Keynes' abominable Z-footnote

Abstract

Keynes' concept of a Zw-function relates the value of aggregate supply in wage units to employment. It aroused much controversy until the very recent past. A special bone of contention was the question of whether Keynes intended the Zw-curve to be drawn as a 45° line. This note argues that the 45° line, which Keynes did mention referred to equilibrium conditions ‘on’ the Zw-curve but not to the shape of the curve itself. Keynes assumed that the Zw-curve is linear and its slope is determined by the share of wages in total income. The linearity assumption is helpful for consistent aggregation. This curve is based on conventional (neo)classical assumptions of profit maximisation under atomistic competition and on well-behaved production functions on the microeconomic level. The Zw-curve is the basis for Keynes's claim that there is a reliable relation between effective demand and employment. Seeing this concept in vicinity to (neo)classical analysis is important for three reasons: (i) it substantiates Keynes's claim to have a General Theory in the sense that it contains the classical analysis; (ii) the approach refutes what the note calls ‘Hayek-type’ criticism of Keynes, namely the claim that classical theory shows that Keynes is wrong in claiming the existence of a reliable relationship between effective demand and employment; (iii) the approach refutes what the note calls ‘Hawtrey-type’ criticism, namely that the (neo)classical analysis is logically so flawed that on this basis no connection can be derived between effective demand and employment.

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