In this book, the author critically examines the classical theory of employment and unemployment, focusing on its second postulate, which states that the real wage of labor is determined by wage bargains between entrepreneurs and workers. The author argues that this postulate is flawed because it assumes that labor is always willing to accept a reduction in its money-wage to maintain its real wage, which is not always the case. The author also questions the idea that unemployment during a depression is due to labor refusing to accept a reduction in money-wages, as there are wide variations in employment levels without any change in the minimum real demands of labor or its productivity.
The author introduces the concept of effective demand, which differs from the classical doctrine of “supply creates its own demand.” The author defines factor cost, user cost, and total income resulting from employment given by an entrepreneur, and explains that the amount of employment depends on the amount of the proceeds that entrepreneurs expect to receive from the corresponding output. The author also discusses the aggregate supply function and the aggregate demand function, which intersect at the point of effective demand, where entrepreneurs’ expectation of profits will be maximized.
Expectations play a crucial role in determining output and employment in the economy, as there is often a time lag between incurring costs and the purchase of the output by consumers. The author distinguishes between short-term and long-term expectations and explains that the amount of employment offered by firms depends on these various expectations.
The author provides further observations on user cost and discusses the meaning of saving and investment, noting that there are differences in the definition of investment. The author defines investment as the net addition to all kinds of capital equipment, after allowing for changes in the value of old capital equipment.
The concept of the multiplier effect is discussed, which refers to the idea that an increase in investment can lead to a larger increase in aggregate income and employment. The author notes that the multiplier effect is not constant and can be influenced by various factors, such as the method of financing the investment and the psychology of the community.
The author critiques the conventional method of investment valuation, arguing that it is based on the assumption that there are organized investment markets and that investors can rely on the maintenance of the convention. However, the author points out that the conventional method has its weak points, such as the gradual increase in the proportion of equity owned by persons who do not manage and have no special knowledge of the circumstances of the business in question.
The relationship between spending, investment, and employment is discussed, highlighting the importance of understanding this relationship in the economic system. The author also provides insights into the works of various economists on the rate of interest and their differing perspectives on the subject.
The speculative-motive for holding money and its importance in transmitting the effects of a change in the quantity of money is discussed. The author breaks up the problem into two compartments of cash: the amount of cash held to satisfy the transactions- and precautionary-motives and the amount held to satisfy the speculative-motive.
The author discusses the relationship between the marginal efficiency of capital and the propensity to consume, arguing that a decline in the marginal efficiency of capital can lead to a decline in the market value of Stock Exchange equities, which can have a depressing influence on those who have invested in the stock market.
Lastly, the author discusses policies that can help restore economic health and strength internationally, arguing that an autonomous rate of interest and a national investment program directed towards an optimum level of domestic employment can benefit both the country and its neighbors. The author also mentions Silvio Gesell, a German merchant who was a prophet of a cult with many thousand disciples throughout the world, and whose work contains flashes of deep insight.