THEORYOFEMPLOYMENT
alsoincreasesaggregatewealthfailstoallowforthepossibilitythatanactofindividualsavingmayreactonsomeoneelse\'ssavingsandhenceonsomeoneelse\'swealth。
Thereconciliationoftheidentitybetweensavingandinvestmentwiththeapparent\'free-will\'oftheindividualtosavewhathechoosesirrespectiveofwhatheorothersmaybeinvesting,essentiallydependsonsavingbeing,likespending,atwo-sidedaffair。Foralthoughtheamountofhisownsavingisunlikelytohaveanysignificantinfluenceonhisownincome,thereactionsoftheamountofhisconsumptionontheincomesofothersmakesitimpossibleforallindividualssimultaneouslytosaveanygivensums。Everysuchattempttosavemorebyreducingconsumptionwillsoaffectincomesthattheattemptnecessarilydefeatsitself。Itis,ofcourse,justasimpossibleforthecommunityasawholetosavelessthantheamountofcurrentinvestment,sincetheattempttodosowillnecessarilyraiseincomestoalevelatwhichthesumswhichindividualschoosetosaveadduptoafigureexactlyequaltotheamountofinvestment。
Theaboveiscloselyanalogouswiththepropositionwhichharmonisestheliberty,whicheveryindividualpossesses,tochange,wheneverhechooses,theamountofmoneyheholds,withthenecessityforthetotalamountofmoney,whichindividualbalancesaddupto,tobeexactlyequaltotheamountofcashwhichthebankingsystemhascreated。Inthislattercasetheequalityisbroughtaboutbythefactthattheamountofmoneywhichpeoplechoosetoholdisnotindependentoftheirincomesorofthepricesofthethingsprimarilysecurities,thepurchaseofwhichisthenaturalalternativetoholdingmoney。Thusincomesandsuchpricesnecessarilychangeuntiltheaggregateoftheamountsofmoneywhichindividualschoosetoholdatthenewlevelofincomesandpricesthusbroughtabouthascometoequalitywiththeamountofmoney[Page85]THEMEANING
OFSAVINGANDINVESTMENT
createdbythebankingsystem。This,indeed,isthefundamentalpropositionofmonetarytheory。
Boththesepropositionsfollowmerelyfromthefactthattherecannotbeabuyerwithoutasellerorasellerwithoutabuyer。Thoughanindividualwhosetransactionsaresmallinrelationtothemarketcansafelyneglectthefactthatdemandisnotaone-sidedtransaction,itmakesnonsensetoneglectitwhenwecometoaggregatedemand。Thisisthevitaldifferencebetweenthetheoryoftheeconomicbehaviouroftheaggregateandthetheoryofthebehaviouroftheindividualunit,inwhichweassumethatchangesintheindividual\'sowndemanddonotaffecthisincome。
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-creditwillsetupthreetendencies¾;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
THEORYOFEMPLOYMENT
alsoincreasesaggregatewealthfailstoallowforthepossibilitythatanactofindividualsavingmayreactonsomeoneelse\'ssavingsandhenceonsomeoneelse\'swealth。
Thereconciliationoftheidentitybetweensavingandinvestmentwiththeapparent\'free-will\'oftheindividualtosavewhathechoosesirrespectiveofwhatheorothersmaybeinvesting,essentiallydependsonsavingbeing,likespending,atwo-sidedaffair。Foralthoughtheamountofhisownsavingisunlikelytohaveanysignificantinfluenceonhisownincome,thereactionsoftheamountofhisconsumptionontheincomesofothersmakesitimpossibleforallindividualssimultaneouslytosaveanygivensums。Everysuchattempttosavemorebyreducingconsumptionwillsoaffectincomesthattheattemptnecessarilydefeatsitself。Itis,ofcourse,justasimpossibleforthecommunityasawholetosavelessthantheamountofcurrentinvestment,sincetheattempttodosowillnecessarilyraiseincomestoalevelatwhichthesumswhichindividualschoosetosaveadduptoafigureexactlyequaltotheamountofinvestment。
Theaboveiscloselyanalogouswiththepropositionwhichharmonisestheliberty,whicheveryindividualpossesses,tochange,wheneverhechooses,theamountofmoneyheholds,withthenecessityforthetotalamountofmoney,whichindividualbalancesaddupto,tobeexactlyequaltotheamountofcashwhichthebankingsystemhascreated。Inthislattercasetheequalityisbroughtaboutbythefactthattheamountofmoneywhichpeoplechoosetoholdisnotindependentoftheirincomesorofthepricesofthethingsprimarilysecurities,thepurchaseofwhichisthenaturalalternativetoholdingmoney。Thusincomesandsuchpricesnecessarilychangeuntiltheaggregateoftheamountsofmoneywhichindividualschoosetoholdatthenewlevelofincomesandpricesthusbroughtabouthascometoequalitywiththeamountofmoney[Page85]THEMEANING
OFSAVINGANDINVESTMENT
createdbythebankingsystem。This,indeed,isthefundamentalpropositionofmonetarytheory。
Boththesepropositionsfollowmerelyfromthefactthattherecannotbeabuyerwithoutasellerorasellerwithoutabuyer。Thoughanindividualwhosetransactionsaresmallinrelationtothemarketcansafelyneglectthefactthatdemandisnotaone-sidedtransaction,itmakesnonsensetoneglectitwhenwecometoaggregatedemand。Thisisthevitaldifferencebetweenthetheoryoftheeconomicbehaviouroftheaggregateandthetheoryofthebehaviouroftheindividualunit,inwhichweassumethatchangesintheindividual\'sowndemanddonotaffecthisincome。
ThePropensitytoConsume:I[Page89]
Chapter8
THEPROPENSITYTOCONSUME:
I。THEOBJECTIVEFACTORS
I
Wearenowinapositiontoreturntoourmaintheme,fromwhichwebrokeoffattheendofBookIinordertodealwithcertaingeneralproblemsofmethodanddefinition。Theultimateobjectofouranalysisistodiscoverwhatdeterminesthevolumeofemployment。Sofarwehaveestablishedthepreliminaryconclusionthatthevolumeofemploymentisdeterminedbythepointofintersectionoftheaggregatesupplyfunctionwiththeaggregatedemandfunction。Theaggregatesupplyfunction,however,whichdependsinthemainonthephysicalconditionsofsupply,involvesfewconsiderationswhicharenotalreadyfamiliar。Theformmaybeunfamiliarbuttheunderlyingfactorsarenotnew。Weshallreturntotheaggregatesupplyfunctioninchapter20,wherewediscussitsinverseunderthenameoftheemploymentfunction。But,inthemain,itisthepartplayedbytheaggregatedemandfunctionwhichhasbeenoverlooked;anditistotheaggregatedemandfunctionthatweshalldevoteBooksIIIandIV。
Theaggregatedemandfunctionrelatesanygivenlevelofemploymenttothe\'proceeds\'whichthatlevelofemploymentisexpectedtorealise。
The\'proceeds\'aremadeupofthesumoftwoquantities¾;thesumwhichwillbespentonconsumptionwhenemploymentisatthegivenlevel,andthesumwhichwillbedevoted[Page90]THEGENERAL
THEORYOFEMPLOYMENT
toinvestment。Thefactorswhichgovernthesetwoquantitiesarelargelydistinct。Inthisbookweshallconsidertheformer,namelywhatfactorsdeterminethesumwhichwillbespentonconsumptionwhenemploymentisatagivenlevel;andinBookIVweshallproceedtothefactorswhichdeterminethesumwhichwillbedevotedtoinvestment。
Sincewearehereconcernedindeterminingwhatsumwillbespentonconsumptionwhenemploymentisatagivenlevel,weshould,strictlyspeaking,considerthefunctionwhichrelatestheformerquantityCtothelatterN。Itismoreconvenient,however,toworkintermsofaslightlydifferentfunction,namely,thefunctionwhichrelatestheconsumptionintermsofwage-unitsCwtotheincomeintermsofwage-unitsYwcorrespondingtoalevelofemploymentN。ThissuffersfromtheobjectionthatYwisnotauniquefunctionofN,whichisthesameinallcircumstances。
FortherelationshipbetweenYwandNmaydependthoughprobablyinaveryminordegreeontheprecisenatureoftheemployment。
Thatistosay,twodifferentdistributionsofagivenaggregateemploymentNbetweendifferentemploymentsmightowingtothedifferentshapesoftheindividualemploymentfunctions¾;amattertobediscussedinChapter20belowleadtodifferentvaluesofYw。Inconceivablecircumstancesaspecialallowancemighthavetobemadeforthisfactor。ButingeneralitisagoodapproximationtoregardYwasuniquelydeterminedbyN。WewillthereforedefinewhatweshallcallthepropensitytoconsumeasthefunctionalrelationshipbetweenYwagivenlevelofincomeintermsofwage-units,andCwtheexpenditureonconsumptionoutofthatlevelofincome,sothatCw=Yw
orC=WYw。Theamountthatthecommunityspendsonconsumptionobviouslydependsi
partlyontheamount[Page91]THEPROPENSITY
TOCONSUME:I
ofitsincome,iipartlyontheotherobjectiveattendantcircumstances,andiiipartlyonthesubjectiveneedsandthepsychologicalpropensitiesandhabitsoftheindividualscomposingitandtheprinciplesonwhichtheincomeisdividedbetweenthemwhichmaysuffermodificationasoutputisincreased。Themotivestospendinginteractandtheattempttoclassifythemrunsthedangeroffalsedivision。Neverthelessitwillclearourmindstoconsiderthemseparatelyundertwobroadheadswhichweshallcallthesubjectivefactorsandtheobjectivefactors。Thesubjectivefactors,whichweshallconsiderinmoredetailinthenextchapter,includethosepsychologicalcharacteristicsofhumannatureandthosesocialpracticesandinstitutionswhich,thoughnotunalterable,areunlikelytoundergoamaterialchangeoverashortperiodoftimeexceptinabnormalorrevolutionarycircumstances。Inanhistoricalenquiryorincomparingonesocialsystemwithanotherofadifferenttype,itisnecessarytotakeaccountofthemannerinwhichchangesinthesubjectivefactorsmayaffectthepropensitytoconsume。But,ingeneral,weshallinwhatfollowstakethesubjectivefactorsasgiven;andweshallassumethatthepropensitytoconsumedependsonlyonchangesintheobjectivefactors。
II
Theprincipalobjectivefactorswhichinfluencethepropensitytoconsumeappeartobethefollowing:
1Achangeinthewage-unit。ConsumptionCisobviouslymuchmoreafunctionofinsomesenserealincomethanofmoney-income。Inagivenstateoftechniqueandtastesandofsocialconditionsdeterminingthedistributionofincome,aman\'srealincomewillriseandfallwiththeamountofhiscommandoverlabour-units,i。e。
withtheamountofhisincomemeasuredinwage-units;thoughwhentheaggregatevolumeofoutputchanges,hisrealincomewillowing[Page92]THEGENERAL
THEORYOFEMPLOYMENT
totheoperationofdecreasingreturnsriselessthaninproportiontohisincomemeasuredinwage-units。Asafirstapproximation,therefore,wecanreasonablyassumethat,ifthewage-unitchanges,theexpenditureonconsumptioncorrespondingtoagivenlevelofemploymentwill,likeprices,changeinthesameproportion;thoughinsomecircumstanceswemayhavetomakeanallowanceforthepossiblereactionsonaggregateconsumptionofthechangeinthedistributionofagivenrealincomebetweenentrepreneursandrentiersresultingfromachangeinthewage-unit。Apartfromthis,wehavealreadyallowedforchangesinthewage-unitbydefiningthepropensitytoconsumeintermsofincomemeasuredintermsofwage-units。
2Achangeinthedifferencebetweenincomeandnetincome。
Wehaveshownabovethattheamountofconsumptiondependsonnetincomeratherthanonincome,sinceitis,bydefinition,hisnetincomethatamanhasprimarilyinmindwhenheisdecidinghisscaleofconsumption。
Inagivensituationtheremaybeasomewhatstablerelationshipbetweenthetwo,inthesensethattherewillbeafunctionuniquelyrelatingdifferentlevelsofincometothecorrespondinglevelsofnetincome。If,however,thisshouldnotbethecase,suchpartofanychangeinincomeasisnotreflectedinnetincomemustbeneglectedsinceitwillhavenoeffectonconsumption;and,similarly,achangeinnetincome,notreflectedinincome,mustbeallowedfor。Saveinexceptionalcircumstances,however,Idoubtthepracticalimportanceofthisfactor。Wewillreturntoafullerdiscussionoftheeffectonconsumptionofthedifferencebetweenincomeandnetincomeinthefourthsectionofthischapter。
3Windfallchangesincapital-valuesnotallowedforincalculatingnetincome。Theseareofmuchmoreimportanceinmodifyingthepropensitytoconsume,sincetheywillbearnostableorregularrelationshiptotheamountofincome。Theconsumptionofthe[Page93]THEPROPENSITY
TOCONSUME:I
wealth-owningclassmaybeextremelysusceptibletounforeseenchangesinthemoney-valueofitswealth。Thisshouldbeclassifiedamongstthemajorfactorscapableofcausingshort-periodchangesinthepropensitytoconsume。
4Changesintherateoftime-discounting,i。e。intheratioofexchangebetweenpresentgoodsandfuturegoods。Thisisnotquitethesamethingastherateofinterest,sinceitallowsforfuturechangesinthepurchasingpowerofmoneyinsofarastheseareforeseen。Accounthasalsotobetakenofallkindsofrisks,suchastheprospectofnotlivingtoenjoythefuturegoodsorofconfiscatorytaxation。
Asanapproximation,however,wecanidentifythiswiththerateofinterest。
Theinfluenceofthisfactorontherateofspendingoutofagivenincomeisopentoagooddealofdoubt。Fortheclassicaltheoryoftherateofinterest,[63]whichwasbasedontheideathattherateofinterestwasthefactorwhichbroughtthesupplyanddemandforsavingsintoequilibrium,itwasconvenienttosupposethatexpenditureonconsumptioniscet。
par。negativelysensitivetochangesintherateofinterest,sothatanyriseintherateofinterestwouldappreciablydiminishconsumption。
Ithaslongbeenrecognised,however,thatthetotaleffectofchangesintherateofinterestonthereadinesstospendonpresentconsumptioniscomplexanduncertain,beingdependentonconflictingtendencies,sincesomeofthesubjectivemotivestowardssavingwillbemoreeasilysatisfiediftherateofinterestrises,whilstotherswillbeweakened。Overalongperiodsubstantialchangesintherateofinterestprobablytendtomodifysocialhabitsconsiderably,thusaffectingthesubjectivepropensitytospend¾;thoughinwhichdirectionitwouldbehardtosay,exceptinthelightofactualexperience。Theusualtypeofshort-periodfluctuationintherateofinterestisnotlikely,however,tohavemuchdirectinfluenceonspendingeitherway。
[Page94]THEGENERAL
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Therearenotmanypeoplewhowillaltertheirwayoflivingbecausetherateofinteresthasfallenfrom5to4percent,iftheiraggregateincomeisthesameasbefore。Indirectlytheremaybemoreeffects,thoughnotallinthesamedirection。Perhapsthemostimportantinfluence,operatingthroughchangesintherateofinterest,onthereadinesstospendoutofagivenincome,dependsontheeffectofthesechangesontheappreciationordepreciationinthepriceofsecuritiesandotherassets。Forifamanisenjoyingawindfallincrementinthevalueofhiscapital,itisnaturalthathismotivestowardscurrentspendingshouldbestrengthened,eventhoughintermsofincomehiscapitalisworthnomorethanbefore;andweakenedifheissufferingcapitallosses。Butthisindirectinfluencewehaveallowedforalreadyunder3above。Apartfromthis,themainconclusionsuggestedbyexperienceis,Ithink,thattheshort-periodinfluenceoftherateofinterestonindividualspendingoutofagivenincomeissecondaryandrelativelyunimportant,except,perhaps,whereunusuallylargechangesareinquestion。Whentherateofinterestfallsverylowindeed,theincreaseintheratiobetweenanannuitypurchasableforagivensumandtheannualinterestonthatsummay,however,provideanimportantsourceofnegativesavingbyencouragingthepracticeofprovidingforoldagebythepurchaseofanannuity。
Theabnormalsituation,wherethepropensitytoconsumemaybesharplyaffectedbythedevelopmentofextremeuncertaintyconcerningthefutureandwhatitmaybringforth,shouldalso,perhaps,beclassifiedunderthisheading。
5Changesinfiscalpolicy。Insofarastheinducementtotheindividualtosavedependsonthefuturereturnwhichheexpects,itclearlydependsnotonlyontherateofinterestbutonthefiscalpolicyofthegovernment。Incometaxes,especiallywhentheydiscriminateagainst\'unearned\'income,taxeson[Page95]THEPROPENSITY
TOCONSUME:I
capital-profits,death-dutiesandthelikeareasrelevantastherateofinterest;whilsttherangeofpossiblechangesinfiscalpolicymaybegreater,inexpectationatleast,thanfortherateofinterestitself。
Iffiscalpolicyisusedasadeliberateinstrumentforthemoreequaldistributionofincomes,itseffectinincreasingthepropensitytoconsumeis,ofcourse,allthegreater。[64]
Wemustalsotakeaccountoftheeffectontheaggregatepropensitytoconsumeofgovernmentsinkingfundsforthedischargeofdebtpaidforoutofordinarytaxation。Fortheserepresentaspeciesofcorporatesaving,sothatapolicyofsubstantialsinkingfundsmustberegardedingivencircumstancesasreducingthepropensitytoconsume。Itisforthisreasonthatachange-overfromapolicyofgovernmentborrowingtotheoppositepolicyofprovidingsinkingfundsorviceversaiscapableofcausingaseverecontractionormarkedexpansionofeffectivedemand。
6Changesinexpectationsoftherelationbetweenthepresentandthefuturelevelofincome。Wemustcataloguethisfactorforthesakeofformalcompleteness。But,whilstitmayaffectconsiderablyaparticularindividual\'spropensitytoconsume,itislikelytoaverageoutforthecommunityasawhole。Moreover,itisamatteraboutwhichthereis,asarule,toomuchuncertaintyforittoexertmuchinfluence。
Wearelefttherefore,withtheconclusionthatinagivensituationthepropensitytoconsumemaybeconsideredafairlystablefunction,providedthatwehaveeliminatedchangesinthewage-unitintermsofmoney。Windfallchangesincapital-valueswillbecapableofchangingthepropensitytoconsume,andsubstantial[Page96]THEGENERAL
THEORYOFEMPLOYMENT
changesintherateofinterestandinfiscalpolicymaymakesomedifference;
buttheotherobjectivefactorswhichmightaffectit,whilsttheymustnotbeoverlooked,arenotlikelytobeimportantinordinarycircumstances。
Thefactthat,giventhegeneraleconomicsituation,theexpenditureonconsumptionintermsofthewage-unitdependsinthemain,onthevolumeofoutputandemploymentisthejustificationforsumminguptheotherfactorsintheportmanteaufunction\'propensitytoconsume\'。Forwhilsttheotherfactorsarecapableofvarying{andthismustnotbeforgotten,theaggregateincomemeasuredintermsofthewage-unitis,asarule,theprincipalvariableuponwhichtheconsumption-constituentoftheaggregatedemandfunctionwilldepend。
III
Granted,then,thatthepropensitytoconsumeisafairlystablefunctionsothat,asarule,theamountofaggregateconsumptionmainlydependsontheamountofaggregateincomebothmeasuredintermsofwage-units,changesinthepropensityitselfbeingtreatedasasecondaryinfluence,whatisthenormalshapeofthisfunction?
Thefundamentalpsychologicallaw,uponwhichweareentitledtodependwithgreatconfidencebothapriorifromourknowledgeofhumannatureandfromthedetailedfactsofexperience,isthatmenaredisposed,asaruleandontheaverage,toincreasetheirconsumptionastheirincomeincreases,butnotbyasmuchastheincreaseintheirincome。Thatistosay,ifCwistheamountofconsumptionandYwisincomebothmeasuredinwage-unitsDCwhasthesamesignasDYwbutissmallerinamount,i。e。dCw/dYwispositiveandlessthanunity。
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Thisisespeciallythecasewherewehaveshortperiodsinview,asinthecaseoftheso-calledcyclicalfluctuationsofemploymentduringwhichhabits,asdistinctfrommorepermanentpsychologicalpropensities,arenotgiventimeenoughtoadaptthemselvestochangedobjectivecircumstances。
Foraman\'shabitualstandardoflifeusuallyhasthefirstclaimonhisincome,andheisapttosavethedifferencewhichdiscoversitselfbetweenhisactualincomeandtheexpenseofhishabitualstandard;or,ifhedoesadjusthisexpendituretochangesinhisincome,hewillovershortperiodsdosoimperfectly。Thusarisingincomewilloftenbeaccompaniedbyincreasedsaving,andafallingincomebydecreasedsaving,onagreaterscaleatfirstthansubsequently。
But,apartfromshort-periodchangesinthelevelofincome,itisalsoobviousthatahigherabsolutelevelofincomewilltend,asarule,towidenthegapbetweenincomeandconsumption。Forthesatisfactionoftheimmediateprimaryneedsofamanandhisfamilyisusuallyastrongermotivethanthemotivestowardsaccumulation,whichonlyacquireeffectiveswaywhenamarginofcomforthasbeenattained。Thesereasonswilllead,asarule,toagreaterproportionofincomebeingsavedasrealincomeincreases。Butwhetherornotagreaterproportionissaved,wetakeitasafundamentalpsychologicalruleofanymoderncommunitythat,whenitsrealincomeisincreased,itwillnotincreaseitsconsumptionbyanequalabsoluteamount,sothatagreaterabsoluteamountmustbesaved,unlessalargeandunusualchangeisoccurringatthesametimeinotherfactors。Asweshallshowsubsequently,[65]thestabilityoftheeconomicsystemessentiallydependsonthisruleprevailinginpractice。
Thismeansthat,ifemploymentandhenceaggregateincomeincrease,notalltheadditionalemploymentwillberequiredtosatisfytheneedsofadditionalconsumption。
[Page98]THEGENERAL
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Ontheotherhand,adeclineinincomeduetoadeclineinthelevelofemployment,ifitgoesfar,mayevencauseconsumptiontoexceedincomenotonlybysomeindividualsandinstitutionsusingupthefinancialreserveswhichtheyhaveaccumulatedinbettertimes,butalsobythegovernment,whichwillbeliable,willinglyorunwillingly,torunintoabudgetarydeficitorwillprovideunemploymentrelief;forexample,outofborrowedmoney。Thus,whenemploymentfallstoalowlevel,aggregateconsumptionwilldeclinebyasmalleramountthanthatbywhichrealincomehasdeclined,byreasonbothofthehabitualbehaviourofindividualsandalsooftheprobablepolicyofgovernments;whichistheexplanationwhyanewpositionofequilibriumcanusuallybereachedwithinamodestrangeoffluctuation。
Otherwiseafallinemploymentandincome,oncestarted,mightproceedtoextremelengths。
Thissimpleprincipleleads,itwillbeseen,tothesameconclusionasbefore,namely,thatemploymentcanonlyincreaseparipassuwithanincreaseininvestment;unless,indeed,thereisachangeinthepropensitytoconsume。Forsinceconsumerswillspendlessthantheincreaseinaggregatesupplypricewhenemploymentisincreased,theincreasedemploymentwillproveunprofitableunlessthereisanincreaseininvestmenttofillthegap。
IV
Wemustnotunderestimatetheimportanceofthefactalreadymentionedabovethat,whereasemploymentisafunctionoftheexpectedconsumptionandtheexpectedinvestment,consumptionis,cet。par。,afunctionofnetincome,i。e。ofnetinvestmentnetincomebeingequaltoconsumptionplusnetinvestment。Inotherwords,thelargerthefinancialprovisionwhichitisthoughtnecessarytomakebeforereckoningnetin-
[Page99]THEPROPENSITY
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come,thelessfavourabletoconsumption,andthereforetoemployment,willagivenlevelofinvestmentprovetobe。
Whenthewholeofthisfinancialprovisionorsupplementarycostisinfactcurrentlyexpendedintheupkeepofthealreadyexistingcapitalequipment,thispointisnotlikelytobeoverlooked。Butwhenthefinancialprovisionexceedstheactualexpenditureoncurrentupkeep,thepracticalresultsofthisinitseffectonemploymentarenotalwaysappreciated。
Fortheamountofthisexcessneitherdirectlygivesrisetocurrentinvestmentnorisavailabletopayforconsumption。Ithas,therefore,tobebalancedbynewinvestment,thedemandforwhichhasarisenquiteindependentlyofthecurrentwastageofoldequipmentagainstwhichthefinancialprovisionisbeingmade;withtheresultthatthenewinvestmentavailabletoprovidecurrentincomeiscorrespondinglydiminishedandamoreintensedemandfornewinvestmentisnecessarytomakepossibleagivenlevelofemployment。
Moreover,muchthesameconsiderationsapplytotheallowanceforwastageincludedinusercost,insofarasthewastageisnotactuallymadegood。
Takeahousewhichcontinuestobehabitableuntilitisdemolishedorabandoned。Ifacertainsumiswrittenoffitsvalueoutoftheannualrentpaidbythetenants,whichthelandlordneitherspendsonupkeepnorregardsasnetincomeavailableforconsumption,thisprovision,whetheritisapartofUorofV;constitutesadragonemploymentallthroughthelifeofthehouse,suddenlymadegoodinalumpwhenthehousehastoberebuilt。
Inastationaryeconomyallthismightnotbeworthmentioning,sinceineachyearthedepreciationallowancesinrespectofoldhouseswouldbeexactlyoffsetbythenewhousesbuiltinreplacementofthosereachingtheendoftheirlivesinthatyear。Butsuchfactorsmaybeseriousinanon-staticeconomy,especially[Page100]THE
GENERALTHEORYOFEMPLOYMENT
duringaperiodwhichimmediatelysucceedsalivelyburstofinvestmentinlong-livedcapital。Forinsuchcircumstancesaverylargeproportionofthenewitemsofinvestmentmaybeabsorbedbythelargerfinancialprovisionsmadebyentrepreneursinrespectofexistingcapitalequipment,upontherepairsandrenewalofwhich,thoughitiswearingoutwithtime,thedatehasnotyetarrivedforspendinganythingapproachingthefullfinancialprovisionwhichisbeingsetaside;withtheresultthatincomescannotriseabovealevelwhichislowenoughtocorrespondwithalowaggregateofnetinvestment。Thussinkingfunds,etc。,areapttowithdrawspendingpowerfromtheconsumerlongbeforethedemandforexpenditureonreplacementswhichsuchprovisionsareanticipatingcomesintoplay;
i。e。theydiminishthecurrenteffectivedemandandonlyincreaseitintheyearinwhichthereplacementisactuallymade。Iftheeffectofthisisaggravatedby\'financialprudence\',i。e。byitsbeingthoughtadvisableto\'writeoff\'theinitialcostmorerapidlythantheequipmentactuallywearsout,thecumulativeresultmaybeveryseriousindeed。
IntheUnitedStates,forexample,by1929therapidcapitalexpansionofthepreviousfiveyearshadledcumulativelytothesettingupofsinkingfundsanddepreciationallowances,inrespectofplantwhichdidnotneedreplacement,onsohugeascalethatanenormousvolumeofentirelynewinvestmentwasrequiredmerelytoabsorbthesefinancialprovisions;anditbecamealmosthopelesstofindstillmorenewinvestmentonasufficientscaletoprovideforsuchnewsavingasawealthycommunityinfullemploymentwouldbedisposedtosetaside。Thisfactoralonewasprobablysufficienttocauseaslump。And,furthermore,since\'financialprudence\'ofthiskindcontinuedtobeexercisedthroughtheslumpbythosegreatcorporationswhichwerestillinapositiontoaffordit,itofferedaseriousobstacletoearlyrecovery。
[Page101]THE
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Oragain,inGreatBritainatthepresenttime1935thesubstantialamountofhouse-buildingandofothernewinvestmentssincethewarhasledtoanamountofsinkingfundsbeingsetupmuchinexcessofanypresentrequirementsforexpenditureonrepairsandrenewals,atendencywhichhasbeenaccentuated,wheretheinvestmenthasbeenmadebylocalauthoritiesandpublicboards,bytheprinciplesof\'sound\'financewhichoftenrequiresinkingfundssufficienttowriteofftheinitialcostsometimebeforereplacementwillactuallyfalldue;withtheresultthatevenifprivateindividualswerereadytospendthewholeoftheirnetincomesitwouldbeaseveretasktorestorefullemploymentinthefaceofthisheavyvolumeofstatutoryprovisionbypublicandsemi-publicauthorities,entirelydissociatedfromanycorrespondingnewinvestment。Thesinkingfundsoflocalauthoritiesnowstand,Ithink,[66]atanannualfigureofmorethanhalftheamountwhichtheseauthoritiesarespendingonthewholeoftheirnewdevelopments。[67]YetitisnotcertainthattheMinistryofHealthareaware,whentheyinsistonstiffsinkingfundsbylocalauthorities,howmuchtheymaybeaggravatingtheproblemofunemployment。Inthecaseofadvancesbybuildingsocietiestohelpanindividualtobuildhisownhouse,thedesiretobeclearofdebtmorerapidlythanthehouseactuallydeterioratesmaystimulatethehouse-ownertosavemorethanheotherwisewould;¾;thoughthisfactorshouldbeclassified,perhaps,asdiminishingthepropensitytoconsumedirectlyratherthanthroughitseffectonnetincome。Inactualfigures,repaymentsofmortgagesadvancedbybuildingsocieties,whichamountedto£;24,000,000in1925,hadrisento[Page102]THE
GENERALTHEORYOFEMPLOYMENT
£;68,000,000by1933,ascomparedwithnewadvancesof£;103,000,000;
andto-daytherepaymentsareprobablystillhigher。
Thatitisinvestment,ratherthannetinvestment,whichemergesfromthestatisticsofoutput,isbroughtoutforciblyandnaturallyinMrColinClark\'sNationalIncome,1924-1931。
Healsoshowswhatalargeproportiondepreciation,etc。,normallybearstothevalueofinvestment。Forexample,heestimatesthatinGreatBritain,overtheyears1928-1931,[68]theinvestmentandthenetinvestmentwereasfollows,thoughhisgrossinvestmentisprobablysomewhatgreaterthanmyinvestment,inasmuchasitmayincludeapartofusercost,anditisnotclearhowcloselyhis\'netinvestment\'
correspondstomydefinitionofthisterm:
£;million
1928192919301931
GrossInvestment-Output791731620482
\'Valueofphysicalwastingofoldcapital\'433435437439
NetInvestment35829618343MrKuznetshasarrivedatmuchthesameconclusionincompilingthestatisticsoftheGrossCapitalFormationashecallswhatIcallinvestment
intheUnitedStates,1919-1933。Thephysicalfact,towhichthestatisticsofoutputcorrespond,isinevitablythegross,andnotthenet,investment。MrKuznetshasalsodiscoveredthedifficultiesinpassingfromgrossinvestmenttonetinvestment。\'Thedifficulty\',hewrites,\'ofpassingfromgrosstonetcapitalformation,thatis,thedifficultyofcorrectingfortheconsumptionofexistingdurablecommodities,isnotonlyinthelackofdata。Theveryconceptofannualconsumptionofcommoditiesthatlastoveranumberofyearssuffersfromambiguity\'。Hefallsback,therefore,\'onthe[Page103]THE
PROPENSITYTOCONSUME:I
assumptionthattheallowancefordepreciationanddepletiononthebooksofbusinessfirmsdescribescorrectlythevolumeofconsumptionofalreadyexisting,finisheddurablegoodsusedbybusinessfirms\'[69]。
Ontheotherhand,heattemptsnodeductionatallinrespectofhousesandotherdurablecommoditiesinthehandsofindividuals。HisveryinterestingresultsfortheUnitedStatescanbesummarisedasfollows:[70]
Severalfactsemergewithprominencefromthistable。Netcapitalformationwasverysteadyoverthequinquennium1925-1929,withonlya10percent。
Millionsofdollars
19251926192719281929
Grosscapitalformationafterallowingfornetchangeinbusinessinventories30,70633,57131,15733,93434,491
Entrepreneurs\'servicing,repairs,maintenance,depreciationanddepletion7,6858,2888,2238,4819,010
NetcapitalformationonMrKuznets\'definition23,02125,28322,93425,45325,481
Millionsofdollars
1930193119321933
Grosscapitalformationafterallowingfornetchangeinbusinessinventories27,53818,7217,78014,879
Entrepreneurs\'servicing,repairs,maintenance,depreciationanddepletion8,5027,6236,5438,204
NetcapitalformationonMrKuznets\'definition19,03611,0981,2376,675
[Page104]THE
GENERALTHEORYOFEMPLOYMENT
increaseinthelatterpartoftheupwardmovement。Thedeductionforentrepreneurs\'repairs,maintenance,depreciationanddepletionremainedatahighfigureevenatthebottomoftheslump。ButMrKuznets\'methodmustsurelyleadtotoolowanestimateoftheannualincreaseindepreciation,etc。;forheputsthelatteratlessthan1½;percentperannumofthenewnetcapitalformation。Aboveall,netcapitalformationsufferedanappallingcollapseafter1929,fallingin1932toafigurenolessthan95percentbelowtheaverageofthequinquennium1925-1929。
Theaboveis,tosomeextent,adigression。Butitisimportanttoemphasisethemagnitudeofthedeductionwhichhastobemadefromtheincomeofasociety,whichalreadypossessesalargestockofcapital,beforewearriveatthenetincomewhichisordinarilyavailableforconsumption。
Forifweoverlookthis,wemayunderestimatetheheavydragonthepropensitytoconsumewhichexistseveninconditionswherethepublicisreadytoconsumeaverylargeproportionofitsnetincome。
Consumption¾;torepeattheobvious¾;isthesoleendandobjectofalleconomicactivity。Opportunitiesforemploymentarenecessarilylimitedbytheextentofaggregatedemand。Aggregatedemandcanbederivedonlyfrompresentconsumptionorfrompresentprovisionforfutureconsumption。Theconsumptionforwhichwecanprofitablyprovideinadvancecannotbepushedindefinitelyintothefuture。Wecannot,asacommunity,provideforfutureconsumptionbyfinancialexpedientsbutonlybycurrentphysicaloutput。Insofarasoursocialandbusinessorganisationseparatesfinancialprovisionforthefuturefromphysicalprovisionforthefuturesothateffortstosecuretheformerdonotnecessarilycarrythelatterwiththem,financialprudencewillbeliabletodiminishaggregatedemandandthusimpairwell-being,astherearemanyexamples[Page105]THE
PROPENSITYTOCONSUME:I
totestify。Thegrcater,moreover,theconsumptionforwhichwehaveprovidedinadvance,themoredifficultitistofindsomethingfurthertoprovideforinadvance,andthegreaterourdependenceonpresentconsumptionasasourceofdemand。Yetthelargerourincomes,thegreater,unfortunately,isthemarginbetweenourincomesandourconsumption。So,failingsomenovelexpedient,thereis,asweshallsee,noanswertotheriddle,exceptthattheremustbesufficientunemploymenttokeepussopoorthatourconsumptionfallsshortofourincomebynomorethantheequivalentofthephysicalprovisionforfutureconsumptionwhichitpaystoproduceto-day。
Orlookatthematterthus。Consumptionissatisfiedpartlybyobjectsproducedcurrentlyandpartlybyobjectsproducedpreviously,i。e。bydisinvestment。
Totheextentthatconsumptionissatisfiedbythelatter,thereisacontractionofcurrentdemand,sincetothatextentapartofcurrentexpenditurefailstofinditswaybackasapartofnetincome。Contrariwisewheneveranobjectisproducedwithintheperiodwithaviewtosatisfyingconsumptionsubsequently,anexpansionofcurrentdemandissetup。Nowallcapital-investmentisdestinedtoresult,soonerorlater,incapital-disinvestment。Thustheproblemofprovidingthatnewcapital-investmentshallalwaysoutruncapital-disinvestmentsufficientlytofillthegapbetweennetincomeandconsumption,presentsaproblemwhichisincreasinglydifficultascapitalincreases。Newcapital-investmentcanonlytakeplaceinexcessofcurrentcapital-disinvestmentiffutureexpenditureonconsumptionisexpectedtoincrease。Eachtimewesecureto-day\'sequilibriumbyincreasedinvestmentweareaggravatingthedifficultyofsecuringequilibriumto-morrow。A
diminishedpropensitytoconsumeto-daycanonlybeaccommodatedtothepublicadvantageifanincreasedpropensitytoconsumeisexpectedtoexistsomeday。Weareremindedof\'TheFableoftheBees\'¾;thegay[Page106]THE
GENERALTHEORYOFEMPLOYMENT
ofto-morrowareabsolutelyindispensabletoprovidearaisond\'ê;treforthegraveofto-day。Itisacuriousthing,worthyofmention,thatthepopularmindseemsonlytobeawareofthisultimateperplexitywherepublicinvestmentisconcerned,asinthecaseofroad-buildingandhouse-buildingandthelike。Itiscommonlyurgedasanobjectiontoschemesforraisingemploymentbyinvestmentundertheauspicesofpublicauthoritythatitislayinguptroubleforthefuture。\'Whatwillyoudo,\'
itisasked,\'whenyouhavebuiltallthehousesandroadsandtownhallsandelectricgridsandwatersuppliesandsoforthwhichthestationarypopulationofthefuturecanbeexpectedtorequire?\'Butitisnotsoeasilyunderstoodthatthesamedifficultyappliestoprivateinvestmentandtoindustrialexpansion;particularlytothelatter,sinceitismucheasiertoseeanearlysatiationofthedemandfornewfactoriesandplantwhichabsorbindividuallybutlittlemoney,thanofthedemandfordwelling-houses。
Theobstacletoaclearunderstandingis,intheseexamples,muchthesameasinmanyacademicdiscussionsofcapital,namely,aninadequateappreciationofthefactthatcapitalisnotaself-subsistententityexistingapartfromconsumption。Onthecontrary,everyweakeninginthepropensitytoconsumeregardedasapermanenthabitmustweakenthedemandforcapitalaswellasthedemandforconsumption。
ThePropensitytoConsume:II[Page107]
Chapter9
THEPROPENSITYTOCONSUME:
II。THESUBJECTIVEFACTORS
I
Thereremainsthesecondcategoryoffactorswhichaffecttheamountofconsumptionoutofagivenincome¾;namely,thosesubjectiveandsocialincentiveswhichdeterminehowmuchisspent,giventheaggregateofincomeintermsofwage-unitsandgiventherelevantobjectivefactorswhichwehavealreadydiscussed。Since,however,theanalysisofthesefactorsraisesnopointofnovelty,itmaybesufficientifwegiveacatalogueofthemoreimportant,withoutenlargingonthematanylength。
Thereare,ingeneral,eightmainmotivesorobjectsofasubjectivecharacterwhichleadindividualstorefrainfromspendingoutoftheirincomes:iTobuildupareserveagainstunforeseencontingencies;iiToprovideforananticipatedfuturerelationbetweentheincomeandtheneedsoftheindividualorhisfamilydifferentfromthatwhichexistsinthepresent,as,forexample,inrelationtooldage,familyeducation,orthemaintenanceofdependents;iiiToenjoyinterestandappreciation,i。e。becausealargerrealconsumptionatalaterdateispreferredtoasmallerimmediateconsumption;
[Page108]THE
GENERALTHEORYOFEMPLOYMENTivToenjoyagraduallyincreasingexpenditure,sinceitgratifiesacommoninstincttolookforwardtoagraduallyimprovingstandardofliferatherthanthecontrary,eventhoughthecapacityforenjoymentmaybediminishing;vToenjoyasenseofindependenceandthepowertodothings,thoughwithoutaclearideaordefiniteintentionofspecificaction;viTosecureamassedemanoeuvretocarryoutspeculativeorbusinessprojects;viiTobequeathafortune;viiiTosatisfypuremiserliness,i。e。unreasonablebutinsistentinhibitionsagainstactsofexpenditureassuch。TheseeightmotivesmightbecalledthemotivesofPrecaution,Foresight,Calculation,Improvement,Independence,Enterprise,PrideandAvarice;
andwecouldalsodrawupacorrespondinglistofmotivestoconsumptionsuchasEnjoyment,Shortsightedness,Generosity,Miscalculation,OstentationandExtravagance。
Apartfromthesavingsaccumulatedbyindividuals,thereisalsothelargeamountofincome,varyingperhapsfromone-thirdtotwo-thirdsofthetotalaccumulationinamodernindustrialcommunitysuchasGreatBritainortheUnitedStates,whichiswithheldbycentralandlocalgovernment,byinstitutionsandbybusinesscorporations¾;formotiveslargelyanalogousto,butnotidenticalwith,thoseactuatingindividuals,andmainlythefourfollowing:iThemotiveofenterprise¾;tosecureresourcestocarryoutfurthercapitalinvestmentwithoutincurringdebtorraisingfurthercapitalonthemarket;iiThemotiveofliquidity¾;tosecureliquidresourcestomeetemergencies,difficultiesanddepressions;
[Page109]THE
PROPENSITYTOCONSUME:IIiiiThemotiveofimprovement¾;tosecureagraduallyincreasingincome,which,incidentally,willprotectthemanagementfromcriticism,sinceincreasingincomeduetoaccumulationisseldomdistinguishedfromincreasingincomeduetoefficiency;ivThemotiveoffinancialprudenceandtheanxietytobe\'ontherightside\'bymakingafinancialprovisioninexcessofuserandsupplementarycost,soastodischargedebtandwriteoffthecostofassetsaheadof;ratherthanbehind,theactualrateofwastageandobsolescence,thestrengthofthismotivemainlydependingonthequantityandcharacterofthecapitalequipmentandtherateoftechnicalchange。Correspondingtothesemotiveswhichfavourthewithholdingofapartofincomefromconsumption,therearealsooperativeattimesmotiveswhichleadtoanexcessofconsumptionoverincome。Severalofthemotivestowardspositivesavingcataloguedaboveasaffectingindividualshavetheirintendedcounterpartinnegativesavingatalaterdate,as,forexample,withsavingtoprovideforfamilyneedsoroldage。Unemploymentrelieffinancedbyborrowingisbestregardedasnegativesaving。
Nowthestrengthofallthesemotiveswillvaryenormouslyaccordingtotheinstitutionsandorganisationoftheeconomicsocietywhichwepresume,accordingtohabitsformedbyrace,education,convention,religionandcurrentmorals,accordingtopresenthopesandpastexperience,accordingtothescaleandtechniqueofcapitalequipment,andaccordingtotheprevailingdistributionofwealthandtheestablishedstandardsoflife。Intheargumentofthisbook,however,weshallnotconcernourselves,exceptinoccasionaldigressions,withtheresultsoffar-reachingsocialchangesorwiththesloweffectsofsecularprogress。Weshall,thatistosay,takeasgiventhemainbackgroundofsubjective[Page110]THE
GENERALTHEORYOFEMPLOYMENT
motivestosavingandtoconsumptionrespectively。Insofarasthedistributionofwealthisdeterminedbythemoreorlesspermanentsocialstructureofthecommunity,thisalsocanbereckonedafactor,subjectonlytoslowchangeandoveralongperiod,whichwecantakeasgiveninourpresentcontext。
II
Since,therefore,themainbackgroundofsubjectiveandsocialincentiveschangesslowly,whilsttheshort-periodinfluenceofchangesintherateofinterestandtheotherobjectivefactorsisoftenofsecondaryimportance,weareleftwiththeconclusionthatshort-periodchangesinconsumptionlargelydependonchangesintherateatwhichincomemeasuredinwage-units
isbeingearnedandnotonchangesinthepropensitytoconsumeoutofagivenincome。
Wemust,however,guardagainstamisunderstanding。Theabovemeansthattheinfluenceofmoderatechangesintherateofinterestonthepropensitytoconsumeisusuallysmall。Itdoesnotmeanthatchangesintherateofinteresthaveonlyasmallinfluenceontheamountsactuallysavedandconsumed。Quitethecontrary。Theinfluenceofchangesintherateofinterestontheamountactuallysavedisofparamountimportance,butisintheoppositedirectiontothatusuallysupposed。Foreveniftheattractionofthelargerfutureincometobeearnedfromahigherrateofinteresthastheeffectofdiminishingthepropensitytoconsume,neverthelesswecanbecertainthatariseintherateofinterestwillhavetheeffectofreducingtheamountactuallysaved。Foraggregatesavingisgovernedbyaggregateinvestment;ariseintherateofinterestunlessitisoffsetbyacorrespondingchangeinthedemand-scheduleforinvestmentwilldiminishinvestment;henceariseintherateofinterestmusthavetheeffectofreducingincomestoalevelatwhichsavingisdecreasedinthe[Page111]THE
PROPENSITYTOCONSUME:II
samemeasureasinvestment。Sinceincomeswilldecreasebyagreaterabsoluteamountthaninvestment,itis,indeed,truethat,whentherateofinterestrises,therateofconsumptionwilldecrease。Butthisdoesnotmeanthattherewillbeawidermarginforsaving。Onthecontrary,savingandspendingwillbothdecrease。
Thus,evenifitisthecasethatariseintherateofinterestwouldcausethecommunitytosavemoreoutofagivenincome,wecanbequitesurethatariseintherateofinterestassumingnofavourablechangeinthedemand-scheduleforinvestmentwilldecreasetheactualaggregateofsavings。Thesamelineofargumentcaneventellusbyhowmuchariseintherateofinterestwill,cet。par。,decreaseincomes。
Forincomeswillhavetofallorberedistributedbyjustthatamountwhichisrequired,withtheexistingpropensitytoconsumetodecreasesavingsbythesameamountbywhichtheriseintherateofinterestwill,withtheexistingmarginalefficiencyofcapital,decreaseinvestment。
Adetailedexaminationofthisaspectwilloccupyournextchapter。
Theriseintherateofinterestmightinduceustosavemore,ifourincomeswereunchanged。Butifthehigherrateofinterestretardsinvestment,ourincomeswillnot,andcannot,beunchanged。Theymustnecessarilyfall,untilthedecliningcapacitytosavehassufficientlyoffsetthestimulustosavegivenbythehigherrateofinterest。Themorevirtuousweare,themoredeterminedlythrifty,themoreobstinatelyorthodoxinournationalandpersonalfinance,themoreourincomeswillhavetofallwheninterestrisesrelativelytothemarginalefficiencyofcapital。Obstinacycanbringonlyapenaltyandnoreward。Fortheresultisinevitable。
Thus,afterall,theactualratesofaggregatesavingandspendingdonotdependonPrecaution,Foresight,Calculation,Improvement,Independence,Enterprise,PrideorAvarice。Virtueandviceplaynopart。Itall[Page112]THE
GENERALTHEORYOFEMPLOYMENT
dependsonhowfartherateofinterestisfavourabletoinvestment,aftertakingaccountofthemarginalefficiencyofcapital。[71]No,thisisanoverstatement。Iftherateofinterestweresogovernedastomaintaincontinuousfullemployment,virtuewouldresumehersway;¾;therateofcapitalaccumulationwoulddependontheweaknessofthepropensitytoconsume。Thus,onceagain,thetributethatclassicaleconomistspaytoherisduetotheirconcealedassumptionthattherateofinterestalwaysissogoverned。
TheMarginalPropensitytoConsume[Page113]