Money, Keynes declared the existing theory of unemployment to be wrong. In a depression there was no wage so low that it could eliminate unemployment. He also proposed that when aggregate demand was low sales and jobs suffered, but when it was high all prospered. Keynes was more of a macroeconomist. He argued that persistent unemployment might be caused by deficiency in demand for production or services, rather than by disequilibria in the labor market. Such deficiencies may be a lack of investment to match savings. While savings cause a leak in circular flow, investment will replace the deficiency. A leakage in circular flow would take away from resources that would otherwise go to capital formation. Capital formation is the building or acquisition of goods or ideas that would allow for greater output or efficiency. Another outdated belief was that any discrepancy between planned savings and planned investment would be canceled out by differing rates of interest. Changes at the rate of interest would provide equilibrium over the goods in the same way, as regular competition would affect the prices. Keynes also argued that cutting jobs or wages was not the solution, but employment was the solution. To increase the employment would create funds for the consumer, that would buy the products that the factories make, which employ the consumers. The goods market could be at an under employment equilibrium, in that it did not ensure equilibrium in the labor market. In such a labor market, firms would not hire workers to the point where it would be profitable so they may generate enough demand to meet output. His emphasis on demand as the key determinate was partly instrumental in the development of income accounting which measure the GNP (Gross National Product.) Keynes also stated that the interest rate was largely a monetary phenomenon, which functioned to balance the supply and demand for money, not savings and inve...
