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　　THEORYOFEMPLOYMENT

　　thirddayasonthesecond，andsoon，eventhoughtherebenofurtherchangeinexpectations。Inthecaseofshort-termexpectationsthisisbecausechangesinexpectationarenot，asarule，sufficientlyviolentorrapid，whentheyarefortheworse，tocausetheabandonmentofworkonalltheproductiveprocesseswhich，inthelightoftherevisedexpectation，itwasamistaketohavebegun；whilst，whentheyareforthebetter，sometimeforpreparationmustneedselapsebeforeemploymentcanreachthelevelatwhichitwouldhavestoodifthestateofexpectationhadbeenrevisedsooner。Inthecaseoflong-termexpectations，equipmentwhichwillnotbereplacedwillcontinuetogiveemploymentuntilitiswornout；whilstwhenthechangeinlong-termexpectationsisforthebetter，employmentmaybeatahigherlevelatfirst，thanitwillbeaftertherehasbeentimetoadjusttheequipmenttothenewsituation。

　　Ifwesupposeastateofexpectationtocontinueforasufficientlengthoftimefortheeffectonemploymenttohaveworkeditselfoutsocompletelythatthereis，broadlyspeaking，nopieceofemploymentgoingonwhichwouldnothavetakenplaceifthenewstateofexpectationhadalwaysexisted，thesteadylevelofemploymentthusattainedmaybecalledthelong-periodemployment[46]correspondingtothatstateofexpectation。Itfollowsthat，althoughexpectationmaychangesofrequentlythattheactuallevelofemploymenthasneverhadtimetoreachthelong-periodemploymentcorrespondingtotheexistingstateofexpectation，neverthelesseverystateofexpectationhasitsdefinitecorrespondingleveloflong-periodemployment。

　　Letusconsider，firstofall，theprocessoftransition[Page49]EXPECTATION

　　ANDEMPLOYMENT

　　toalong-periodpositionduetoachangeinexpectation，whichisnotconfusedorinterruptedbyanyfurtherchangeinexpectation。Wewillfirstsupposethatthechangeisofsuchacharacterthatthenewlong-periodemploymentwillbegreaterthantheold。Now，asarule，itwillonlybetherateofinputwhichwillbemuchaffectedatthebeginning，thatistosay，thevolumeofworkontheearlierstagesofnewprocessesofproduction，whilsttheoutputofconsumption-goodsandtheamountofemploymentonthelaterstagesofprocesseswhichwerestartedbeforethechangewillremainmuchthesameasbefore。Insofarastherewerestocksofpartlyfinishedgoods，thisconclusionmaybemodified；thoughitislikelytoremaintruethattheinitialincreaseinemploymentwillbemodest。As，however，thedayspassby，employmentwillgraduallyincrease。Moreover，itiseasytoconceiveofconditionswhichwillcauseittoincreaseatsomestagetoahigherlevelthanthenewlong-periodemployment。

　　Fortheprocessofbuildingupcapitaltosatisfythenewstateofexpectationmayleadtomoreemploymentandalsotomorecurrentconsumptionthanwilloccurwhenthelong-periodpositionhasbeenreached。Thusthechangeinexpectationmayleadtoagradualcrescendointhelevelofemployment，risingtoapeakandthendecliningtothenewlong-periodlevel。Thesamethingmayoccurevenifthenewlong-periodlevelisthesameastheold，ifthechangerepresentsachangeinthedirectionofconsumptionwhichrenderscertainexistingprocessesandtheirequipmentobsolete。

　　Oragain，ifthenewlong-periodemploymentislessthantheold，thelevelofemploymentduringthetransitionmayfallforatimebelowwhatthenewlong-periodlevelisgoingtobe。Thusamerechangeinexpectationiscapableofproducinganoscillationofthesamekindofshapeasacyclicalmovement，inthecourseofworkingitselfout。ItwasmovementsofthiskindwhichIdiscussedinmyTreatiseonMoneyinconnection[Page50]THEGENERAL

　　THEORYOFEMPLOYMENT

　　withthebuildinguporthedepletionofstocksofworkingandliquidcapitalconsequentonchange。

　　Anuninterruptedprocessoftransition，suchastheabove，toanewlong-periodpositioncanbecomplicatedindetail。Buttheactualcourseofeventsismorecomplicatedstill。Forthestateofexpectationisliabletoconstantchange，anewexpectationbeingsuperimposedlongbeforethepreviouschangehasfullyworkeditselfout；sothattheeconomicmachineisoccupiedatanygiventimewithanumberofoverlappingactivities，theexistenceofwhichisduetovariouspaststatesofexpectation。

　　II

　　Thisleadsustotherelevanceofthisdiscussionforourpresentpurpose。

　　Itisevidentfromtheabovethatthelevelofemploymentatanytimedepends，inasense，notmerelyontheexistingstateofexpectationbutonthestatesofexpectationwhichhaveexistedoveracertainpastperiod。Neverthelesspastexpectations，whichhavenotyetworkedthemselvesout，areembodiedintheto-day\'scapitalequipmentwithreferencetowhichtheentrepreneurhastomaketo-day\'sdecisions，andonlyinfluencehisdecisionsinsofarastheyaresoembodied。Itfollows，therefore，that，inspiteoftheabove，to-day\'semploymentcanbecorrectlydescribedasbeinggovernedbyto-day\'sexpectationstakeninconjunctionwithto-day\'scapitalequipment。

　　Expressreferencetocurrentlong-termexpectationscanseldombeavoided。

　　Butitwilloftenbesafetoomitexpressreferencetoshort-termexpectation，inviewofthefactthatinpracticetheprocessofrevisionofshort-termexpectationisagradualandcontinuousone，carriedonlargelyinthelightofrealisedresults；sothatexpectedandrealisedresultsrunintoandoverlaponeanotherintheirinfluence。For，althoughoutputandemploymentaredeterminedby[Page51]EXPECTATION

　　ANDEMPLOYMENT

　　theproducer\'sshort-termexpectationsandnotbypastresults，themostrecentresultsusuallyplayapredominantpartindeterminingwhattheseexpectationsare。Itwouldbetoocomplicatedtoworkouttheexpectationsdenovowheneveraproductiveprocesswasbeingstarted；anditwould，moreover，beawasteoftimesincealargepartofthecircumstancesusuallycontinuesubstantiallyunchangedfromonedaytothenext。Accordinglyitissensibleforproducerstobasetheirexpectationsontheassumptionthatthemostrecentlyrealisedresultswillcontinue，exceptinsofarastherearedefinitereasonsforexpectingachange。Thusinpracticethereisalargeoverlapbetweentheeffectsonemploymentoftherealisedsale-proceedsofrecentoutputandthoseofthesale-proceedsexpectedfromcurrentinput；andproducers\'forecastsaremoreoftengraduallymodifiedinthelightofresultsthaninanticipationofprospectivechanges。[

　　47]

　　Nevertheless，wemustnotforgetthat，inthecaseofdurablegoods，theproducer\'sshort-termexpectationsarebasedonthecurrentlong-termexpectationsoftheinvestor；anditisofthenatureoflong-termexpectationsthattheycannotbecheckedatshortintervalsinthelightofrealisedresults。Moreover，asweshallseeinchapter12，whereweshallconsiderlong-termexpectationsinmoredetail，theyareliabletosuddenrevision。

　　Thusthefactorofcurrentlong-termexpectationscannotbeevenapproximatelyeliminatedorreplacedbyrealisedresults。

　　TheDefinitionofIncome[Page52]

　　Chapter6

　　THEDEFINITIONOFINCOME，SAVINGANDINVESTMENT

　　I。IncomeDuringanyperiodoftimeanentrepreneurwillhavesoldfinishedoutputtoconsumersortootherentrepreneursforacertainsumwhichwewilldesignateasA。Hewillalsohavespentacertainsum，designatedbyA1，onpurchasingfinishedoutputfromotherentrepreneurs。

　　Andhewillendupwithacapitalequipment，whichtermincludesbothhisstocksofunfinishedgoodsorworkingcapitalandhisstocksoffinishedgoods，havingavalueG。

　　Somepart，however，ofAG-A1willbeattributable，nottotheactivitiesoftheperiodinquestion，buttothecapitalequipmentwhichhehadatthebeginningoftheperiod。Wemust，therefore，inordertoarriveatwhatwemeanbytheincomeofthecurrentperiod，deductfromAG-A1acertainsum，torepresentthatpartofitsvaluewhichhasbeeninsomesensecontributedbytheequipmentinheritedfromthepreviousperiod。Theproblemofdefiningincomeissolvedassoonaswehavefoundasatisfactorymethodforcalculatingthisdeduction。

　　Therearetwopossibleprinciplesforcalculatingit，eachofwhichhasacertainsignificance；&frac34；oneoftheminconnectionwithproduction，andtheotherinconnectionwithconsumption。

　　Letusconsidertheminturn。

　　iTheactualvalueGofthecapitalequipmentat[Page53]THEDEFINITION

　　OFINCOME

　　theendoftheperiodisthenetresultoftheentrepreneur，ontheonehand，havingmaintainedandimproveditduringtheperiod，bothbypurchasesfromotherentrepreneursandbyworkdoneuponitbyhimself，and，ontheotherhand，havingexhaustedordepreciateditthroughusingittoproduceoutput。Ifhehaddecidednottouseittoproduceoutput，thereis，nevertheless，acertainoptimumsumwhichitwouldhavepaidhimtospendonmaintainingandimprovingit。Letussupposethat，inthisevent，hewouldhavespentB\'onitsmaintenanceandimprovement，andthat，havinghadthisspentonit，itwouldhavebeenworthG\'attheendoftheperiod。Thatistosay，G\'-B\'isthemaximumnetvaluewhichmighthavebeenconservedfromthepreviousperiod，ifithadnotbeenusedtoproduceA。TheexcessofthispotentialvalueoftheequipmentoverG-A1isthemeasureofwhathasbeensacrificedonewayoranothertoproduceA。Letuscallthisquantity，namelyG\'-B\'-G-A1，whichmeasuresthesacrificeofvalueinvolvedintheproductionofA，theusercostofA。UsercostwillbewrittenU。

　　[48]Theamountpaidoutbytheentrepreneurtotheotherfactorsofproductioninreturnfortheirservices，whichfromtheirpointofviewistheirincome，wewillcallthefactorcostofA。ThesumofthefactorcostFandtheusercostUweshallcalltheprimecostoftheoutputA。

　　Wecanthendefinetheincome[49]oftheentrepreneurasbeingtheexcessofthevalueofhisfinishedoutputsoldduringtheperiodoverhisprimecost。Theentrepreneur\'sincome，thatistosay，istakenasbeingequaltothequantity，dependingonhisscaleofproduction，whichheendeavourstomaximise，i。e。tohisgrossprofit[Page54]THEGENERAL

　　THEORYOFEMPLOYMENT

　　intheordinarysenseofthisterm；&frac34；whichagreeswithcommonsense。Hence，sincetheincomeoftherestofthecommunityisequaltotheentrepreneur\'sfactorcost，aggregateincomeisequaltoA-U。

　　Income，thusdefined，isacompletelyunambiguousquantity。Moreover，sinceitistheentrepreneur\'sexpectationoftheexcessofthisquantityoverhisoutgoingstotheotherfactorsofproductionwhichheendeavourstomaximisewhenhedecideshowmuchemploymenttogivetotheotherfactorsofproduction，itisthequantitywhichiscausallysignificantforemployment。

　　Itisconceivable，ofcourse，thatG-A1mayexceedG\'-B\'，sothatusercostwillbenegative。Forexample，thismaywellbethecaseifwehappentochooseourperiodinsuchawaythatinputhasbeenincreasingduringtheperiodbutwithouttherehavingbeentimefortheincreasedoutputtoreachthestageofbeingfinishedandsold。

　　Itwillalsobethecase，wheneverthereispositiveinvestment，ifweimagineindustrytobesomuchintegratedthatentrepreneursmakemostoftheirequipmentforthemselves。Since，however，usercostisonlynegativewhentheentrepreneurhasbeenincreasinghiscapitalequipmentbyhisownlabour，wecan，inaneconomywherecapitalequipmentislargelymanufacturedbydifferentfirmsfromthosewhichuseit，normallythinkofusercostasbeingpositive。Moreover，itisdifficulttoconceiveofacasewheremarginalusercostassociatedwithanincreaseinA，i。e。dU/dA，willbeotherthanpositive。

　　Itmaybeconvenienttomentionhere，inanticipationofthelatterpartofthischapter，that，forthecommunityasawhole，theaggregateconsumptionCoftheperiodisequaltoSA-A1，andtheaggregateinvestmentIisequaltoSA1-U。Moreover，Uistheindividualentrepreneur\'sdisinvestmentand-Uhisinvestmentinrespectofhisownequipmentexclusive[Page55]THEDEFINITION

　　OFINCOME

　　ofwhathebuysfromotherentrepreneurs。ThusinacompletelyintegratedsystemwhereA1=0consumptionisequaltoAandinvestmentto-U，i。e。

　　toG-G\'-B\'。Theslightcomplicationoftheabove，throughtheintroductionofA1，issimplyduetothedesirabilityofprovidinginageneralisedwayforthecaseofanon-integratedsystemofproduction。

　　Furthermore，theeffectivedemandissimplytheaggregateincomeorproceedswhichtheentrepreneursexpecttoreceive，inclusiveoftheincomeswhichtheywillhandontotheotherfactorsofproduction，fromtheamountofcurrentemploymentwhichtheydecidetogive。Theaggregatedemandfunctionrelatesvarioushypotheticalquantitiesofemploymenttotheproceedswhichtheiroutputsareexpectedtoyield；andtheeffectivedemandisthepointontheaggregatedemandfunctionwhichbecomeseffectivebecause，takeninconjunctionwiththeconditionsofsupply，itcorrespondstothelevelofemploymentwhichmaximisestheentrepreneur\'sexpectationofprofit。

　　Thissetofdefinitionsalsohastheadvantagethatwecanequatethemarginalproceedsorincometothemarginalfactorcost；andthusarriveatthesamesortofpropositionsrelatingmarginalproceedsthusdefinedtomarginalfactorcostsashavebeenstatedbythoseeconomistswho，byignoringusercostorassumingittobezero，haveequatedsupplyprice[50]tomarginalfactorcost。[51]

　　[Page56]THEGENERAL

　　THEORYOFEMPLOYMENT

　　iiWeturn，next，tothesecondoftheprinciplesreferredtoabove。

　　Wehavedealtsofarwiththatpartofthechangeinthevalueofthecapitalequipmentattheendoftheperiodascomparedwithitsvalueatthebeginningwhichisduetothevoluntarydecisionsoftheentrepreneurinseekingtomaximisehisprofit。Buttheremay，inaddition，beaninvoluntarylossorgaininthevalueofhiscapitalequipment，occurringforreasonsbeyondhiscontrolandirrespectiveofhiscurrentdecisions，onaccountofe。g。achangeinmarketvalues，wastagebyobsolescenceorthemerepassageoftime，ordestructionbycatastrophesuchaswarorearthquake。Nowsomepartoftheseinvoluntarylosses，whilsttheyareunavoidable，are&frac34；broadlyspeaking&frac34；notunexpected；suchaslossesthroughthelapseoftimeirrespectiveofuse，andalso\'normal\'obsolescencewhich，asProfessorPigouexpressesit，\'issufficientlyregulartobeforeseen，ifnotindetail，atleastinthelarge\'，including，wemayadd，thoselossestothecommunityasawholewhicharesufficientlyregulartobecommonlyregardedas\'insurablerisks\'。

　　Letusignoreforthemomentthefactthattheamountoftheexpectedlossdependsonwhentheexpectationisassumedtobeframed，andletuscallthedepreciationoftheequipment，whichisinvoluntarybutnotunexpected，i。e。theexcessoftheexpecteddepreciationovertheusercost，thesupplementarycost，whichwillbewrittenV。Itis，perhaps，hardlynecessarytopointoutthatthisdefinitionisnotthesameasMarshall\'sdefinitionofsupplementarycost，thoughtheunderlyingidea，namely，ofdealingwiththatpartoftheexpecteddepreciationwhichdoesnotenterintoprimecost，issimilar。

　　[Page57]THEDEFINITION

　　OFINCOME

　　Inreckoning，therefore，thenetincomeandthenetprofitoftheentrepreneuritisusualtodeducttheestimatedamountofthesupplementarycostfromhisincomeandgrossprofitasdefinedabove。Forthepsychologicaleffectontheentrepreneur，whenheisconsideringwhatheisfreetospendandtosave，ofthesupplementarycostisvirtuallythesameasthoughitcameoffhisgrossprofit。Inhiscapacityasaproducerdecidingwhetherornottousetheequipment，primecostandgrossprofit，asdefinedabove，arethesignificantconcepts。Butinhiscapacityasaconsumertheamountofthesupplementarycostworksonhismindinthesamewayasifitwereapartoftheprimecost。Henceweshallnotonlycomenearesttocommonusagebutwillalsoarriveataconceptwhichisrelevanttotheamountofconsumption，if，indefiningaggregatenetincome，wedeductthesupplementarycostaswellastheusercost，sothataggregatenetincomeisequaltoA-U-V。

　　Thereremainsthechangeinthevalueoftheequipment，duetounforeseenchangesinmarketvalues，exceptionalobsolescenceordestructionbycatastrophe，whichisbothinvoluntaryand&frac34；inabroadsense&frac34；unforeseen。Theactuallossunderthishead，whichwedisregardeveninreckoningnetincomeandchargetocapitalaccount，maybecalledthewindfallloss。

　　ThecausalsignificanceofnetincomeliesinthepsychologicalinfluenceofthemagnitudeofVontheamountofcurrentconsumption，sincenetincomeiswhatwesupposetheordinarymantoreckonhisavailableincometobewhenheisdecidinghowmuchtospendoncurrentconsumption。Thisisnot，ofcourse，theonlyfactorofwhichhetakesaccountwhenheisdecidinghowmuchtospend。Itmakesaconsiderabledifference，forexample，howmuchwindfallgainorlossheismakingoncapitalaccount。Butthereisadifferencebetweenthesupplementarycostandawindfalllossinthatchangesintheformerareapttoaffect[Page58]THEGENERAL

　　THEORYOFEMPLOYMENT

　　himinjustthesamewayaschangesinhisgrossprofit。Itistheexcessoftheproceedsofthecurrentoutputoverthesumoftheprimecostandthesupplementarycostwhichisrelevanttotheentrepreneur\'sconsumption；

　　whereas，althoughthewindfalllossorgainentersintohisdecisions，itdoesnotenterintothemonthesamescale&frac34；agivenwindfalllossdoesnothavethesameeffectasanequalsupplementarycost。

　　Wemustnowrecur，however，tothepointthatthelinebetweensupplementarycostsandwindfalllosses，i。e。betweenthoseunavoidablelosseswhichwethinkitpropertodebittoincomeaccountandthosewhichitisreasonabletoreckonasawindfalllossorgainoncapitalaccount，ispartlyaconventionalorpsychologicalone，dependingonwhatarethecommonlyacceptedcriteriaforestimatingtheformer。Fornouniqueprinciplecanbeestablishedfortheestimationofsupplementarycost，anditsamountwilldependonourchoiceofanaccountingmethod。Theexpectedvalueofthesupplementarycost，whentheequipmentwasoriginallyproduced，isadefinitequantity。

　　Butifitisre-estimatedsubsequently，itsamountovertheremainderofthelifeoftheequipmentmayhavechangedasaresultofachangeinthemeantimeinourexpectations；thewindfallcapitallossbeingthediscountedvalueofthedifferencebetweentheformerandtherevisedexpectationoftheprospectiveseriesofUV。Itisawidelyapprovedprincipleofbusinessaccounting，endorsedbytheInlandRevenueauthorities，toestablishafigureforthesumofthesupplementarycostandtheusercostwhentheequipmentisacquiredandtomaintainthisunalteredduringthelifeoftheequipment，irrespectiveofsubsequentchangesinexpectation。

　　Inthiscasethesupplementarycostoveranyperiodmustbetakenastheexcessofthispredeterminedfigureovertheactualusercost。Thishastheadvantageofensuringthatthewindfallgainorlossshallbezerooverthelifeofthe[Page59]THEDEFINITION

　　OFINCOME

　　equipmenttakenasawhole。Butitisalsoreasonableincertaincircumstancestorecalculatetheallowanceforsupplementarycostonthebasisofcurrentvaluesandexpectationsatanarbitraryaccountinginterval，e。g。annually。

　　Businessmeninfactdifferastowhichcoursetheyadopt。Itmaybeconvenienttocalltheinitialexpectationofsupplementarycostwhentheequipmentisfirstacquiredthebasicsupplementarycost，andthesamequantityrecalculateduptodateonthebasisofcurrentvaluesandexpectationsthecurrentsupplementarycost。

　　Thuswecannotgetclosertoaquantitativedefinitionofsupplementarycostthanthatitcomprisesthosedeductionsfromhisincomewhichatypicalentrepreneurmakesbeforereckoningwhatheconsidershisnetincomeforthepurposeofdeclaringadividendinthecaseofacorporationorofdecidingthescaleofhiscurrentconsumptioninthecaseofanindividual。

　　Sincewindfallchargesoncapitalaccountarenotgoingtoberuledoutofthepicture，itisclearlybetter，incaseofdoubt，toassignanitemtocapitalaccount，andtoincludeinsupplementarycostonlywhatratherobviouslybelongsthere。Foranyoverloadingoftheformercanbecorrectedbyallowingitmoreinfluenceontherateofcurrentconsumptionthanitwouldotherwisehavehad。

　　ItwillbeseenthatourdefinitionofnetincomecomesveryclosetoMarshall\'sdefinitionofincome，whenhedecidedtotakerefugeinthepracticesoftheIncomeTaxCommissionersand&frac34；broadlyspeakingtoregardasincomewhateverthey，withtheirexperience，choosetotreatassuch。Forthefabricoftheirdecisionscanberegardedastheresultofthemostcarefulandextensiveinvestigationwhichisavailable，tointerpretwhat，inpractice，itisusualtotreatasnetincome。ItalsocorrespondstothemoneyvalueofProfessorPigou\'smostrecentdefinitionofthenationaldividend。[52]

　　[Page60]THEGENERAL

　　THEORYOFEMPLOYMENT

　　Itremainstrue，however，thatnetincome，beingbasedonanequivocalcriterionwhichdifferentauthoritiesmightinterpretdifferently，isnotperfectlyclear-cut。ProfessorHayek，forexample，hassuggestedthatanindividualownerofcapitalgoodsmightaimatkeepingtheincomehederivesfromhispossessionsconstant，sothathewouldnotfeelhimselffreetospendhisincomeonconsumptionuntilhehadsetasidesufficienttooffsetanytendencyofhisinvestment-incometodeclineforwhateverreason。[

　　53]Idoubtifsuchanindividualexists；but，obviously，notheoreticalobjectioncanberaisedagainstthisdeductionasprovidingapossiblepsychologicalcriterionofnetincome。ButwhenProfessorHayekinfersthattheconceptsofsavingandinvestmentsufferfromacorrespondingvagueness，heisonlyrightifhemeansnetsavingandnetinvestment。

　　Thesavingandtheinvestment，whicharerelevanttothetheoryofemployment，areclearofthisdefect，andarecapableofobjectivedefinition，aswehaveshownabove。

　　Thusitisamistaketoputalltheemphasisonnetincome，whichisonlyrelevanttodecisionsconcerningconsumption，andis，moreover，onlyseparatedfromvariousotherfactorsaffectingconsumptionbyanarrowline；andtooverlookashasbeenusualtheconceptofincomeproper，whichistheconceptrelevanttodecisionsconcerningcurrentproductionandisquiteunambiguous。

　　Theabovedefinitionsofincomeandofnetincomeareintendedtoconformascloselyaspossibletocommonusage。Itisnecessary，therefore，thatIshouldatonceremindthereaderthatinmyTreatiseonMoneyI

　　definedincomeinaspecialsense。Thepeculiarityinmyformerdefinitionrelatedtothatpartofaggregateincomewhichaccruestotheentrepreneurs，sinceItookneithertheprofitwhethergrossornetactuallyrealisedfromtheircurrentoperationsnortheprofitwhichtheyexpectedwhentheydecidedtounder-

　　[Page61]THEDEFINITION

　　OFINCOME

　　taketheircurrentoperations，butinsomesensenot，asInowthink，sufficientlydefinedifweallowforthepossibilityofchangesinthescaleofoutputanormalorequilibriumprofit；withtheresultthatonthisdefinitionsavingexceededinvestmentbytheamountoftheexcessofnormalprofitovertheactualprofit。Iamafraidthatthisuseoftermshascausedconsiderableconfusion，especiallyinthecaseofthecorrelativeuseofsaving；sinceconclusionsrelating，inparticular，totheexcessofsavingoverinvestment，whichwereonlyvalidifthetermsemployedwereinterpretedinmyspecialsense，havebeenfrequentlyadoptedinpopulardiscussionasthoughthetermswerebeingemployedintheirmorefamiliarsense。Forthisreason，andalsobecauseInolongerrequiremyformertermstoexpressmyideasaccurately，Ihavedecidedtodiscardthem&frac34；withmuchregretfortheconfusionwhichtheyhavecaused。

　　II。SavingandInvestmentAmidstthewelterofdivergentusagesofterms，itisagreeabletodiscoveronefixedpoint。SofarasIknow，everyoneisagreedthatsavingmeanstheexcessofincomeoverexpenditureonconsumption。Thusanydoubtsaboutthemeaningofsavingmustarisefromdoubtsaboutthemeaningeitherofincomeorofconsumption。Incomewehavedefinedabove。

　　Expenditureonconsumptionduringanyperiodmustmeanthevalueofgoodssoldtoconsumersduringthatperiod，whichthrowsusbacktothequestionofwhatismeantbyaconsumer-purchaser。Anyreasonabledefinitionofthelinebetweenconsumer-purchasersandinvestor-purchaserswillserveusequallywell，providedthatitisconsistentlyapplied。Suchproblemasthereis，e。g。whetheritisrighttoregardthepurchaseofamotor-carasaconsumer-purchaseandthepurchaseofahouseasaninvestor-purchase，hasbeenfrequentlydiscussedandIhavenothingmaterialtoaddtothediscussion。

　　[Page62]THEGENERAL

　　THEORYOFEMPLOYMENT

　　Thecriterionmustobviouslycorrespondtowherewedrawthelinebetweentheconsumerandtheentrepreneur。ThuswhenwehavedefinedA1asthevalueofwhatoneentrepreneurhaspurchasedfromanother，wehaveimplicitlysettledthequestion。ItfollowsthatexpenditureonconsumptioncanbeunambiguouslydefinedasSA-A1，whereAisthetotalsalesmadeduringtheperiodandA1isthetotalsalesmadebyoneentrepreneurtoanother。Inwhatfollowsitwillbeconvenient，asarule，toomitandwriteAfortheaggregatesalesofallkinds，A1fortheaggregatesalesfromoneentrepreneurtoanotherandUfortheaggregateusercostsoftheentrepreneurs。

　　Havingnowdefinedbothincomeandconsumption，thedefinitionofsaving，whichistheexcessofincomeoverconsumption，naturallyfollows。SinceincomeisequaltoA-UandconsumptionisequaltoA-A1，itfollowsthatsavingisequaltoA1-U。Similarly，wehavenetsavingfortheexcessofnetincomeoverconsumption，equaltoA1-U-V。

　　Ourdefinitionofincomealsoleadsatoncetothedefinitionofcurrentinvestment。Forwemustmeanbythisthecurrentadditiontothevalueofthecapitalequipmentwhichhasresultedfromtheproductiveactivityoftheperiod。Thisis，clearly，equaltowhatwehavejustdefinedassaving。Foritisthatpartoftheincomeoftheperiodwhichhasnotpassedintoconsumption。WehaveseenabovethatastheresultoftheproductionofanyperiodentrepreneursendupwithhavingsoldfinishedoutputhavingavalueAandwithacapitalequipmentwhichhassufferedadeteriorationmeasuredbyUoranimprovementmeasuredby-UwhereUisnegativeasaresultofhavingproducedandpartedwithA，afterallowingforpurchasesA1fromotherentrepreneurs。DuringthesameperiodfinishedoutputhavingavalueA-A1willhavepassedintoconsumption。TheexcessofA-UoverA-A1，namelyA1-U，istheadditiontocapital[Page63]THEDEFINITION

　　OFINCOME

　　equipmentasaresultoftheproductiveactivitiesoftheperiodandis，therefore，theinvestmentoftheperiod。SimilarlyA1-U-V；

　　whichisthenetadditiontocapitalequipment，afterallowingfornormalimpairmentinthevalueofcapitalapartfromitsbeingusedandapartfromwindfallchangesinthevalueoftheequipmentchargeabletocapitalaccount，isthenetinvestmentoftheperiod。

　　Whilst，therefore，theamountofsavingisanoutcomeofthecollectivebehaviourofindividualconsumersandtheamountofinvestmentofthecollectivebehaviourofindividualentrepreneurs，thesetwoamountsarenecessarilyequal，sinceeachofthemisequaltotheexcessofincomeoverconsumption。

　　Moreover，thisconclusioninnowaydependsonanysubtletiesorpeculiaritiesinthedefinitionofincomegivenabove。Provideditisagreedthatincomeisequaltothevalueofcurrentoutput，thatcurrentinvestmentisequaltothevalueofthatpartofcurrentoutputwhichisnotconsumed，andthatsavingisequaltotheexcessofincomeoverconsumption&frac34；allofwhichisconformablebothtocommonsenseandtothetraditionalusageofthegreatmajorityofeconomists&frac34；theequalityofsavingandinvestmentnecessarilyfollows。Inshort-Income=valueofoutput=consumptioninvestment。Saving=income-consumption。Thereforesaving=investment。Thusanysetofdefinitionswhichsatisfytheaboveconditionsleadstothesameconclusion。Itisonlybydenyingthevalidityofoneorotherofthemthattheconclusioncanbeavoided。

　　Theequivalencebetweenthequantityofsavingandthequantityofinvestmentemergesfromthebilateralcharacterofthetransactionsbetweentheproducerontheonehandand，ontheotherhand，theconsumerorthepurchaserofcapitalequipment。

　　[Page64]THEGENERAL

　　THEORYOFEMPLOYMENT

　　Incomeiscreatedbythevalueinexcessofusercostwhichtheproducerobtainsfortheoutputhehassold；butthewholeofthisoutputmustobviouslyhavebeensoldeithertoaconsumerortoanotherentrepreneur；andeachentrepreneur\'scurrentinvestmentisequaltotheexcessoftheequipmentwhichhehaspurchasedfromotherentrepreneursoverhisownusercost。

　　Hence，intheaggregatetheexcessofincomeoverconsumption，whichwecallsaving，cannotdifferfromtheadditiontocapitalequipmentwhichwecallinvestment。Andsimilarlywithnetsavingandnetinvestment。Saving，infact，isamereresidual。Thedecisionstoconsumeandthedecisionstoinvestbetweenthemdetermineincomes。Assumingthatthedecisionstoinvestbecomeeffective，theymustindoingsoeithercurtailconsumptionorexpandincome。Thustheactofinvestmentinitselfcannothelpcausingtheresidualormargin，whichwecallsaving，toincreasebyacorrespondingamount。

　　Itmightbe，ofcourse，thatindividualsweresot&ecirc；temont&eacute；eintheirdecisionsastohowmuchtheythemselveswouldsaveandinvestrespectively，thattherewouldbenopointofpriceequilibriumatwhichtransactionscouldtakeplace。Inthiscaseourtermswouldceasetobeapplicable，sinceoutputwouldnolongerhaveadefinitemarketvalue，priceswouldfindnoresting-placebetweenzeroandinfinity。Experienceshows，however，thatthis，infact，isnotso；andthattherearehabitsofpsychologicalresponsewhichallowofanequilibriumbeingreachedatwhichthereadinesstobuyisequaltothereadinesstosell。Thatthereshouldbesuchathingasamarketvalueforoutputis，atthesametime，anecessaryconditionformoney-incometopossessadefinitevalueandasufficientconditionfortheaggregateamountwhichsavingindividualsdecidetosavetobeequaltotheaggregateamountwhichinvestingindividualsdecidetoinvest。

　　Clearnessofmindonthismatterisbestreached，[Page65]THEDEFINITION

　　OFINCOME

　　perhaps，bythinkingintermsofdecisionstoconsumeortorefrainfromconsumingratherthanofdecisionstosave。Adecisiontoconsumeornottoconsumetrulylieswithinthepoweroftheindividual；sodoesadecisiontoinvestornottoinvest。Theamountsofaggregateincomeandofaggregatesavingaretheresultsofthefreechoicesofindividualswhetherornottoconsumeandwhetherornottoinvest；buttheyareneitherofthemcapableofassuminganindependentvalueresultingfromaseparatesetofdecisionstakenirrespectiveofthedecisionsconcerningconsumptionandinvestment。Inaccordancewiththisprinciple，theconceptionofthepropensitytoconsumewill，inwhatfollows，taketheplaceofthepropensityordispositiontosave。

　　AppendixonUserCost[Page66]

　　AppendixonUserCostI

　　Usercosthas，Ithink，animportancefortheclassicaltheoryofvaluewhichhasbeenoverlooked。Thereismoretobesaidaboutitthanwouldberelevantorappropriateinthisplace。But，asadigression，wewillexamineitsomewhatfurtherinthisappendix。

　　Anentrepreneur\'susercostisbydefinitionequaltoA1G\'-B\'-G，whereA1istheamountofourentrepreneur\'spurchasesfromotherentrepreneurs，Gtheactualvalueofhiscapitalequipmentattheendoftheperiod，andG\'thevalueitmighthavehadattheendoftheperiodifhehadrefrainedfromusingitandhadspenttheoptimumsumB\'onitsmaintenanceandimprovement。NowG-G\'-B\'，namelytheincrementinthevalueoftheentrepreneur\'sequipmentbeyondthenetvaluewhichhehasinheritedfromthepreviousperiod，representstheentrepreneur\'scurrentinvestmentinhisequipmentandcanbewrittenI。ThusU，theusercostofhissales-turnoverA，isequaltoA1-IwhereA1iswhathehasboughtfromotherentrepreneursandIiswhathehascurrentlyinvestedinhisownequipment。A

　　littlereflectionwillshowthatallthisisnomorethancommonsense。

　　Somepartofhisoutgoingstootherentrepreneursisbalancedbythevalueofhiscurrentinvestmentinhisownequipment，andtherestrepresentsthesacrificewhichtheoutputhehassoldmusthavecosthimoverandabovethetotalsumwhichhehaspaidouttothefactorsofproduction。

　　Ifthereadertriestoexpressthesubstanceofthisotherwise，hewillfindthatitsadvantageliesinitsavoidanceofinsolubleandunnecessary

　　accountingproblems。Thereis，Ithink，nootherwayofanalysingthecurrentproceedsofproductionunambiguously。Ifindustryiscompletelyintegratedoriftheentrepreneurhasboughtnothingfromoutside，sothatA1

　　=0，the[Page67]APPENDIX

　　ONUSERCOST

　　usercostissimplytheequivalentofthecurrentdisinvestmentinvolvedinusingtheequipment；butwearestillleftwiththeadvantagethatwedonotrequireatanystageoftheanalysistoallocatethefactorcostbetweenthegoodswhicharesoldandtheequipmentwhichisretained。Thuswecanregardtheemploymentgivenbyafirm，whetherintegratedorindividual，asdependingonasingleconsolidateddecision&frac34；aprocedurewhichcorrespondstotheactualinterlockingcharacteroftheproductionofwhatiscurrentlysoldwithtotalproduction。

　　Theconceptofusercostenablesus，moreover，togiveaclearerdefinitionthanthatusuallyadoptedoftheshort-periodsupplypriceofaunitofafirm\'ssaleableoutput。Fortheshort-periodsupplypriceisthesumofthemarginalfactorcostandthemarginalusercost。

　　Nowinthemoderntheoryofvalueithasbeenausualpracticetoequatetheshort-periodsupplypricetothemarginalfactorcostalone。Itisobvious，however，thatthisisonlylegitimateifmarginalusercostiszeroorifsupplypriceisspeciallydefinedsoastobenetofmarginalusercost，justasIhavedefinedp。24above\'proceeds\'and\'aggregatesupplyprice\'asbeingnetofaggregateusercost。But，whereasitmaybeoccasionallyconvenientindealingwithoutputasawholetodeductusercost，thisproceduredeprivesouranalysisofallrealityifitishabituallyandtacitlyappliedtotheoutputofasingleindustryorfirm，sinceitdivorcesthe\'supplyprice\'ofanarticlefromanyordinarysenseofits\'price\'；andsomeconfusionmayhaveresultedfromthepracticeofdoingso。Itseemstohavebeenassumedthat\'supplyprice\'hasanobviousmeaningasappliedtoaunitofthesaleableoutputofanindividualfirm，andthematterhasnotbeendeemedtorequirediscussion。

　　Yetthetreatmentbothofwhatispurchasedfromotherfirmsandofthewastageofthefirm\'sownequipmentasaconsequenceofproducingthemarginaloutputinvolvesthewholepackofperplexitieswhichattendthedefinitionofincome。For，evenifweassumethatthemarginalcostofpurchasesfromotherfirmsinvolvedinsellinganadditionalunitofoutputhastobedeductedfromthesale-proceedsperunitinordertogiveuswhatwemeanbyourfirm\'ssupplyprice，westillhavetoallowforthemarginaldisinvestmentinthefirm\'sownequipmentinvolvedinproducingthemarginaloutput。

　　Evenifallproductioniscarriedonbyacompletelyintegratedfirm，itisstillillegitimatetosupposethatthemarginalusercostiszero，i。e。

　　thatthemarginaldisinvestmentinequipmentduetotheproductionofthemarginaloutputcangenerallybeneglected。

　　[Page68]THEGENERAL

　　THEORYOFEMPLOYMENT

　　Theconceptsofusercostandofsupplementarycostalsoenableustoestablishaclearerrelationshipbetweenlong-periodsupplypriceandshort-periodsupplyprice。Long-periodcostmustobviouslyincludeanamounttocoverthebasicsupplementarycostaswellastheexpectedprimecostappropriatelyaveragedoverthelifeoftheequipment。Thatistosay，thelong-periodcostoftheoutputisequaltotheexpectedsumoftheprimecostandthesupplementarycost；and，furthermore，inordertoyieldanormalprofit，thelong-periodsupplypricemustexceedthelong-periodcostthuscalculatedbyanamountdeterminedbythecurrentrateofinterestonloansofcomparabletermandrisk，reckonedasapercentageofthecostoftheequipment。Orifweprefertotakeastandard\'pure\'rateofinterest，wemustincludeinthelong-periodcostathirdtermwhichwemightcalltherisk-costtocovertheunknownpossibilitiesoftheactualyielddifferingfromtheexpectedyield。Thusthelong-periodsupplypriceisequaltothesumoftheprimecost，thesupplementarycost，theriskcostandtheinterestcost，intowhichseveralcomponentsitcanbeanalysed。Theshort-periodsupplyprice，ontheotherhand，isequaltothemarginalprimecost。Theentrepreneurmust，therefore，expect，whenhebuysorconstructshisequipment，tocoverhissupplementarycost，hisriskcostandhisinterestcostoutoftheexcessofthemarginalvalueoftheprimecostoveritsaveragevalue；sothatinlong-periodequilibriumtheexcessofthemarginalprimecostovertheaverageprimecostisequaltothesumofthesupplementary，riskandinterestcosts。[54]

　　Thelevelofoutput，atwhichmarginalprimecostisexactlyequaltothesumoftheaverageprimeandsupplementarycosts，hasaspecialimportance，becauseitisthepointatwhichtheentrepreneur\'stradingaccountbreakseven。Itcorresponds，[Page69]APPENDIX

　　ONUSERCOST

　　thatistosay，tothepointofzeronetprofit；whilstwithasmalleroutputthanthisheistradingatanetloss。

　　Theextenttowhichthesupplementarycosthastobeprovidedforapartfromtheprimecostvariesverymuchfromonetypeofequipmenttoanother。

　　Twoextremecasesarethefollowing:

　　iSomepartofthemaintenanceoftheequipmentmustnecessarilytakeplaceparipassuwiththeactofusingite。g。oilingthemachine。Theexpenseofthisapartfromoutsidepurchasesisincludedinthefactorcost。If，forphysicalreasons，theexactamountofthewholeofthecurrentdepreciationhasnecessarilytobemadegoodinthisway，theamountoftheusercostapartfromoutsidepurchaseswouldbeequalandoppositetothatofthesupplementarycost；andinlong-periodequilibriumthemarginalfactorcostwouldexceedtheaveragefactorcostbyanamountequaltotheriskandinterestcost。

　　iiSomepartofthedeteriorationinthevalueoftheequipmentonlyoccursifitisused。Thecostofthisischargedinusercost，insofarasitisnotmadegoodparipassuwiththeactofusingit。

　　Iflossinthevalueoftheequipmentcouldonlyoccurinthisway，supplementarycostwouldbezero。

　　Itmaybeworthpointingoutthatanentrepreneurdoesnotusehisoldestandworstequipmentfirst，merelybecauseitsusercostislow；sinceitslowusercostmaybeoutweighedbyitsrelativeinefficiency，i。e。byitshighfactorcost。Thusanentrepreneurusesbypreferencethatpartofhisequipmentforwhichtheusercostplusfactorcostisleastperunitofoutput。[55]Itfollowsthatforanygivenvolumeofoutputoftheproductinquestionthereisacorrespondingusercost，[56]butthatthistotalusercostdoesnotbearauniformrelationtothemarginalusercost，i。e。totheincrementofusercostduetoanincrementintherateofoutput。

　　II

　　Usercostconstitutesoneofthelinksbetweenthepresentandthefuture。

　　Forindecidinghisscaleofproductionan[Page70]THEGENERAL

　　THEORYOFEMPLOYMENT

　　entrepreneurhastoexerciseachoicebetweenusinguphisequipmentnowandpreservingittobeusedlateron。Itistheexpectedsacrificeoffuturebenefitinvolvedinpresentusewhichdeterminestheamountoftheusercost，anditisthemarginalamountofthissacrificewhich，togetherwiththemarginalfactorcostandtheexpectationofthemarginalproceeds，determineshisscaleofproduction。How，then，istheusercostofanactofproductioncalculatedbytheentrepreneur？

　　Wehavedefinedtheusercostasthereductioninthevalueoftheequipmentduetousingitascomparedwithnotusingit，afterallowingforthecostofthemaintenanceandimprovementswhichitwouldbeworthwhiletoundertakeandforpurchasesfromotherentrepreneurs。Itmustbearrivedat，therefore，bycalculatingthediscountedvalueoftheadditionalprospectiveyieldwhichwouldbeobtainedatsomelaterdateifitwerenotusednow。Nowthismustbeatleastequaltothepresentvalueoftheopportunitytopostponereplacementwhichwillresultfromlayinguptheequipment；anditmaybemore。[57]

　　Ifthereisnosurplusorredundantstock，sothatmoreunitsofsimilarequipmentarebeingnewlyproducedeveryyeareitherasanadditionorinreplacement，itisevidentthatmarginalusercostwillbecalculablebyreferencetotheamountbywhichthelifeorefficiencyoftheequipmentwillbeshortenedifitisused，andthecurrentreplacementcost。If，however，thereisredundantequipment，thentheusercostwillalsodependontherateofinterestandthecurrenti。e。re-estimatedsupplementarycostovertheperiodoftimebeforetheredundancyisexpectedtobeabsorbedthroughwastage，etc。Inthiswayinterestcostandcurrentsupplementarycostenterindirectlyintothecalculationofusercost。

　　Thecalculationisexhibitedinitssimplestandmostintelligibleformwhenthefactorcostiszero，e。g。inthecaseofaredundantstockofarawmaterialsuchascopper，onthelineswhichIhaveworkedoutinmyTreatiseonMoney，vol。ii。chap。29。Letustaketheprospectivevaluesofcopperatvariousfuturedates，aserieswhichwillbegovernedbytherateatwhichredundancyisbeingabsorbedandgraduallyapproachestheestimatednormalcost。Thepresentvalueorusercostofatonofsurpluscopperwillthenbeequaltothegreatestofthevaluesobtainablebysubtractingfromtheestimatedfuturevalueatany[Page71]APPENDIX

　　ONUSERCOST

　　givendateofatonofcoppertheinterestcostandthecurrentsupplementarycostonatonofcopperbetweenthatdateandthepresent。

　　Inthesamewaytheusercostofashiporfactoryormachine，whentheseequipmentsareinredundantsupply，isitsestimatedreplacementcostdiscountedatthepercentagerateofitsinterestandcurrentsupplementarycoststotheprospectivedateofabsorptionoftheredundancy。

　　Wehaveassumedabovethattheequipmentwillbereplacedinduecoursebyanidenticalarticle。Iftheequipmentinquestionwillnotberenewedidenticallywhenitiswornout，thenitsusercosthastobecalculatedbytakingaproportionoftheusercostofthenewequipment，whichwillbeerectedtodoitsworkwhenitisdiscarded，givenbyitscomparativeefficiency。

　　III

　　Thereadershouldnoticethat，wheretheequipmentisnotobsolescentbutmerelyredundantforthetimebeing，thedifferencebetweentheactualusercostanditsnormalvaluei。e。thevaluewhenthereisnoredundantequipmentvarieswiththeintervaloftimewhichisexpectedtoelapsebeforetheredundancyisabsorbed。Thusifthetypeofequipmentinquestionisofallagesandnot\'bunched\'，sothatafairproportionisreachingtheendofitslifeannually，themarginalusercostwillnotdeclinegreatlyunlesstheredundancyisexceptionallyexcessive。Inthecaseofageneralslump，marginalusercostwilldependonhowlongentrepreneursexpecttheslumptolast。Thustheriseinthesupplypricewhenaffairsbegintomendmaybepartlyduetoasharpincreaseinmarginalusercostduetoarevisionoftheirexpectations。

　　Ithassometimesbeenargued，contrarytotheopinionofbusinessmen，thatorganisedschemesforscrappingredundantplantcannothavethedesiredeffectofraisingpricesunlesstheyapplytothewholeoftheredundantplant。Buttheconceptofusercostshowshowthescrappingofsayhalftheredundantplantmayhavetheeffectofraisingpricesimmediately。

　　Forbybringingthedateoftheabsorptionoftheredundancynearer，thispolicyraisesmarginalusercostandconsequentlyincreasesthecurrentsupplyprice。Thusbusinessmenwouldseemtohavethenotionofusercostimplicitlyinmind，thoughtheydonotformulateitdistinctly。Ifthesupplementarycostisheavy，itfollowsthatthemarginalusercostwillbelowwhenthereissurplusequipment。Moreover，[Page72]THEGENERAL

　　THEORYOFEMPLOYMENT

　　whenthereissurplusequipment，themarginalfactorandusercostsareunlikelytobemuchinexcessoftheiraveragevalue。Ifboththeseconditionsarefulfilled，theexistenceofsurplusequipmentislikelytoleadtotheentrepreneur\'sworkingatanetloss，andperhapsataheavynetloss。Therewillnotbeasuddentransitionfromthisstateofaffairstoanormalprofit，takingplaceatthemomentwhentheredundancyisabsorbed。

　　Astheredundancybecomesless，theusercostwillgraduallyincrease；

　　andtheexcessofmarginaloveraveragefactorandusercostmayalsograduallyincrease。

　　IV

　　InMarshall\'sPrinciplesofEconomics6thed。p。360apartofusercostisincludedinprimecostundertheheadingof\'extrawear-and-tearofplant\'。Butnoguidanceisgivenastohowthisitemistobecalculatedorastoitsimportance。InhisTheoryofUnemploymentp。42ProfessorPigouexpresslyassumesthatthemarginaldisinvestmentinequipmentduetothemarginaloutputcan，ingeneral，beneglected:\'Thedifferencesinthequantityofwear-and-tearsufferedbyequipmentandinthecostsofnon-manuallabouremployed，thatareassociatedwithdifferencesinoutput，areignored，asbeing，ingeneral，ofsecondaryimportance\'。[

　　58]Indeed，thenotionthatthedisinvestmentinequipmentiszeroatthemarginofproductionrunsthroughagooddealofrecenteconomictheory。

　　Butthewholeproblemisbroughttoanobviousheadassoonasitisthoughtnecessarytoexplainexactlywhatismeantbythesupplypriceofanindividualfirm。

　　Itistruethatthecostofmaintenanceofidleplantmayoften，forthereasonsgivenabove，reducethemagnitudeofmarginalusercost，especiallyinaslumpwhichisexpectedtolastalongtime。Neverthelessaverylowusercostatthemarginisnotacharacteristicoftheshortperiodassuch，butofparticularsituationsandtypesofequipmentwherethecostofmaintainingidleplanthappenstobeheavy，andofthosedisequilibriawhicharecharacterisedbyveryrapidobsolescenceorgreatredundancy，especiallyifitiscoupledwithalargeproportionofcomparativelynewplant。

　　Inthecaseofrawmaterialsthenecessityofallowingforusercostisobvious；&frac34；ifatonofcopperisusedupto-dayitcannotbe[Page73]APPENDIX

　　ONUSERCOST

　　usedto-morrow，andthevaluewhichthecopperwouldhaveforthepurposesofto-morrowmustclearlyhereckonedasapartofthemarginalcost。Butthefacthasbeenoverlookedthatcopperisonlyanextremecaseofwhatoccurswhenevercapitalequipmentisusedtoproduce。Theassumptionthatthereisasharpdivisionbetweenrawmaterialswherewemustallowforthedisinvestmentduetousingthemandfixedcapitalwherewecansafelyneglectitdoesnotcorrespondtothefacts；&frac34；especiallyinnormalconditionswhereequipmentisfallingdueforreplacementeveryyearandtheuseofequipmentbringsnearerthedateatwhichreplacementisnecessary。

　　Itisanadvantageoftheconceptsofusercostandsupplementarycostthattheyareasapplicabletoworkingandliquidcapitalastofixedcapital。

　　Theessentialdifferencebetweenrawmaterialsandfixedcapitalliesnotintheirliabilitytouserandsupplementarycosts，butinthefactthatthereturntoliquidcapitalconsistsofasingleterm；whereasinthecaseoffixedcapital，whichisdurableandusedupgradually，thereturnconsistsofaseriesofusercostsandprofitsearnedinsuccessiveperiods。

　　TheMeaningofSavingandInvestment[Page74]

　　Chapter7

　　THEMEANINGOFSAVINGANDINVESTMENT

　　FURTHERCONSIDERED

　　I

　　Inthepreviouschaptersavingandinvestmenthavebeensodefinedthattheyarenecessarilyequalinamount，being，forthecommunityasawhole，merelydifferentaspectsofthesamething。SeveralcontemporarywritersincludingmyselfinmyTreatiseonMoneyhave，however，givenspecialdefinitionsofthesetermsonwhichtheyarenotnecessarilyequal。

　　Othershavewrittenontheassumptionthattheymaybeunequalwithoutprefacingtheirdiscussionwithanydefinitionsatall。Itwillbeuseful，therefore，withaviewtorelatingtheforegoingtootherdiscussionsoftheseterms，toclassifysomeofthevarioususesofthemwhichappeartobecurrent。

　　SofarasIknow，everyoneagreesinmeaningbysavingtheexcessofincomeoverwhatisspentonconsumption。Itwouldcertainlybeveryinconvenientandmisleadingnottomeanthis。Noristhereanyimportantdifferenceofopinionastowhatismeantbyexpenditureonconsumption。Thusthedifferencesofusageariseeitheroutofthedefinitionofinvestmentoroutofthatofincome。

　　II

　　Letustakeinvestmentfirst。Inpopularusageitiscommontomeanbythisthepurchaseofanasset，old[Page75]THEMEANING

　　OFSAVINGANDINVESTMENT

　　ornew，byanindividualoracorporation。Occasionally，thetermmightberestrictedtothepurchaseofanassetontheStockExchange。Butwespeakjustasreadilyofinvesting，forexample，inahouse，orinamachine，orinastockoffinishedorunfinishedgoods；and，broadlyspeaking，newinvestment，asdistinguishedfromreinvestment，meansthepurchaseofacapitalassetofanykindoutofincome。Ifwereckonthesaleofaninvestmentasbeingnegativeinvestment，i。e。disinvestment，myowndefinitionisinaccordancewithpopularusage；sinceexchangesofoldinvestmentsnecessarilycancelout。Wehave，indeed，toadjustforthecreationanddischargeofdebtsincludingchangesinthequantityofcreditormoney；butsinceforthecommunityasawholetheincreaseordecreaseoftheaggregatecreditorpositionisalwaysexactlyequaltotheincreaseordecreaseoftheaggregatedebtorposition，thiscomplicationalsocancelsoutwhenwearedealingwithaggregateinvestment。Thus，assumingthatincomeinthepopularsensecorrespondstomynetincome，aggregateinvestmentinthepopularsensecoincideswithmydefinitionofnetinvestment，namelythenetadditiontoallkindsofcapitalequipment，afterallowingforthosechangesinthevalueoftheoldcapitalequipmentwhicharetakenintoaccountinreckoningnetincome。

　　Investment，thusdefined，includes，therefore，theincrementofcapitalequipment，whetheritconsistsoffixedcapital，workingcapitalorliquidcapital；andthesignificantdifferencesofdefinitionapartfromthedistinctionbetweeninvestmentandnetinvestmentareduetotheexclusionfrominvestmentofoneormoreofthesecategories。

　　MrHawtrey，forexample，whoattachesgreatimportancetochangesinliquidcapital，i。e。toundesignedincrementsordecrementsinthestockofunsoldgoods，hassuggestedapossibledefinitionof[Page76]THEGENERAL

　　THEORYOFEMPLOYMENT

　　investmentfromwhichsuchchangesareexcluded。Inthiscaseanexcessofsavingoverinvestmentwouldbethesamethingasanundesignedincrementinthestockofunsoldgoods，i。e。asanincreaseofliquidcapital。MrHawtreyhasnotconvincedmethatthisisthefactortostress；foritlaysalltheemphasisonthecorrectionofchangeswhichwereinthefirstinstanceunforeseen，ascomparedwiththosewhichare，rightlyorwrongly，anticipated。MrHawtreyregardsthedailydecisionsofentrepreneursconcerningtheirscaleofoutputasbeingvariedfromthescaleofthepreviousdaybyreferencetothechangesintheirstockofunsoldgoods。Certainly，inthecaseofconsumptiongoods，thisplaysanimportantpartintheirdecisions。ButIseenoobjectinexcludingtheplayofotherfactorsontheirdecisions；andIprefer，therefore，toemphasisethetotalchangeofeffectivedemandandnotmerelythatpartofthechangeineffectivedemandwhichreflectstheincreaseordecreaseofunsoldstocksinthepreviousperiod。Moreover，inthecaseoffixedcapital，theincreaseordecreaseofunusedcapacitycorrespondstotheincreaseordecreaseinunsoldstocksinitseffectondecisionstoproduce；andIdonotseehowMrHawtrey\'smethodcanhandlethisatleastequallyimportantfactor。

　　Itseemsprobablethatcapitalformationandcapitalconsumption，asusedbytheAustrianschoolofeconomists，arenotidenticaleitherwithinvestmentanddisinvestmentasdefinedaboveorwithnetinvestmentanddisinvestment。Inparticular，capitalconsumptionissaidtooccurincircumstanceswherethereisquiteclearlynonetdecreaseincapitalequipmentasdefinedabove。Ihave，however，beenunabletodiscoverareferencetoanypassagewherethemeaningofthesetermsisclearlyexplained。Thestatement，forexample，thatcapitalformationoccurswhenthereisalengtheningoftheperiodofproductiondoesnotmuchadvancematters。

　　[Page77]THEMEANING

　　OFSAVINGANDINVESTMENT

　　III

　　Wecomenexttothedivergencesbetweensavingandinvestmentwhichareduetoaspecialdefinitionofincomeandhenceoftheexcessofincomeoverconsumption。MyownuseoftermsinmyTreatiseonMoneyisanexampleofthis。For，asIhaveexplainedonp。60above，thedefinitionofincome，whichIthereemployed，differedfrommypresentdefinitionbyreckoningastheincomeofentrepreneursnottheiractuallyrealisedprofitsbutinsomesensetheir\'normalprofit\'。ThusbyanexcessofsavingoverinvestmentImeantthatthescaleofoutputwassuchthatentrepreneurswereearningalessthannormalprofitfromtheirownershipofthecapitalequipment；andbyanincreasedexcessofsavingoverinvestmentImeantthatadeclinewastakingplaceintheactualprofits，sothattheywouldbeunderamotivetocontractoutput。

　　AsInowthink，thevolumeofemploymentandconsequentlyofoutputandrealincomeisfixedbytheentrepreneurunderthemotiveofseekingtomaximisehispresentandprospectiveprofitstheallowanceforusercostbeingdeterminedbyhisviewastotheuseofequipmentwhichwillmaximisehisreturnfromitoveritswholelife；whilstthevolumeofemploymentwhichwillmaximisehisprofitdependsontheaggregatedemandfunctiongivenbyhisexpectationsofthesumoftheproceedsresultingfromconsumptionandinvestmentrespectivelyonvarioushypotheses。InmyTreatiseonMoneytheconceptofchangesintheexcessofinvestmentoversaving，astheredefined，wasawayofhandlingchangesinprofit，thoughIdidnotinthatbookdistinguishclearlybetweenexpectedandrealisedresults。[59]Itherearguedthatchangeintheexcessof[Page78]THEGENERAL

　　THEORYOFEMPLOYMENT

　　investmentoversavingwasthemotiveforcegoverningchangesinthevolumeofoutput。Thusthenewargument，thoughasInowthinkmuchmoreaccurateandinstructive，isessentiallyadevelopmentoftheold。ExpressedinthelanguageofmyTreatiseonMoney，itwouldrun:theexpectationofanincreasedexcessofinvestmentoversaving，giventheformervolumeofemploymentandoutput，willinduceentrepreneurstoincreasethevolumeofemploymentandoutput。Thesignificanceofbothmypresentandmyformerargumentsliesintheirattempttoshowthatthevolumeofemploymentisdeterminedbytheestimatesofeffectivedemandmadebytheentrepreneurs，anexpectedincreaseofinvestmentrelativelytosavingasdefinedinmyTreatiseonMoneybeingacriterionofanincreaseineffectivedemand。ButtheexpositioninmyTreatiseonMoneyis，ofcourse，veryconfusingandincompleteinthelightofthefurtherdevelopmentsheresetforth。

　　MrD。H。Robertsonhasdefinedto-day\'sincomeasbeingequaltoyesterday\'sconsumptionplusinvestment，sothatto-day\'ssaving，inhissense，isequaltoyesterday\'sinvestmentplustheexcessofyesterday\'sconsumptionoverto-day\'sconsumption。Onthisdefinitionsavingcanexceedinvestment，namely，bytheexcessofyesterday\'sincomeinmysenseoverto-day\'sincome。ThuswhenMrRobertsonsaysthatthereisanexcessofsavingoverinvestment，hemeansliterallythesamethingasImeanwhenIsaythatincomeisfalling，andtheexcessofsavinginhissenseisexactlyequaltothedeclineofincomeinmysense。Ifitweretruethatcurrentexpectationswerealwaysdeterminedbyyesterday\'srealisedresults，to-day\'seffectivedemandwouldbeequaltoyesterday\'sincome。ThusMrRobertson\'smethodmightberegardedasanalternative。attempttominebeing，perhaps，afirstapproximationtoittomakethesamedistinction，sovitalforcausalanalysis，thatIhavetried[Page79]THEMEANING

　　OFSAVINGANDINVESTMENT

　　tomakebythecontrastbetweeneffectivedemandandincome。[60]

　　IV

　　Wecomenexttothemuchvaguerideasassociatedwiththephrase\'forcedsaving\'。Isanyclearsignificancediscoverableinthese？InmyTreatiseonMoneyvol。1，p。171，footnote[JMK，vol。V，p。154]Igavesomereferencestoearlierusesofthisphraseandsuggestedthattheyboresomeaffinitytothedifferencebetweeninvestmentand\'saving\'inthesenseinwhichIthereusedthelatterterm。IamnolongerconfidentthattherewasinfactsomuchaffinityasIthensupposed。Inanycase，Ifeelsurethat\'forcedsaving\'andanalogousphrasesemployedmorerecentlye。g。byProfessorHayekorProfessorRobbinshavenodefiniterelationtothedifferencebetweeninvestmentand\'saving\'inthesenseintendedinmyTreatiseonMoney。Forwhilsttheseauthorshavenotexplainedexactlywhattheymeanbythisterm，itisclearthat\'forcedsaving\'，intheirsense，isaphenomenonwhichresultsdirectlyfrom，andismeasuredby，changesinthequantityofmoneyorbank-credit。

　　Itisevidentthatachangeinthevolumeofoutputandemploymentwill，indeed，causeachangeinincomemeasuredinwage-units；thatachangeinthewage-unitwillcausebotharedistributionofincomebetweenborrowersandlendersandachangeinaggregateincomemeasuredinmoney；andthatineithereventtherewillormaybeachangeintheamountsaved。Since，therefore，changesinthequantityofmoneymayresult，throughtheireffectontherateofinterest，inachangeinthevolumeanddistributionofincomeasweshallshowlater，suchchangesmayinvolve，indirectly，achangeintheamountsaved。Butsuch[Page80]THEGENERAL

　　THEORYOFEMPLOYMENT

　　changesintheamountssavedarenomore\'forcedsavings\'thananyotherchangesintheamountssavedduetoachangeincircumstances；andthereisnomeansofdistinguishingbetweenonecaseandanother，unlesswespecifytheamountsavedincertaingivenconditionsasournormorstandard。Moreover，asweshallsee，theamountofthechangeinaggregatesavingwhichresultsfromagivenchangeinthequantityofmoneyishighlyvariableanddependsonmanyotherfactors。

　　Thus\'forcedsaving\'hasnomeaninguntilwehavespecifiedsomestandardrateofsaving。Ifweselectasmightbereasonabletherateofsavingwhichcorrespondstoanestablishedstateoffullemployment，theabovedefinitionwouldbecome:\'Forcedsavingistheexcessofactualsavingoverwhatwouldbesavediftherewerefullemploymentinapositionoflong-periodequilibrium\'。Thisdefinitionwouldmakegoodsense，butasenseinwhichaforcedexcessofsavingwouldbeaveryrareandaveryunstablephenomenon，andaforceddeficiencyofsavingtheusualstateofaffairs。

　　ProfessorHayek\'sinteresting\'NoteontheDevelopmentoftheDoctrineofForcedSaving\'[61]showsthatthiswasinfacttheoriginalmeaningoftheterm。\'Forcedsaving\'or\'forcedfrugality\'was，inthefirstinstance，aconceptionofBentham\'s；andBenthamexpresslystatedthathehadinmindtheconsequencesofanincreaseinthequantityofmoneyrelativelytothequantityofthingsvendibleformoneyincircumstancesof\'allhandsbeingemployedandemployedinthemostadvantageousmanner\'。

　　[62]Insuchcircumstances，Benthampointsout，realincomecannotbeincreased，and，consequently，additionalinvestment，takingplaceasaresultofthetransition，involvesforcedfrugality\'attheexpenseofnationalcomfortandnationaljustice\'。Allthenineteenth-century[Page81]THEMEANING

　　OFSAVINGANDINVESTMENT

　　writerswhodealtwiththismatterhadvirtuallythesameideainmind。

　　Butanattempttoextendthisperfectlyclearnotiontoconditionsoflessthanfullemploymentinvolvesdifficulties。Itistrue，ofcourseowingtothefactofdiminishingreturnstoanincreaseintheemploymentappliedtoagivencapitalequipment，thatanyincreaseinemploymentinvolvessomesacrificeofrealincometothosewhowerealreadyemployed，butanattempttorelatethislosstotheincreaseininvestmentwhichmayaccompanytheincreaseinemploymentisnotlikelytobefruitful。AtanyrateI

　　amnotawareofanyattempthavingbeenmadebythemodernwriterswhoareinterestedin\'forcedsaving\'toextendtheideatoconditionswhereemploymentisincreasing；andtheyseem，asarule，tooverlookthefactthattheextensionoftheBenthamiteconceptofforcedfrugalitytoconditionsoflessthanfullemploymentrequiressomeexplanationorqualification。

　　V

　　Theprevalenceoftheideathatsavingandinvestment，takenintheirstraightforwardsense，candifferfromoneanother，istobeexplained，Ithink，byanopticalillusionduetoregardinganindividualdepositor\'srelationtohisbankasbeingaone-sidedtransaction，insteadofseeingitasthetwo-sidedtransactionwhichitactuallyis。Itissupposedthatadepositorandhisbankcansomehowcontrivebetweenthemtoperformanoperationbywhichsavingscandisappearintothebankingsystemsothattheyarelosttoinvestment，or，contrariwise，thatthebankingsystemcanmakeitpossibleforinvestmenttooccur，towhichnosavingcorresponds。

　　Butnoonecansavewithoutacquiringanasset，whetheritbecashoradebtorcapital-goods；andnoonecanacquireanassetwhichhedidnotpreviouslypossess，unlesseitheranassetofequalvalueisnewlyproducedorsomeoneelse[Page82]THEGENERAL

　　THEORYOFEMPLOYMENT

　　partswithanassetofthatvaluewhichhepreviouslyhad。Inthefirstalternativethereisacorrespondingnewinvestment:inthesecondalternativesomeoneelsemustbedis-savinganequalsum。Forhislossofwealthmustbeduetohisconsumptionexceedinghisincome，andnottoalossoncapitalaccountthroughachangeinthevalueofacapital-asset，sinceitisnotacaseofhissufferingalossofvaluewhichhisassetformerlyhad；heisdulyreceivingthecurrentvalueofhisassetandyetisnotretainingthisvalueinwealthofanyform，i。e。hemustbespendingitoncurrentconsumptioninexcessofcurrentincome。Moreover，ifitisthebankingsystemwhichpartswithanasset，someonemustbepartingwithcash。Itfollowsthattheaggregatesavingofthefirstindividualandofotherstakentogethermustnecessarilybeequaltotheamountofcurrentnewinvestment。

　　Thenotionthatthecreationofcreditbythebankingsystemallowsinvestmenttotakeplacetowhich\'nogenuinesaving\'correspondscanonlybetheresultofisolatingoneoftheconsequencesoftheincreasedbank-credittotheexclusionoftheothers。Ifthegrantofabankcredittoanentrepreneuradditionaltothecreditsalreadyexistingallowshimtomakeanadditiontocurrentinvestmentwhichwouldnothaveoccurredotherwise，incomeswillnecessarilybeincreasedandataratewhichwillnormallyexceedtherateofincreasedinvestment。Moreover，exceptinconditionsoffullemployment，therewillbeanincreaseofrealincomeaswellasofmoney-income。Thepublicwillexercise\'afreechoice\'astotheproportioninwhichtheydividetheirincreaseofincomebetweensavingandspending；

　　anditisimpossiblethattheintentionoftheentrepreneurwhohasborrowedinordertoincreaseinvestmentcanbecomeeffectiveexceptinsubstitutionforinvestmentbyotherentrepreneurswhichwouldhaveoccurredotherwise

　　atafasterratethanthepublicdecidetoincreasetheir[Page83]THEMEANING

　　OFSAVINGANDINVESTMENT

　　savings。Moreover，thesavingswhichresultfromthisdecisionarejustasgenuineasanyothersavings。Noonecanbecompelledtoowntheadditionalmoneycorrespondingtothenewbank-credit，unlesshedeliberatelypreferstoholdmoremoneyratherthansomeotherformofwealth。Yetemployment，incomesandpricescannothelpmovinginsuchawaythatinthenewsituationsomeonedoeschoosetoholdtheadditionalmoney。Itistruethatanunexpectedincreaseofinvestmentinaparticulardirectionmaycauseanirregularityintherateofaggregatesavingandinvestmentwhichwouldnothaveoccurredifithadbeensufficientlyforeseen。Itisalsotruethatthegrantofthebank-creditwillsetupthreetendencies&frac34；1

　　foroutputtoincrease，2forthemarginalproducttoriseinvalueintermsofthewage-unitwhichinconditionsofdecreasingreturnmustnecessarilyaccompanyanincreaseofoutput，and3forthewage-unittoriseintermsofmoneysincethisisafrequentconcomitantofbetteremployment；

　　andthesetendenciesmayaffectthedistributionofrealincomebetweendifferentgroups。Butthesetendenciesarecharacteristicofastateofincreasingoutputassuch，andwilloccurjustasmuchiftheincreaseinoutputhasbeeninitiatedotherwisethanbyanincreaseinbank-credit。

　　Theycanonlybeavoidedbyavoidinganycourseofactioncapableofimprovingemployment。Muchoftheabove，however，isanticipatingtheresultofdiscussionswhichhavenotyetbeenreached。

　　Thustheold-fashionedviewthatsavingalwaysinvolvesinvestment，thoughincompleteandmisleading，isformallysounderthanthenew-fangledviewthattherecanbesavingwithoutinvestmentorinvestmentwithout\'genuine\'saving。Theerrorliesinproceedingtotheplausibleinferencethat，whenanindividualsaves，hewillincreaseaggregateinvestmentbyanequalamount。Itistrue，that，whenanindividualsavesheincreaseshisownwealth。Buttheconclusionthathe[Page84]THEGENERAL