an alarming pace that removes the need for labour. Also more people are ‘coming to the table’ to demand a share of ‘the good life’ we promised, and deceived them into believing they could have if they joined us. We also bombard them, sometimes in their mud huts, and shanty towns, with moving pictures (worth more than a thousand words) of a life so long denied them, but which requires rewarding employment to attain.

    There is no going back to the old status quo. We are well past the point of no return. Only a steadily fading hope, aided by false promise, is keeping more people off the streets.

    Hope? Well, as Nietzsche said: ““Hope in reality is the worst of all evils because it prolongs the torments of man.”

    We need a new, enlightened, Keynes that can provide answers to fulfil that hope for all of humanity in a fast changing world.


  11. 11 Blue Aurora July 18, 2013 at 12:09 am

    David Glasner: No, I wasn’t expecting you to say that you had not read Book V. I should have been clearer: the part of The General Theory that deals with Say’s Law is not as critical as Book V. As for my question to you on the comments…yes, I do see where you’re coming from. Perhaps I should’ve asked, “When are you going to start responding to comments again?”, instead. As for the paper on the Fisher Effect and the article by Betancourt and Dimand…well, what I really had in mind was asking you whether you were aware of it, and I was really trying to suggest that you cite that article for your paper on the Fisher Effect. Instead, I failed to be clear, and a lapse in memory must’ve made things worse.


  12. 12 David Glasner July 21, 2013 at 2:19 pm

    Greg, OK, I think that you are describing a scenario that can give rise to a reduction in aggregate demand. A general apprehension of some future adverse event or events that will frustrate current current plans may induce people to try take defensive positions and reduce their liabilities. This would cause people to want to increase their access to liquidity by building up their cash balances, but also by cutting back expenditures and paying down debt. This is different from a straightforward reduction in time preference (with no increase In perceived uncertainty) that would correspond to increasing asset prices and reduced real interest rates, thereby inducing increased investment. In this situation, the increased perception of risk and uncertainty may offset or even outweigh the tendency toward reduced interest rates, leading to a fall in investment expenditures as well as reduced consumption expenditures. But given that uncertainty has increased, it is not obvious that a reduction in current economic activity is not efficient. If making new investments now have a high probability of going bad, it is probably a good thing for fewer investments to be made. The problem is that the initial reduction in investment has a multiplier effect that further reduces income and expenditure. But those multiplier effects have both a supply-side and a demand-side component. So while I wouldn’t insist that the demand-side multiplier is identical to the supply-side multiplier, I do think that they are very closely related.

    Ray, Thanks for sharing your thoughts about issues that are well above my pay grade.

    Blue Aurora, I will try to go back and have a look at Book V sometime soon, but am not offering any guarantees. And again thanks for the Dimand-Betancourt paper, which is, very informative, and certainly well worth citing.


  13. 13 Blue Aurora July 22, 2013 at 1:46 am

    Regarding the paper by Dimand and Betancourt…don’t mention it. Also, I won’t blame you if you don’t get a chance to carefully reread and examine Book V of The General Theory any time soon, as we all have more pressing priorities in real life.

    One more thing though – have your views on the Real Bills Doctrine evolved since you made those publications on that issue?

    Also, is it just me, or is there an uncanny resemblance between the RBD and what Post-Keynesians call “Endogenous Money”? Thomas Tooke (and the rest of the Banking School) have been named as advocates of the RBD, and Post-Keynesians cite Thomas Tooke as a forerunner to what they call “Endogenous Money”. I remember you being sympathetic to the idea of getting rid of the money multiplier when Krugman and Keen were debating the nature of the money supply a while back, so that’s why I’m asking you about this.

    I also raised this issue in a comment on a post at J.P. Koning’s blog…please see the link below. J.P. Koning then responded by pointing me to an interesting paper published a couple of decades ago in Australia’s History of Economics Review.



  14. 14 Greg Hill July 22, 2013 at 11:40 am


    I’m in your debt for another patient and illuminating reply. I’d like to add one thought to your point below:

    “But given that uncertainty has increased, it is not obvious that a reduction in current economic activity is not efficient. If making new investments now have a high probability of going bad, it is probably a good thing for fewer investments to be made.”

    I think there may be solutions to this kind of uncertainty. Suppose each firm’s investment decisions depend, at least in part, on their forecasts of aggregate demand. If a preponderance of firms expects weak aggregate demand, they’ll hold back on their investment spending and their expectations will be fulfilled. If, by contrast, most firms expect strong aggregate demand, then they’ll make larger investment commitments and their expectations will be fulfilled. So, in this very simple case, there’s a low-output equilibrium and a high-output equilibrium. The aim of policy is to coax firms to coordinate around the high-output equilibrium.

    There are a couple of ways this might be done: 1) creating an institutional framework that would facilitate multilateral contracts in which firms A, B, C, etc., would invest if they were assured firms M, N, O, etc. would do likewise. You can find a more detailed account at [http://www.the-human-predicament.com/2012/09/how-to-solve-our-massive-macroeconomic.html]; and 2) establish a futures market in indices of aggregate economic activity so that firms worried about weak demand could hedge their bets by shorting the index, so losses due to weaker than expected demand would be offset by the gains won in shorting the aggregate index.

    Thanks again for your wonderful posts.


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

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