The General Theory of Employment, Interest, and Money

Keynes addresses the challenge of measuring economic aggregates in a way that supports precise, causal analysis. He critiques traditional concepts—the National Dividend, net real output, and general price level—as inherently vague because they encompass heterogeneous goods and services that cannot be summed into a single quantity without artificial assumptions. Instead, Keynes proposes using only two fundamental units for macroeconomic analysis: 1) money-values, and 2) employment measured in homogeneous “labour-units,” where skilled labor is weighted by its wage rate. By focusing on how much labor is employed at a given money-wage (“wage-unit”), economists avoid the dilemma of comparing physically different goods or older versus newer equipment. Keynes acknowledges that broad statistical measures of output or price levels may be suitable for historical comparisons, but they do not lend themselves to the level of precision required to explain why entrepreneurs hire more or fewer workers at any given time. This “choice of units” is a foundational step for the subsequent development of his general theory, ensuring the arguments rest on clear, consistent measures rather than on ill-defined aggregates.

Keynes argues that both short-term and long-term expectations significantly influence output and employment, though each operates over a different time horizon. Short-term expectations drive a firm’s immediate decisions regarding daily production and pricing, often revised gradually in response to recent sales outcomes.