Capital Accumulation, Technical Progress and Labour Supply Growth: Keynes's Approach to Aggregate Supply and Demand Analysis Revisited

This paper addresses the effects on employment and the price level of a range of factors including capital accumulation, technical progress and money wage changes by formalising the aggregate supply and demand framework posited by Keynes in his General Theory. We find that labour-augmenting technical progress reduces the equilibrium level of employment, thus lending support to Hansen's notion of technological unemployment. We also find that capital accumulation and capital-augmenting technical progress raise the level of employment whereas, as argued by Keynes and several subsequent authors, money wage cuts have an ambiguous effect on the level of employment. We discuss a number of results as well as some aspects related to the adjustment of aggregate demand to aggregate supply in the long run. We conclude that Keynes's aggregate supply and demand framework provides a robust explanation of the mechanism through which increases in potential output lead over time to equiproportional increases in the level of aggregate demand and that the mechanism of adjustment to increases in the labour force in Keynes's theory differs markedly from that in classical theory.