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Using Kalecki's Theory of Effective Demand to Make Sense of
Keynes's Labor Market Analysis in The General Theory

Paul Dalziel and Marc Lavoie

Abstract: Although Keynes emphasized in The General Theory that his new principle of effective demand had profound implications for classical theories of unemployment, labor market presentations of that principle are relatively rare. This paper uses Kalecki's version of effective demand theory to explain Keynes's analysis of unemployment as a stable point on the marginal product of labor curve inside the aggregate labor supply curve. This is contrasted with Patinkin's neo-Keynesian model. In Keynes's model, full employment cannot be restored by lower nominal wages, underlining the importance of appropriate fiscal and monetary policies to manage aggregate demand growth.

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