IV
Wehaveshownabovethatforacommoditytobethestandardofvalueisnotasufficientconditionforthatcommodity\'srateofinteresttobethesignificantrateofinterest。Itis，however，interestingtoconsiderhowfarthosecharacteristicsofmoneyasweknowit，whichmakethemoney-rateofinterestthesignificantrate，areboundupwithmoneybeingthestandardinwhichdebtsandwagesareusuallyfixed。Thematterrequiresconsiderationundertwoaspects。
Inthefirstplace，thefactthatcontractsarefixed，andwagesareusuallysomewhatstable，intermsofmoneyunquestionablyplaysalargepartinattractingtomoneysohighaliquidity-premium。Theconveni-
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OFINTERESTANDMONEY
enceofholdingassetsinthesamestandardasthatinwhichfutureliabilitiesmayfalldueandinastandardintermsofwhichthefuturecostoflivingisexpectedtoberelativelystable，isobvious。Atthesametimetheexpectationofrelativestabilityinthefuturemoney-costofoutputmightnotbeentertainedwithmuchconfidenceifthestandardofvaluewereacommoditywithahighelasticityofproduction。Moreover，thelowcarrying-costsofmoneyasweknowitplayquiteaslargeapartasahighliquidity-premiuminmakingthemoney-rateofinterestthesignificantrate。Forwhatmattersisthedifferencebetweentheliquidity-premiumandthecarrying-costs；andinthecaseofmostcommodities，otherthansuchassetsasgoldandsilverandbank-notes，thecarrying-costsareatleastashighastheliquidity-premiumordinarilyattachingtothestandardinwhichcontractsandwagesarefixed，sothat，eveniftheliquidity-premiumnowattachingtoe。g。sterling-moneyweretobetransferredtoe。g。
wheat，thewheat-rateofinterestwouldstillbeunlikelytoriseabovezero。Itremainsthecase，therefore，that，whilstthefactofcontractsandwagesbeingfixedintermsofmoneyconsiderablyenhancesthesignificanceofthemoney-rateofinterest，thiscircumstanceis，nevertheless，probablyinsufficientbyitselftoproducetheobservedcharacteristicsofthemoney-rateofinterest。
Thesecondpointtobeconsideredismoresubtle。Thenormalexpectationthatthevalueofoutputwillbemorestableintermsofmoneythanintermsofanyothercommodity，dependsofcourse，notonwagesbeingarrangedintermsofmoney，butonwagesbeingrelativelystickyintermsofmoney。What，then，wouldthepositionbeifwageswereexpectedtobemorestickyi。e。morestableintermsofsomeoneormorecommoditiesotherthanmoney，thanintermsofmoneyitself？Suchanexpectationrequires，notonlythatthecostsofthecommodityinquestionareexpectedtoberelativelyconstantintermsofthewage-unitfor[Page238]THE
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agreaterorsmallerscaleofoutputbothintheshortandinthelongperiod，butalsothatanysurplusoverthecurrentdemandatcost-pricecanbetakenintostockwithoutcost，i。e。thatitsliquidity-premiumexceedsitscarrying-costsfor，otherwise，sincethereisnohopeofprofitfromahigherprice，thecarryingofastockmustnecessarilyinvolvealoss。
Ifacommoditycanbefoundtosatisfytheseconditions，then，assuredly，itmightbesetupasarivaltomoney。Thusitisnotlogicallyimpossiblethatthereshouldbeacommodityintermsofwhichthevalueofoutputisexpectedtobemorestablethanintermsofmoney。Butitdoesnotseemprobablethatanysuchcommodityexists。
Iconclude，therefore，thatthecommodity，intermsofwhichwagesareexpectedtobemoststicky，cannotbeonewhoseelasticityofproductionisnotleast，andforwhichtheexcessofcarrying-costsoverliquidity-premiumisnotleast。Inotherwords，theexpectationofarelativestickinessofwagesintermsofmoneyisacorollaryoftheexcessofliquidity-premiumovercarrying-costsbeinggreaterformoneythanforanyotherasset。
Thusweseethatthevariouscharacteristics，whichcombinetomakethemoney-rateofinterestsignificant，interactwithoneanotherinacumulativefashion。Thefactthatmoneyhaslowelasticitiesofproductionandsubstitutionandlowcarrying-coststendstoraisetheexpectationthatmoney-wageswillberelativelystable；andthisexpectationenhancesmoney\'sliquidity-premiumandpreventstheexceptionalcorrelationbetweenthemoney-rateofinterestandthemarginalefficienciesofotherassetswhichmight，ifitcouldexist，robthemoney-rateofinterestofitssting。
ProfessorPigouwithothershasbeenaccustomedtoassumethatthereisapresumptioninfavourofrealwagesbeingmorestablethanmoney-wages。
Butthiscouldonlybethecaseiftherewereapresumptionin[Page239]PROPERTIES
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favourofstabilityofemployment。Moreover，thereisalsothedifficultythatwage-goodshaveahighcarrying-cost。If，indeed，someattemptweremadetostabiliserealwagesbyfixingwagesintermsofwage-goods，theeffectcouldonlybetocauseaviolentoscillationofmoney-prices。Foreverysmallfluctuationinthepropensitytoconsumeandtheinducementtoinvestwouldcausemoney-pricestorushviolentlybetweenzeroandinfinity。
Thatmoney-wagesshouldbemorestablethanrealwagesisaconditionofthesystempossessinginherentstability。Thustheattributionofrelativestabilitytorealwagesisnotmerelyamistakeinfactandexperience。
Itisalsoamistakeinlogic，ifwearesupposingthatthesysteminviewisstable，inthesensethatsmallchangesinthepropensitytoconsumeandtheinducementtoinvestdonotproduceviolenteffectsonprices。
V
Asafootnotetotheabove，itmaybeworthemphasisingwhathasbeenalreadystatedabove，namely，that\'liquidity\'and\'carrying-costs\'arebothamatterofdegree；andthatitisonlyinhavingtheformerhighrelativelytothelatterthatthepeculiarityof\'money\'consists。
Consider，forexample，aneconomyinwhichthereisnoassetforwhichtheliquidity-premiumisalwaysinexcessofthecarrying-costs；whichisthebestdefinitionIcangiveofaso-called\'non-monetary\'economy。
Thereexistsnothing，thatistosay，butparticularconsumablesandparticularcapitalequipmentsmoreorlessdifferentiatedaccordingtothecharacteroftheconsumableswhichtheycanyieldup，orassisttoyieldup，overagreaterorashorterperiodoftime；allofwhich，unlikecash，deteriorateorinvolveexpense，iftheyarekeptinstock，toavalueinexcessofanyliquidity-premiumwhichmayattachtothem。
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Insuchaneconomycapitalequipmentswilldifferfromoneanothera
inthevarietyoftheconsumablesintheproductionofwhichtheyarecapableofassisting，binthestabilityofvalueoftheiroutputinthesenseinwhichthevalueofbreadismorestablethroughtimethanthevalueoffashionablenovelties，andcintherapiditywithwhichthewealthembodiedinthemcanbecome\'liquid\'，inthesenseofproducingoutput，theproceedsofwhichcanbere-embodiedifdesiredinquiteadifferentform。
Theownersofwealthwillthenweighthelackof\'liquidity\'ofdifferentcapitalequipmentsintheabovesenseasamediuminwhichtoholdwealthagainstthebestavailableactuarialestimateoftheirprospectiveyieldsafterallowingforrisk。Theliquidity-premium，itwillbeobserved，ispartlysimilartotherisk-premium，butpartlydifferent；¾；thedifferencecorrespondingtothedifferencebetweenthebestestimateswecanmakeofprobabilitiesandtheconfidencewithwhichwemakethem。[
125]Whenweweredealing，inearlierchapters，withtheestimationofprospectiveyield，wedidnotenterintodetailastohowtheestimationismade:andtoavoidcomplicatingtheargument，wedidnotdistinguishdifferencesinliquidityfromdifferencesinriskproper。Itisevident，however，thatincalculatingtheown-rateofinterestwemustallowforboth。
Thereis，clearly，noabsolutestandardof\'liquidity\'butmerelyascaleofliquidity¾；avaryingpremiumofwhichaccounthastobetaken，inadditiontotheyieldofuseandthecarrying-costs，inestimatingthecomparativeattractionsofholdingdifferentformsofwealth。Theconceptionofwhatcontributesto\'liquidity\'isapartlyvagueone，changingfromtimetotimeanddependingonsocialpracticesandinstitutions。Theorderofpreferenceinthemindsofownersofwealthinwhichatanygiventimetheyexpresstheirfeelingsaboutliquidityis，however，definiteandisallwerequire[Page241]PROPERTIES
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forouranalysisofthebehaviouroftheeconomicsystem。
Itmaybethatincertainhistoricenvironmentsthepossessionoflandhasbeencharacterisedbyahighliquidity-premiuminthemindsofownersofwealth；andsincelandresemblesmoneyinthatitselasticitiesofproductionandsubstitutionmaybeverylow，[126]itisconceivablethattherehavebeenoccasionsinhistoryinwhichthedesiretoholdlandhasplayedthesamerô；leinkeepinguptherateofinterestattoohighalevelwhichmoneyhasplayedinrecenttimes。Itisdifficulttotracethisinfluencequantitativelyowingtotheabsenceofaforwardpriceforlandintermsofitselfwhichisstrictlycomparablewiththerateofinterestonamoneydebt。Wehave，however，somethingwhichhas，attimes，beencloselyanalogous，intheshapeofhighratesofinterestonmortgages。[127]Thehighratesofinterestfrommortgagesonland，oftenexceedingtheprobablenetyieldfromcultivatingtheland，havebeenafamiliarfeatureofmanyagriculturaleconomies。Usurylawshavebeendirectedprimarilyagainstencumbrancesofthischaracter。Andrightlyso。Forinearliersocialorganisationwherelong-termbondsinthemodernsensewerenon-existent，thecompetitionofahighinterest-rateonmortgagesmaywellhavehadthesameeffectinretardingthegrowthofwealthfromcurrentinvestmentinnewlyproducedcapital-assets，ashighinterestratesonlong-termdebtshavehadinmorerecenttimes。
[Page242]THE
GENERALTHEORYOFEMPLOYMENT
Thattheworldafterseveralmillenniaofsteadyindividualsaving，issopoorasitisinaccumulatedcapital-assets，istobeexplained，inmyopinion，neitherbytheimprovidentpropensitiesofmankind，norevenbythedestructionofwar，butbythehighliquidity-premiumsformerlyattachingtotheownershipoflandandnowattachingtomoney。IdifferinthisfromtheolderviewasexpressedbyMarshallwithanunusualdogmaticforceinhisPrinciplesofEconomics，p。581:Everyoneisawarethattheaccumulationofwealthisheldincheck，andtherateofinterestsofarsustained，bythepreferencewhichthegreatmassofhumanityhaveforpresentoverdeferredgratifications，or，inotherwords，bytheirunwillingnessto\'wait\'。VI
InmyTreatiseonMoneyIdefinedwhatpurportedtobeauniquerateofinterest，whichIcalledthenaturalrateofinterest¾；namely，therateofinterestwhich，intheterminologyofmyTreatise，preservedequalitybetweentherateofsavingastheredefinedandtherateofinvestment。IbelievedthistobeadevelopmentandclarificationofWicksell\'s\'naturalrateofinterest\'，whichwas，accordingtohim，theratewhichwouldpreservethestabilityofsome，notquiteclearlyspecified，price-level。
Ihad，however，overlookedthefactthatinanygivensocietythereis，onthisdefinition，adifferentnaturalrateofinterestforeachhypotheticallevelofemployment。And，similarly，foreveryrateofinterestthereisalevelofemploymentforwhichthatrateisthe\'natural\'
rate，inthesensethatthesystemwillbeinequilibriumwiththatrateofinterestandthatlevelofemployment。Thusitwasamistaketospeakofthenaturalrateofinterestortosuggestthattheabovedefinitionwouldyieldauniquevaluefortherateofinterestirrespectiveofthelevelofemployment。Ihad[Page243]PROPERTIES
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notthenunderstoodthat，incertainconditions，thesystemcouldbeinequilibriumwithlessthanfullemployment。
Iamnownolongeroftheopinionthattheconceptofa\'natural\'rateofinterest，whichpreviouslyseemedtomeamostpromisingidea，hasanythingveryusefulorsignificanttocontributetoouranalysis。Itismerelytherateofinterestwhichwillpreservethestatusquo；and，ingeneral，wehavenopredominantinterestinthestatusquoassuch。
Ifthereisanysuchrateofinterest，whichisuniqueandsignificant，itmustbetheratewhichwemighttermtheneutralrateofinterest，[128]namely，thenaturalrateintheabovesensewhichisconsistentwithfullemployment，giventheotherparametersofthesystem；
thoughthisratemightbebetterdescribed，perhaps，astheoptimumrate。
Theneutralrateofinterestcanbemorestrictlydefinedastherateofinterestwhichprevailsinequilibriumwhenoutputandemploymentaresuchthattheelasticityofemploymentasawholeiszero。[129]
Theabovegivesus，onceagain，theanswertothequestionastowhattacitassumptionisrequiredtomakesenseoftheclassicaltheoryoftherateofinterest。Thistheoryassumeseitherthattheactualrateofinterestisalwaysequaltotheneutralrateofinterestinthesenseinwhichwehavejustdefinedthelatter，oralternativelythattheactualrateofinterestisalwaysequaltotherateofinterestwhichwillmaintainemploymentatsomespecifiedconstantlevel。Ifthetraditionaltheoryisthusinterpreted，thereislittleornothinginitspracticalconclusionstowhichweneedtakeexception。Theclassicaltheoryassumesthatthebankingauthorityornaturalforcescausethemarket-rateofinterestto[Page244]THE
GENERALTHEORYOFEMPLOYMENT
satisfyoneorotheroftheaboveconditions；anditinvestigateswhatlawswillgoverntheapplicationandrewardsofthecommunity\'sproductiveresourcessubjecttothisassumption。Withthislimitationinforce，thevolumeofoutputdependssolelyontheassumedconstantlevelofemploymentinconjunctionwiththecurrentequipmentandtechnique；andwearesafelyensconcedinaRicardianworld。TheGeneralTheoryRe-Stated[Page245]
Chapter18
THEGENERALTHEORYOF
EMPLOYMENTRE-STATED
I
Wehavenowreachedapointwherewecangathertogetherthethreadsofourargument。Tobeginwith，itmaybeusefultomakeclearwhichelementsintheeconomicsystemweusuallytakeasgiven，whicharetheindependentvariablesofoursystemandwhicharethedependentvariables。
Wetakeasgiventheexistingskillandquantityofavailablelabour，theexistingqualityandquantityofavailableequipment，theexistingtechnique，thedegreeofcompetition，thetastesandhabitsoftheconsumer，thedisutilityofdifferentintensitiesoflabourandoftheactivitiesofsupervisionandorganisation，aswellasthesocialstructureincludingtheforces，otherthanourvariablessetforthbelow，whichdeterminethedistributionofthenationalincome。Thisdoesnotmeanthatweassumethesefactorstobeconstant；butmerelythat，inthisplaceandcontext，wearenotconsideringortakingintoaccounttheeffectsandconsequencesofchangesinthem。
Ourindependentvariablesare，inthefirstinstance，thepropensitytoconsume，thescheduleofthemarginalefficiencyofcapitalandtherateofinterest，though，aswehavealreadyseen，thesearecapableoffurtheranalysis。
Ourdependentvariablesarethevolumeofemploymentandthenationalincomeornationaldividendmeasuredinwage-units。
Thefactors，whichwehavetakenasgiven，influence[Page246]THE
GENERALTHEORYOFEMPLOYMENT
ourindependentvariables，butdonotcompletelydeterminethem。Forexample，thescheduleofthemarginalefficiencyofcapitaldependspartlyontheexistingquantityofequipmentwhichisoneofthegivenfactors，butpartlyonthestateoflong-termexpectationwhichcannotbeinferredfromthegivenfactors。Buttherearecertainotherelementswhichthegivenfactorsdeterminesocompletelythatwecantreatthesederivativesasbeingthemselvesgiven。Forexample，thegivenfactorsallowustoinferwhatlevelofnationalincomemeasuredintermsofthewage-unitwillcorrespondtoanygivenlevelofemployment；sothat，withintheeconomicframeworkwhichwetakeasgiven，thenationalincomedependsonthevolumeofemployment，i。e。onthequantityofeffortcurrentlydevotedtoproduction，inthesensethatthereisauniquecorrelationbetweenthetwo。[130]Furthermore，theyallowustoinfertheshapeoftheaggregatesupplyfunctions，whichembodythephysicalconditionsofsupply，fordifferenttypesofproducts；¾；thatistosay，thequantityofemploymentwhichwillbedevotedtoproductioncorrespondingtoanygivenlevelofeffectivedemandmeasuredintermsofwage-units。Finally，theyfurnishuswiththesupplyfunctionoflabouroreffort；sothattheytellusinteraliaatwhatpointtheemploymentfunction[
131]forlabourasawholewillceasetobeelastic。
Thescheduleofthemarginalefficiencyofcapitaldepends，however，partlyonthegivenfactorsandpartlyontheprospectiveyieldofcapital-assetsofdifferentkinds；whilsttherateofinterestdependspartlyonthestateofliquidity-preferencei。e。ontheliquidityfunctionandpartlyonthequantityofmoneymeasuredintermsofwage-units。Thuswecansometimesregardourultimateindependentvariablesasconsistingofithethreefundamentalpsychological[Page247]THE
GENERALTHEORYRE-STATED
factors，namely，thepsychologicalpropensitytoconsume，thepsychologicalattitudetoliquidityandthepsychologicalexpectationoffutureyieldfromcapital-assets，2thewage-unitasdeterminedbythebargainsreachedbetweenemployersandemployed，and3thequantityofmoneyasdeterminedbytheactionofthecentralbank；sothat，ifwetakeasgiventhefactorsspecifiedabove，thesevariablesdeterminethenationalincomeordividend
andthequantityofemployment。Buttheseagainwouldbecapableofbeingsubjectedtofurtheranalysis，andarenot，sotospeak，ourultimateatomicindependentelements。
Thedivisionofthedeterminantsoftheeconomicsystemintothetwogroupsofgivenfactorsandindependentvariablesis，ofcourse，quitearbitraryfromanyabsolutestandpoint。Thedivisionmustbemadeentirelyonthebasisofexperience，soastocorrespondontheonehandtothefactorsinwhichthechangesseemtobesosloworsolittlerelevantastohaveonlyasmallandcomparativelynegligibleshort-terminfluenceonourquaesitum；andontheotherhandtothosefactorsinwhichthechangesarefoundinpracticetoexerciseadominantinfluenceonourquaesitum。Ourpresentobjectistodiscoverwhatdeterminesatanytimethenationalincomeofagiveneconomicsystemandwhichisalmostthesamethingtheamountofitsemployment；whichmeansinastudysocomplexaseconomics，inwhichwecannothopetomakecompletelyaccurategeneralisations，thefactorswhosechangesmainlydetermineourquaesitum。Ourfinaltaskmightbetoselectthosevariableswhichcanbedeliberatelycontrolledormanagedbycentralauthorityinthekindofsysteminwhichweactuallylive。
II
Letusnowattempttosummarisetheargumentofthepreviouschapters；
takingthefactorsinthereverseordertothatinwhichwehaveintroducedthem。
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Therewillbeaninducementtopushtherateofnewinvestmenttothepointwhichforcesthesupply-priceofeachtypeofcapital-assettoafigurewhich，takeninconjunctionwithitsprospectiveyield，bringsthemarginalefficiencyofcapitalingeneraltoapproximateequalitywiththerateofinterest。Thatistosay，thephysicalconditionsofsupplyinthecapital-goodsindustries，thestateofconfidenceconcerningtheprospectiveyield，thepsychologicalattitudetoliquidityandthequantityofmoneypreferablycalculatedintermsofwage-unitsdetermine，betweenthem，therateofnewinvestment。
Butanincreaseordecreaseintherateofinvestmentwillhavetocarrywithitanincreaseordecreaseintherateofconsumption；becausethebehaviourofthepublicis，ingeneral，ofsuchacharacterthattheyareonlywillingtowidenornarrowthegapbetweentheirincomeandtheirconsumptioniftheirincomeisbeingincreasedordiminished。Thatistosay，changesintherateofconsumptionare，ingeneral，inthesamedirectionthoughsmallerinamountaschangesintherateofincome。Therelationbetweentheincrementofconsumptionwhichhastoaccompanyagivenincrementofsavingisgivenbythemarginalpropensitytoconsume。Theratio，thusdetermined，betweenanincrementofinvestmentandthecorrespondingincrementofaggregateincome，bothmeasuredinwage-units，isgivenbytheinvestmentmultiplier。
Finally，ifweassumeasafirstapproximationthattheemploymentmultiplierisequaltotheinvestmentmultiplier，wecan，byapplyingthemultipliertotheincrementordecrementintherateofinvestmentbroughtaboutbythefactorsfirstdescribed，infertheincrementofemployment。
Anincrementordecrementofemploymentisliable，however，toraiseorlowerthescheduleofliquidity-preference；therebeingthreewaysinwhichitwilltendtoincreasethedemandformoney，inasmuch[Page249]THE
GENERALTHEORYRE-STATED
asthevalueofoutputwillrisewhenemploymentincreasesevenifthewage-unitandpricesintermsofthewage-unitareunchanged，but，inaddition，thewage-unititselfwilltendtoriseasemploymentimproves，andtheincreaseinoutputwillbeaccompaniedbyariseofpricesintermsofthewage-unitowingtoincreasingcostintheshortperiod。
Thusthepositionofequilibriumwillbeinfluencedbytheserepercussions；
andthereareotherrepercussionsalso。Moreover，thereisnotoneoftheabovefactorswhichisnotliabletochangewithoutmuchwarning，andsometimessubstantially。Hencetheextremecomplexityoftheactualcourseofevents。
Nevertheless，theseseemtobethefactorswhichitisusefulandconvenienttoisolate。Ifweexamineanyactualproblemalongthelinesoftheaboveschematism，weshallfinditmoremanageable；andourpracticalintuitionwhichcantakeaccountofamoredetailedcomplexoffactsthancanbetreatedongeneralprincipleswillbeofferedalessintractablematerialuponwhichtowork。
III
TheaboveisasummaryoftheGeneralTheory。Buttheactualphenomenaoftheeconomicsystemarealsocolouredbycertainspecialcharacteristicsofthepropensitytoconsume，thescheduleofthemarginalefficiencyofcapitalandtherateofinterest，aboutwhichwecansafelygeneralisefromexperience，butwhicharenotlogicallynecessary。
Inparticular，itisanoutstandingcharacteristicoftheeconomicsysteminwhichwelivethat，whilstitissubjecttoseverefluctuationsinrespectofoutputandemployment，itisnotviolentlyunstable。Indeeditseemscapableofremaininginachronicconditionofsubnormalactivityforaconsiderableperiodwithoutanymarkedtendencyeithertowardsrecoveryortowardscompletecollapse。Moreover，theevidenceindicates[Page250]THE
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thatfull，orevenapproximatelyfull，employmentisofrareandshort-livedoccurrence。Fluctuationsmaystartbrisklybutseemtowearthemselvesoutbeforetheyhaveproceededtogreatextremes，andanintermediatesituationwhichisneitherdesperatenorsatisfactoryisournormallot。Itisuponthefactthatfluctuationstendtowearthemselvesoutbeforeproceedingtoextremesandeventuallytoreversethemselves，thatthetheoryofbusinesscycleshavingaregularphasehasbeenfounded。Thesamethingistrueofprices，which；inresponsetoaninitiatingcauseofdisturbance，seemtobeabletofindalevelatwhichtheycanremain，forthetimebeing，moderatelystable。
Now，sincethesefactsofexperiencedonotfollowoflogicalnecessity，onemustsupposethattheenvironmentandthepsychologicalpropensitiesofthemodernworldmustbeofsuchacharacterastoproducetheseresults。
Itis，therefore，usefultoconsiderwhathypotheticalpsychologicalpropensitieswouldleadtoastablesystem；and，then，whetherthesepropensitiescanbeplausiblyascribed，onourgeneralknowledgeofcontemporaryhumannature，totheworldinwhichwelive。
Theconditionsofstabilitywhichtheforegoinganalysissuggeststousascapableofexplainingtheobservedresultsarethefollowing:
iThemarginalpropensitytoconsumeissuchthat，whentheoutputofagivencommunityincreasesordecreasesbecausemoreorless
employmentisbeingappliedtoitscapitalequipment，themultiplierrelatingthetwoisgreaterthanunitybutnotverylarge。
iiWhenthereisachangeintheprospectiveyieldofcapitalorintherateofinterest，thescheduleofthemarginalefficiencyofcapitalwillbesuchthatthechangeinnewinvestmentwillnotbeingreatdisproportiontothechangeintheformer；i。e。moderatechangesintheprospectiveyieldofcapitalorintherateofinterestwillnotbeassociatedwithverygreatchangesintherateofinvestment。
[Page251]THE
GENERALTHEORYRE-STATED
iiiWhenthereisachangeinemployment，money-wagestendtochangeinthesamedirectionas，butnotingreatdisproportionto，thechangeinemployment；i。e。moderatechangesinemploymentarenotassociatedwithverygreatchangesinmoney-wages。Thisisaconditionofthestabilityofpricesratherthanofemployment。
ivWemayaddafourthcondition，whichprovidesnotsomuchforthestabilityofthesystemasforthetendencyofafluctuationinonedirectiontoreverseitselfinduecourse；namely，thatarateofinvestment，higherorlowerthanprevailedformerly，beginstoreactunfavourablyorfavourablyonthemarginalefficiencyofcapitalifitiscontinuedforaperiodwhich，measuredinyears，isnotverylarge。
iOurfirstconditionofstability，namely，thatthemultiplier，whilstgreaterthanunity，isnotverygreat，ishighlyplausibleasapsychologicalcharacteristicofhumannature。Asrealincomeincreases，boththepressureofpresentneedsdiminishesandthemarginovertheestablishedstandardoflifeisincreased；andasrealincomediminishestheoppositeistrue。Thusitisnatural¾；atanyrateontheaverageofthecommunity¾；thatcurrentconsumptionshouldbeexpandedwhenemploymentincreases，butbylessthanthefullincrementofrealincome；andthatitshouldbediminishedwhenemploymentdiminishes，butbylessthanthefulldecrementofrealincome。Moreover，whatistrueoftheaverageofindividualsislikelytobealsotrueofgovernments，especiallyinanagewhenaprogressiveincreaseofunemploymentwillusuallyforcetheStatetoprovidereliefoutofborrowedfunds。
Butwhetherornotthispsychologicallawstrikesthereaderasplausibleapriori，itiscertainthatexperiencewouldbeextremelydifferentfromwhatitisifthelawdidnothold。Forinthatcaseanincreaseofinvestment，howeversmall，wouldsetmovingacumulativeincreaseofeffectivedemanduntilapositionoffull[Page252]THE
GENERALTHEORYOFEMPLOYMENT
employmenthadbeenreached；whileadecreaseofinvestmentwouldsetmovingacumulativedecreaseofeffectivedemanduntilnooneatallwasemployed。Yetexperienceshowsthatwearegenerallyinanintermediateposition。Itisnotimpossiblethattheremaybearangewithinwhichinstabilitydoesinfactprevail。But，ifso，itisprobablyanarrowone，outsideofwhichineitherdirectionourpsychologicallawmustunquestionablyholdgood。Furthermore，itisalsoevidentthatthemultiplier，thoughexceedingunity，isnot，innormalcircumstances，enormouslylarge。For，ifitwere，agivenchangeintherateofinvestmentwouldinvolveagreatchangelimitedonlybyfullorzeroemploymentintherateofconsumption。
iiWhilstourfirstconditionprovidesthatamoderatechangeintherateofinvestmentwillnotinvolveanindefinitelygreatchangeinthedemandforconsumption-goodsoursecondconditionprovidesthatamoderatechangeintheprospectiveyieldofcapital-assetsorintherateofinterestwillnotinvolveanindefinitelygreatchangeintherateofinvestment。ThisislikelytobethecaseowingtotheincreasingcostofproducingagreatlyenlargedOutputfromtheexistingequipment。If，indeed，westartfromapositionwherethereareverylargesurplusresourcesfortheproductionofcapital-assets，theremaybeconsiderableinstabilitywithinacertainrange；butthiswillceasetoholdgoodassoonasthesurplusisbeinglargelyutilised。Moreover，thisconditionsetsalimittotheinstabilityresultingfromrapidchangesintheprospectiveyieldofcapital-assetsduetosharpfluctuationsinbusinesspsychologyortoepoch-makinginventions¾；thoughmore，perhaps，intheupwardthaninthedownwarddirection。
iiiOurthirdconditionaccordswithourexperienceofhumannature。Foralthoughthestruggleformoney-wagesis，aswehavepointedoutabove，essentiallyastruggletomaintainahighrelativewage，[Page253]THE
GENERALTHEORYRE-STATED
thisstruggleislikely，asemploymentincreases，tobeintensifiedineachindividualcasebothbecausethebargainingpositionoftheworkerisimprovedandbecausethediminishedmarginalutilityofhiswageandhisimprovedfinancialmarginmakehimreadiertorunrisks。Yet，allthesame，thesemotiveswilloperatewithinlimits，andworkerswillnotseekamuchgreatermoney-wagewhenemploymentimprovesorallowaverygreatreductionratherthansufferanyunemploymentatall。
Buthereagain，whetherornotthisconclusionisplausibleapriori，experienceshowsthatsomesuchpsychologicallawmustactuallyhold。Forifcompetitionbetweenunemployedworkersalwaysledtoaverygreatreductionofthemoney-wage，therewouldbeaviolentinstabilityintheprice-level。
Moreover，theremightbenopositionofstableequilibriumexceptinconditionsconsistentwithfullemployment；sincethewage-unitmighthavetofallwithoutlimituntilitreachedapointwheretheeffectoftheabundanceofmoneyintermsofthewage-unitontherateofinterestwassufficienttorestorealeveloffullemployment。Atnootherpointcouldtherebearesting-place。[132]
ivOurfourthcondition，whichisaconditionnotsomuchofstabilityasofalternaterecessionandrecovery，ismerelybasedonthepresumptionthatcapital-assetsareofvariousages，wearoutwithtimeandarenotallverylong-lived；sothatiftherateofinvestmentfallsbelowacertainminimumlevel，itismerelyaquestionoftimefailinglargefluctuationsinotherfactorsbeforethemarginalefficiencyofcapitalrisessufficientlytobringaboutarecoveryofinvestmentabovethisminimum。Andsimilarly，ofcourse，ifinvestmentrisestoahigherfigurethanformerly，itisonlyaquestionoftimebeforethemarginalefficiencyofcapitalfallssufficientlytobringabout[Page254]THE
GENERALTHEORYOFEMPLOYMENT
arecessionunlesstherearecompensatingchangesinotherfactors。
Forthisreason，eventhosedegreesofrecoveryandrecession，whichcanoccurwithinthelimitationssetbyourotherconditionsofstability，willbelikely，iftheypersistforasufficientlengthoftimeandarenotinterferedwithbychangesintheotherfactors，tocauseareversemovementintheoppositedirection，untilthesameforcesasbeforeagainreversethedirection。
Thusourfourconditionstogetherareadequatetoexplaintheoutstandingfeaturesofouractualexperience；¾；namely，thatweoscillate，avoidingthegravestextremesoffluctuationinemploymentandinpricesinbothdirections，roundanintermediatepositionappreciablybelowfullemploymentandappreciablyabovetheminimumemploymentadeclinebelowwhichwouldendangerlife。
Butwemustnotconcludethatthemeanpositionthusdeterminedby\'natural\'
tendencies，namely，bythosetendencieswhicharelikelytopersist，failingmeasuresexpresslydesignedtocorrectthem，is，therefore，establishedbylawsofnecessity。Theunimpededruleoftheaboveconditionsisafactofobservationconcerningtheworldasitisorhasbeen，andnotanecessaryprinciplewhichcannotbechanged。ChangesinMoney-Wages[Page257]
Chapter19
CHANGESINMONEY-WAGES
I
Itwouldhavebeenanadvantageiftheeffectsofachangeinmoney-wagescouldhavebeendiscussedinanearlierchapter。Fortheclassicaltheoryhasbeenaccustomedtorestthesupposedlyself-adjustingcharacteroftheeconomicsystemonanassumedfluidityofmoney-wages；and，whenthereisrigidity，tolayonthisrigiditytheblameofmaladjustment。
Itwasnotpossible，however，todiscussthismatterfullyuntilourowntheoryhadbeendeveloped。Fortheconsequencesofachangeinmoney-wagesarecomplicated。Areductioninmoney-wagesisquitecapableincertaincircumstancesofaffordingastimulustooutput，astheclassicaltheorysupposes。Mydifferencefromthistheoryisprimarilyadifferenceofanalysis；
sothatitcouldnotbesetforthclearlyuntilthereaderwasacquaintedwithmyownmethod。
Thegenerallyacceptedexplanationis，asIunderstandit，quiteasimpleone。Itdoesnotdependonroundaboutrepercussions，suchasweshalldiscussbelow。Theargumentsimplyisthatareductioninmoney-wageswillcet。
par。stimulatedemandbydiminishingthepriceofthefinishedproduct，andwillthereforeincreaseoutputandemploymentuptothepointwherethereductionwhichlabourhasagreedtoacceptinitsmoney-wagesisjustoffsetbythediminishingmarginalefficiencyoflabourasoutputfromagivenequipmentisincreased。
[Page258]THE
GENERALTHEORYOFEMPLOYMENT
Initscrudestform，thisistantamounttoassumingthatthereductioninmoney-wageswillleavedemandunaffected。Theremaybesomeeconomistswhowouldmaintainthatthereisnoreasonwhydemandshouldbeaffected，arguingthataggregatedemanddependsonthequantityofmoneymultipliedbytheincome-velocityofmoneyandthatthereisnoobviousreasonwhyareductioninmoney-wageswouldreduceeitherthequantityofmoneyoritsincome-velocity。Ortheymayevenarguethatprofitswillnecessarilygoupbecausewageshavegonedown。Butitwould，Ithink，bemoreusualtoagreethatthereductioninmoney-wagesmayhavesomeeffectonaggregatedemandthroughitsreducingthepurchasingpowerofsomeoftheworkers，butthattherealdemandofotherfactors，whosemoneyincomeshavenotbeenreduced，willbestimulatedbythefallinprices，andthattheaggregatedemandoftheworkersthemselveswillbeverylikelyincreasedasaresultoftheincreasedvolumeofemployment，unlesstheelasticityofdemandforlabourinresponsetochangesinmoney-wagesislessthanunity。Thusinthenewequilibriumtherewillbemoreemploymentthantherewouldhavebeenotherwiseexcept，perhaps，insomeunusuallimitingcasewhichhasnorealityinpractice。
ItisfromthistypeofanalysisthatIfundamentallydiffer；orratherfromtheanalysiswhichseemstoliebehindsuchobservationsastheabove。
Forwhilsttheabovefairlyrepresents，Ithink，thewayinwhichmanyeconomiststalkandwrite，theunderlyinganalysishasseldombeenwrittendownindetail。
Itappears，however，thatthiswayofthinkingisprobablyreachedasfollows。Inanygivenindustrywehaveademandschedulefortheproductrelatingthequantitieswhichcanbesoldtothepricesasked；wehaveaseriesofsupplyschedulesrelatingthepriceswhichwillbeaskedforthesaleofdifferentquantitiesonvariousbasesofcost；andtheseschedulesbetween[Page259]CHANGES
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themleaduptoafurtherschedulewhich，ontheassumptionthatothercostsareunchangedexceptasaresultofthechangeinoutput，givesusthedemandscheduleforlabourintheindustryrelatingthequantityofemploymenttodifferentlevelsofwages，theshapeofthecurveatanypointfurnishingtheelasticityofdemandforlabour。Thisconceptionisthentransferredwithoutsubstantialmodificationtoindustryasawhole；
anditissupposed，byaparityofreasoning，thatwehaveademandscheduleforlabourinindustryasawholerelatingthequantityofemploymenttodifferentlevelsofwages。Itisheldthatitmakesnomaterialdifferencetothisargumentwhetheritisintermsofmoney-wagesorofrealwages。
Ifwearethinkingintermsofmoney-wages，wemust，ofcourse，correctforchangesinthevalueofmoney；butthisleavesthegeneraltendencyoftheargumentunchanged，sincepricescertainlydonotchangeinexactproportiontochangesinmoney-wages。
Ifthisisthegroundworkoftheargumentand，ifitisnot，Idonotknowwhatthegroundworkis，surelyitisfallacious。Forthedemandschedulesforparticularindustriescanonlybeconstructedonsomefixedassumptionastothenatureofthedemandandsupplyschedulesofotherindustriesandastotheamountoftheaggregateeffectivedemand。Itisinvalid，therefore，totransfertheargumenttoindustryasawholeunlesswealsotransferourassumptionthattheaggregateeffectivedemandisfixed。Yetthisassumptionreducestheargumenttoanignoratioelenchi。For，whilstnoonewouldwishtodenythepropositionthatareductioninmoney-wagesaccompaniedbythesameaggregateeffectivedemandasbeforewillbeassociatedwithanincreaseinemployment，theprecisequestionatissueiswhetherthereductioninmoney-wageswillorwillnotbeaccompaniedbythesameaggregateeffectivedemandasbeforemeasuredinmoney，or，atanyrate，byanaggregateeffectivedemandwhichisnot[Page260]THE
GENERALTHEORYOFEMPLOYMENT
reducedinfullproportiontothereductioninmoney-wagesi。e。whichissomewhatgreatermeasuredinwage-units。Butiftheclassicaltheoryisnotallowedtoextendbyanalogyitsconclusionsinrespectofaparticularindustrytoindustryasawhole，itiswhollyunabletoanswerthequestionwhateffectonemploymentareductioninmoney-wageswillhave。Forithasnomethodofanalysiswherewithtotackletheproblem。ProfessorPigou\'sTheoryofUnemploymentseemstometogetoutoftheclassicaltheoryallthatcanbegotoutofit；withtheresultthatthebookbecomesastrikingdemonstrationthatthistheoryhasnothingtooffer，whenitisappliedtotheproblemofwhatdeterminesthevolumeofactualemploymentasawhole。[133]
II
Letus，then，applyourownmethodofanalysistoansweringtheproblem。
Itfallsintotwoparts。iDoesareductioninmoney-wageshaveadirecttendency，cet。par。，toincreaseemployment，\'cet。par。\'
beingtakentomeanthatthepropensitytoconsume，thescheduleofthemarginalefficiencyofcapitalandtherateofinterestarethesameasbeforeforthecommunityasawhole？And2doesareductioninmoney-wageshaveacertainorprobable。tendencytoaffectemploymentinaparticulardirectionthroughitscertainorprobablerepercussionsonthesethreefactors？
Thefirstquestionwehavealreadyansweredinthenegativeintheprecedingchapters。Forwehaveshownthatthevolumeofemploymentisuniquelycorrelatedwiththevolumeofeffectivedemandmeasuredinwage-units，andthattheeffectivedemand，beingthesumoftheexpectedconsumptionandtheexpectedinvestment，cannotchange，ifthepropensitytoconsume，thescheduleofmarginalefficiencyofcapitaland[Page261]CHANGES
INMONEY-WAGES
therateofinterestareallunchanged。If，withoutanychangeinthesefactors，theentrepreneursweretoincreaseemploymentasawhole，theirproceedswillnecessarilyfallshortoftheirsupply-price。
Perhapsitwillhelptorebutthecrudeconclusionthatareductioninmoney-wageswillincreaseemployment\'becauseitreducesthecostofproduction\'，ifwefollowupthecourseofeventsonthehypothesismostfavourabletothisview，namelythatattheoutsetentrepreneursexpectthereductioninmoney-wagestohavethiseffect。Itisindeednotunlikelythattheindividualentrepreneur，seeinghisowncostsreduced，willoverlookattheoutsettherepercussionsonthedemandforhisproductandwillactontheassumptionthathewillbeabletosellataprofitalargeroutputthanbefore。If，then，entrepreneursgenerallyactonthisexpectation，willtheyinfactsucceedinincreasingtheirprofits？Onlyifthecommunity\'smarginalpropensitytoconsumeisequaltounity，sothatthereisnogapbetweentheincrementofincomeandtheincrementofconsumption；orifthereisanincreaseininvestment，correspondingtothegapbetweentheincrementofincomeandtheincrementofconsumption，whichwillonlyoccurifthescheduleofmarginalefficienciesofcapitalhasincreasedrelativelytotherateofinterest。Thustheproceedsrealisedfromtheincreasedoutputwilldisappointtheentrepreneursandemploymentwillfallbackagaintoitspreviousfigure，unlessthemarginalpropensitytoconsumeisequaltounityorthereductioninmoney-wageshashadtheeffectofincreasingthescheduleofmarginalefficienciesofcapitalrelativelytotherateofinterestandhencetheamountofinvestment。Forifentrepreneursofferemploymentonascalewhich，iftheycouldselltheiroutputattheexpectedprice，wouldprovidethepublicwithincomesoutofwhichtheywouldsavemorethantheamountofcurrentinvestment，entrepreneursareboundtomakealossequaltothedifference；andthiswillbethecase[Page262]THE
GENERALTHEORYOFEMPLOYMENT
absolutelyirrespectiveofthelevelofmoney-wages。Atthebest，thedateoftheirdisappointmentcanonlybedelayedfortheintervalduringwhichtheirowninvestmentinincreasedworkingcapitalisfillingthegap。
Thusthereductioninmoney-wageswillhavenolastingtendencytoincreaseemploymentexceptbyvirtueofitsrepercussioneitheronthepropensitytoconsumeforthecommunityasawhole，oronthescheduleofmarginalefficienciesofcapital，orontherateofinterest。Thereisnomethodofanalysingtheeffectofareductioninmoney-wages，exceptbyfollowingupitspossibleeffectsonthesethreefactors。
Themostimportantrepercussionsonthesefactorsarelikely，inpractice，tobethefollowing:
1Areductionofmoney-wageswillsomewhatreduceprices。Itwill，therefore，involvesomeredistributionofrealincomeafromwage-earnerstootherfactorsenteringintomarginalprimecostwhoseremunerationhasnotbeenreduced，andbfromentrepreneurstorentierstowhomacertainincomefixedintermsofmoneyhasbeenguaranteed。
Whatwillbetheeffectofthisredistributiononthepropensitytoconsumeforthecommunityasawhole？Thetransferfromwage-earnerstootherfactorsislikelytodiminishthepropensitytoconsume。Theeffectofthetransferfromentrepreneurstorentiersismoreopentodoubt。Butifrentiersrepresentonthewholetherichersectionofthecommunityandthosewhosestandardoflifeisleastflexible，thentheeffectofthisalsowillbeunfavourable。Whatthenetresultwillbeonabalanceofconsiderations，wecanonlyguess。Probablyitismorelikelytobeadversethanfavourable。
2Ifwearedealingwithanunclosedsystem，andthereductionofmoney-wagesisareductionrelativelytomoney-wagesabroadwhenbotharereducedtoacommonunit，itisevidentthatthechangewillbefavourabletoinvestment，sinceitwilltendtoincreasethebalanceoftrade。Thisassumes，ofcourse，thatthe[Page263]CHANGES
INMONEY-WAGES
advantageisnotoffsetbyachangeintariffs，quotas，etc。Thegreaterstrengthofthetraditionalbeliefintheefficacyofareductioninmoney-wagesasameansofincreasingemploymentinGreatBritain，ascomparedwiththeUnitedStates，isprobablyattributabletothelatterbeing，comparativelywithourselves，aclosedsystem。
3Inthecaseofanunclosedsystem，areductionofmoney-wages，thoughitincreasesthefavourablebalanceoftrade，islikelytoworsenthetermsoftrade。Thustherewillbeareductioninrealincomes，exceptinthecaseofthenewlyemployed，whichmaytendtoincreasethepropensitytoconsume。
4Ifthereductionofmoney-wagesisexpectedtobeareductionrelativelytomoney-wagesinthefuture，thechangewillbefavourabletoinvestment，becauseaswehaveseenabove，itwillincreasethemarginalefficiencyofcapital；whilstforthesamereasonitmaybefavourabletoconsumption。If，ontheotherhand，thereductionleadstotheexpectation，oreventotheseriouspossibility，ofafurtherwage-reductioninprospect，itwillhavepreciselytheoppositeeffect。Foritwilldiminishthemarginalefficiencyofcapitalandwillleadtothepostponementbothofinvestmentandofconsumption。
5Thereductioninthewages-bill，accompaniedbysomereductioninpricesandinmoney-incomesgenerally，willdiminishtheneedforcashforincomeandbusinesspurposes；anditwillthereforereduceprotantothescheduleofliquidity-preferenceforthecommunityasawhole。Cet。par。thiswillreducetherateofinterestandthusprovefavourabletoinvestment。Inthiscase，however，theeffectofexpectationconcerningthefuturewillbeofanoppositetendencytothosejustconsideredunder4。For，ifwagesandpricesareexpectedtoriseagainlateron，thefavourablereactionwillbemuchlesspronouncedinthecaseoflong-termloansthaninthatofshort-termloans。If，more-
[Page264]THE
GENERALTHEORYOFEMPLOYMENT
over，thereductioninwagesdisturbspoliticalconfidencebycausingpopulardiscontent，theincreaseinliquidity-preferenceduetothiscausemaymorethanoffsetthereleaseofcashfromtheactivecirculation。
6Sinceaspecialreductionofmoney-wagesisalwaysadvantageoustoanindividualentrepreneurorindustry，ageneralreductionthoughitsactualeffectsaredifferentmayalsoproduceanoptimistictoneinthemindsofentrepreneurs，whichmaybreakthroughaviciouscircleofundulypessimisticestimatesofthemarginalefficiencyofcapitalandsetthingsmovingagainonamorenormalbasisofexpectation。Ontheotherhand，iftheworkersmakethesamemistakeastheiremployersabouttheeffectsofageneralreduction，labourtroublesmayoffsetthisfavourablefactor；apartfromwhich，sincethereis，asarule，nomeansofsecuringasimultaneousandequalreductionofmoney-wagesinallindustries，itisintheinterestofallworkerstoresistareductionintheirownparticularcase。Infact，amovementbyemployerstorevisemoney-wagebargainsdownwardwillbemuchmorestronglyresistedthanagradualandautomaticloweringofrealwagesasaresultofrisingprices。
7Ontheotherhand，thedepressinginfluenceonentrepreneursoftheirgreaterburdenofdebtmaypartlyoffsetanycheerfulreactionsfromthereductionofwages。Indeedifthefallofwagesandpricesgoesfar，theembarrassmentofthoseentrepreneurswhoareheavilyindebtedmaysoonreachthepointofinsolvency，¾；withseverelyadverseeffectsoninvestment。Moreovertheeffectofthelowerprice-levelontherealburdenofthenationaldebtandhenceontaxationislikelytoproveveryadversetobusinessconfidence。
Thisisnotacompletecatalogueofallthepossiblereactionsofwagereductionsinthecomplexrealworld。Buttheabovecover，Ithink，thosewhichareusuallythemostimportant。
If，therefore，werestrictourargumenttothecase[Page265]CHANGES
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ofaclosedsystem，andassumethatthereisnothingtobehoped，butifanythingthecontrary，fromtherepercussionsofthenewdistributionofrealincomesonthecommunity\'spropensitytospend，itfollowsthatwemustbaseanyhopesoffavourableresultstoemploymentfromareductioninmoney-wagesmainlyonanimprovementininvestmentdueeithertoanincreasedmarginalefficiencyofcapitalunder4oradecreasedrateofinterestunder5。Letusconsiderthesetwopossibilitiesinfurtherdetail。
Thecontingency，whichisfavourabletoanincreaseinthemarginalefficiencyofcapital，isthatinwhichmoney-wagesarebelievedtohavetouchedbottom，sothatfurtherchangesareexpectedtobeintheupwarddirection。Themostunfavourablecontingencyisthatinwhichmoney-wagesareslowlysaggingdownwardsandeachreductioninwagesservestodiminishconfidenceintheprospectivemaintenanceofwages。Whenweenteronaperiodofweakeningeffectivedemand，asuddenlargereductionofmoney-wagestoalevelsolowthatnoonebelievesinitsindefinitecontinuancewouldbetheeventmostfavourabletoastrengtheningofeffectivedemand。Butthiscouldonlybeaccomplishedbyadministrativedecreeandisscarcelypracticalpoliticsunderasystemoffreewage-bargaining。Ontheotherhand，itwouldbemuchbetterthatwagesshouldberigidlyfixedanddeemedincapableofmaterialchanges，thanthatdepressionsshouldbeaccompaniedbyagradualdownwardtendencyofmoney-wages，afurthermoderatewagereductionbeingexpectedtosignaliseeachincreaseof；say，1percentintheamountofunemployment。Forexample，theeffectofanexpectationthatwagesaregoingtosagby，say，2percentinthecomingyearwillberoughlyequivalenttotheeffectofariseof2percentintheamountofinterestpayableforthesameperiod。Thesameobservationsapplymutatismutandistothecaseofaboom。
Itfollowsthatwiththeactualpracticesandin-
[Page266]THE
GENERALTHEORYOFEMPLOYMENT
stitutionsofthecontemporaryworlditismoreexpedienttoaimatarigidmoney-wagepolicythanataflexiblepolicyrespondingbyeasystagestochangesintheamountofunemployment；¾；sofar，thatistosay，asthemarginalefficiencyofcapitalisconcerned。
Butisthisconclusionupsetwhenweturntotherateofinterest？
Itis，therefore，ontheeffectofafallingwage-andprice-levelonthedemandformoneythatthosewhobelieveintheself-adjustingqualityoftheeconomicsystemmustresttheweightoftheirargument；thoughI
amnotawarethattheyhavedoneso。Ifthequantityofmoneyisitselfafunctionofthewage-andprice-level，thereisindeed，nothingtohopeinthisdirection。Butifthequantityofmoneyisvirtuallyfixed，itisevidentthatitsquantityintermsofwage-unitscanbeindefinitelyincreasedbyasufficientreductioninmoney-wages；andthatitsquantityinproportiontoincomesgenerallycanbelargelyincreased，thelimittothisincreasedependingontheproportionofwage-costtomarginalprimecostandontheresponseofotherelementsofmarginalprimecosttothefallingwage-unit。
Wecan，therefore，theoreticallyatleast，producepreciselythesameeffectsontherateofinterestbyreducingwages，whilstleavingthequantityofmoneyunchanged，thatwecanproducebyincreasingthequantityofmoneywhilstleavingthelevelofwagesunchanged。Itfollowsthatwagereductions，asamethodofsecuringfullemployment，arealsosubjecttothesamelimitationsasthemethodofincreasingthequantityofmoney。Thesamereasonsasthosementionedabove，whichlimittheefficacyofincreasesinthequantityofmoneyasameansofincreasinginvestmenttotheoptimumfigure，applymutatismutandistowagereductions。Justasamoderateincreaseinthequantityofmoneymayexertaninadequateinfluenceoverthelong-termrateofinterest，whilstan[Page267]CHANGES
INMONEY-WAGES
immoderateincreasemayoffsetitsotheradvantagesbyitsdisturbingeffectonconfidence；soamoderatereductioninmoney-wagesmayproveinadequate，whilstanimmoderatereductionmightshatterconfidenceevenifitwerepracticable。
Thereis，therefore，nogroundforthebeliefthataflexiblewagepolicyiscapableofmaintainingastateofcontinuousfullemployment；¾；anymorethanforthebeliefthatanopen-marketmonetarypolicyiscapable，unaided，ofachievingthisresult。Theeconomicsystemcannotbemadeself-adjustingalongtheselines。
If，indeed，labourwerealwaysinapositiontotakeactionandweretodoso，whenevertherewaslessthanfullemployment，toreduceitsmoneydemandsbyconcertedactiontowhateverpointwasrequiredtomakemoneysoabundantrelativelytothewage-unitthattherateofinterestwouldfalltoalevelcompatiblewithfullemployment，weshould，ineffect，havemonetarymanagementbythetradeunions，aimedatfullemployment，insteadofbythebankingsystem。
Neverthelesswhileaflexiblewagepolicyandaflexiblemoneypolicycome，analytically，tothesamething，inasmuchastheyarealternativemeansofchangingthequantityofmoneyintermsofwage-units，inotherrespectsthereis，ofcourse，aworldofdifferencebetweenthem。Letmebrieflyrecalltothereader\'smindthefouroutstandingconsiderations。
iExceptinasocialisedcommunitywherewage-policyissettledbydecree，thereisnomeansofsecuringuniformwagereductionsforeveryclassoflabour。Theresultcanonlybebroughtaboutbyaseriesofgradual，irregularchanges，justifiableonnocriterionofsocialjusticeoreconomicexpedience，andprobablycompletedonlyafterwastefulanddisastrousstruggles，wherethoseintheweakestbargainingpositionwillsufferrelativelytotherest。Achangeinthequantityofmoney，ontheotherhand，isalreadywithinthe[Page268]THE
GENERALTHEORYOFEMPLOYMENT
powerofmostgovernmentsbyopen-marketpolicyoranalogousmeasures。
Havingregardtohumannatureandourinstitutions，itcanonlybeafoolishpersonwhowouldpreferaflexiblewagepolicytoaflexiblemoneypolicy，unlesshecanpointtoadvantagesfromtheformerwhicharenotobtainablefromthelatter。Moreover，otherthingsbeingequal，amethodwhichitiscomparativelyeasytoapplyshouldbedeemedpreferabletoamethodwhichisprobablysodifficultastobeimpracticable。
iiIfmoney-wagesareinflexible，suchchangesinpricesasoccuri。e。apartfrom\'administered\'ormonopolypriceswhicharedeterminedbyotherconsiderationsbesidesmarginalcostwillmainlycorrespondtothediminishingmarginalproductivityoftheexistingequipmentastheoutputfromitisincreased。Thusthegreatestpracticablefairnesswillbemaintainedbetweenlabourandthefactorswhoseremunerationiscontractuallyfixedintermsofmoney，inparticulartherentierclassandpersonswithfixedsalariesonthepermanentestablishmentofafirm，aninstitutionortheState。Ifimportantclassesaretohavetheirremunerationfixedintermsofmoneyinanycase，socialjusticeandsocialexpediencyarebestservediftheremunerationsofallfactorsaresomewhatinflexibleintermsofmoney。Havingregardtothelargegroupsofincomeswhicharecomparativelyinflexibleintermsofmoney，itcanonlybeanunjustpersonwhowouldpreferaflexiblewagepolicytoaflexiblemoneypolicy，unlesshecanpointtoadvantagesfromtheformerwhicharenotobtainablefromthelatter。
iiiThemethodofincreasingthequantityofmoneyintermsofwage-unitsbydecreasingthewage-unitincreasesproportionatelytheburdenofdebt；whereasthemethodofproducingthesameresultbyincreasingthequantityofmoneywhilstleavingthewage-unitunchangedhastheoppositeeffect。Havingregardtotheexcessiveburdenofmanytypesofdebt，[Page269]CHANGES
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itcanonlybeaninexperiencedpersonwhowouldprefertheformer。
ivIfasaggingrateofinteresthastobebroughtaboutbyasaggingwage-level，thereis，forthereasonsgivenabove，adoubledragonthemarginalefficiencyofcapitalandadoublereasonforputtingoffinvestmentandthuspostponingrecovery。
III
Itfollows，therefore，thatiflabourweretorespondtoconditionsofgraduallydiminishingemploymentbyofferingitsservicesatagraduallydiminishingmoney-wage，thiswouldnot，asarule，havetheeffectofreducingrealwagesandmightevenhavetheeffectofincreasingthem，throughitsadverseinfluenceonthevolumeofoutput。Thechiefresultofthispolicywouldbetocauseagreatinstabilityofprices，soviolentperhapsastomakebusinesscalculationsfutileinaneconomicsocietyfunctioningafterthemannerofthatinwhichwelive。Tosupposethataflexiblewagepolicyisarightandproperadjunctofasystemwhichonthewholeisoneoflaissez-faire，istheoppositeofthetruth。Itisonlyinahighlyauthoritariansociety，wheresudden，substantial，all-roundchangescouldbedecreedthataflexiblewagepolicycouldfunctionwithsuccess。
OnecanimagineitinoperationinItaly，GermanyorRussia，butnotinFrance，theUnitedStatesorGreatBritain。
If，asinAustralia，anattemptweremadetofixrealwagesbylegislation，thentherewouldbeacertainlevelofemploymentcorrespondingtothatlevelofrealwages；andtheactuallevelofemploymentwould，inaclosedsystem，oscillateviolentlybetweenthatlevelandnoemploymentatall，accordingastherateofinvestmentwasorwasnotbelowtheratecompatiblewiththatlevel；whilstpriceswouldbeinunstableequilibriumwheninvestmentwasatthecriticallevel，racingtozero[Page270]THE
GENERALTHEORYOFEMPLOYMENT
wheneverinvestmentwasbelowit，andtoinfinitywheneveritwasaboveit。Theelementofstabilitywouldhavetobefound，ifatall，inthefactorscontrollingthequantityofmoneybeingsodeterminedthattherealwaysexistedsomelevelofmoney-wagesatwhichthequantityofmoneywouldbesuchastoestablisharelationbetweentherateofinterestandthemarginalefficiencyofcapitalwhichwouldmaintaininvestmentatthecriticallevel。Inthiseventemploymentwouldbeconstantatthelevelappropriatetothelegalrealwagewithmoney-wagesandpricesfluctuatingrapidlyinthedegreejustnecessarytomaintainthisrateofinvestmentattheappropriatefigure。IntheactualcaseofAustralia，theescapewasfound，partlyofcourseintheinevitableinefficacyofthelegislationtoachieveitsobject，andpartlyinAustralianotbeingaclosedsystem，sothatthelevelofmoney-wageswasitselfadeterminantofthelevelofforeigninvestmentandhenceoftotalinvestment，whilstthetermsoftradewereanimportantinfluenceonrealwages。
InthelightoftheseconsiderationsIamnowoftheopinionthatthemaintenanceofastablegenerallevelofmoney-wagesis，onabalanceofconsiderations，themostadvisablepolicyforaclosedsystem；whilstthesameconclusionwillholdgoodforanopensystem，providedthatequilibriumwiththerestoftheworldcanbesecuredbymeansoffluctuatingexchanges。
Thereareadvantagesinsomedegreeofflexibilityinthewagesofparticularindustriessoastoexpeditetransfersfromthosewhicharerelativelydecliningtothosewhicharerelativelyexpanding。Butthemoney-wagelevelasawholeshouldbemaintainedasstableaspossible，atanyrateintheshortperiod。
Thispolicywillresultinafairdegreeofstabilityintheprice-level；¾；greaterstability，atleast，thanwithaflexiblewagepolicy。Apartfrom\'administered\'
ormonopolyprices，theprice-levelwillonlychangeintheshortperiodinresponsetotheextentthatchangesin[Page271]CHANGES
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thevolumeofemploymentaffectmarginalprimecosts；whilstinthelongperiodtheywillonlychangeinresponsetochangesinthecostofproductionduetonewtechniquesandneworincreasedequipment。
Itistruethat，ifthereare，nevertheless，largefluctuationsinemployment，substantialfluctuationsintheprice-levelwillaccompanythem。Butthefluctuationswillbeless，asIhavesaidabove，thanwithaflexiblewagepolicy。
Thuswitharigidwagepolicythestabilityofpriceswillbeboundupintheshortperiodwiththeavoidanceoffluctuationsinemployment。
Inthelongperiod，ontheotherhand，wearestillleftwiththechoicebetweenapolicyofallowingpricestofallslowlywiththeprogressoftechniqueandequipmentwhilstkeepingwagesstable，orofallowingwagestoriseslowlywhilstkeepingpricesstable。Onthewholemypreferenceisforthelatteralternative，onaccountofthefactthatitiseasierwithanexpectationofhigherwagesinfuturetokeeptheactuallevelofemploymentwithinagivenrangeoffullemploymentthanwithanexpectationoflowerwagesinfuture，andonaccountalsoofthesocialadvantagesofgraduallydiminishingtheburdenofdebt，thegreatereaseofadjustmentfromdecayingtogrowingindustries，andthepsychologicalencouragementlikelytobefeltfromamoderatetendencyformoney-wagestoincrease。
Butnoessentialpointofprincipleisinvolved，anditwouldleadmebeyondthescopeofmypresentpurposetodevelopindetailtheargumentsoneitherside。
AppendixtoChapter19[Page272]
AppendixtoChapter19
PROFESSORPIGOU\'S\'THEORYOFUNEMPLOYMENT\'
ProfessorPigouinhisTheoryofUnemploymentmakesthevolumeofemploymenttodependontwofundamentalfactors，namelyitherealratesofwagesforwhichworkpeoplestipulate，and2theshapeoftheRealDemandFunctionforLabour。Thecentralsectionsofhisbookareconcernedwithdeterminingtheshapeofthelatterfunction。Thefactthatworkpeopleinfactstipulate，notforarealrateofwages，butforamoney-rate，isnotignored；but，ineffect，itisassumedthattheactualmoney-rateofwagesdividedbythepriceofwage-goodscanbetakentomeasuretherealratedemanded。
Theequationswhich，ashesays，\'formthestartingpointoftheenquiry\'
intotheRealDemandFunctionforLabouraregiveninhisTheoryofUnemployment，p。90。Sincethetacitassumptions，whichgoverntheapplicationofhisanalysis，slipinneartheoutsetofhisargument，I
willsummarisehistreatmentuptothecrucialpoint。
ProfessorPigoudividesindustriesintothose\'engagedinmakingwage-goodsathomeandinmakingexportsthesaleofwhichcreatesclaimstowage-goodsabroad\'andthe\'other\'industries:whichitisconvenienttocallthewage-goodsindustriesandthenon-wage-goodsindustriesrespectively。Hesupposesxmentobeemployedintheformerandymeninthelatter。Theoutputinvalueofwage-goodsofthexmenhecallsFx；andthegeneralrateofwagesF\'x。
This，thoughhedoesnotstoptomentionit，istantamounttoassumingthatmarginalwage-costisequaltomarginalprimecost。[134]Further，heassumes[Page273]APPENDIX
TOCHAPTER19
thatxy=fx，i。e。thatthenumberofmenemployedinthewage-goodsindustriesisafunctionoftotalemployment。Hethenshowsthattheelasticityoftherealdemandforlabourintheaggregatewhichgivesustheshapeofourquaesitum，namelytheRealDemandFunctionforLabourcanbewrittenf\'xF\'x
Er=¾；¾；¾；×；¾；¾；¾；¾；
fxF\"xSofarasnotationgoes，thereisnosignificantdifferencebetweenthisandmyownmodesofexpression。InsofaraswecanidentifyProfessorPigou\'swage-goodswithmyconsumption-goods，andhis\'othergoods\'withmyinvestment-goods，itfollowsthathisFx/F\'x，beingthevalueoftheoutputofthewage-goodsindustriesintermsofthewage-unit，isthesameasmyCw。Furthermore，hisfunctionissubjecttotheidentificationofwage-goodswithconsumption-goods
afunctionofwhatIhavecalledabovetheemploymentmultiplierk\'。
ForDx=k\'Dy，1
sothatf\'x=
1¾；¾；
kThusProfessorPigou\'s\'elasticityoftherealdemandforlabourintheaggregate\'isaconcoctionsimilartosomeofmyown，dependingpartlyonthephysicalandtechnicalconditionsinindustryasgivenbyhisfunctionFandpartlyonthepropensitytoconsumewage-goodsasgivenbyhisfunctionf；providedalwaysthatwearelimitingourselvestothespecialcasewheremarginallabour-costisequaltomarginalprimecost。
Todeterminethequantityofemployment，ProfessorPigou[Page274]THE
GENERALTHEORYOFEMPLOYMENT
thencombineswithhis\'realdemandforlabour\'，asupplyfunctionforlabour。Heassumesthatthisisafunctionoftherealwageandofnothingelse。But，ashehasalsoassumedthattherealwageisafunctionofthenumberofmenxwhoareemployedinthewage-goodsindustries，thisamountstoassumingthatthetotalsupplyoflabourattheexistingrealwageisafunctionofxandofnothingelse。Thatistosay，n=cx，wherenisthesupplyoflabouravailableatarealwageF\'x。
Thus，clearedofallcomplication，ProfessorPigou\'sanalysisamountstoanattempttodiscoverthevolumeofactualemploymentfromtheequationsxy=fxandn=cx。
Butthereareherethreeunknownsandonlytwoequations。Itseemsclearthathegetsroundthisdifficultybytakingn=xy。Thisamounts，ofcourse，toassumingthatthereisnoinvoluntaryunemploymentinthestrictsense，i。e。thatalllabouravailableattheexistingrealwageisinfactemployed。Inthiscasexhasthevaluewhichsatisfiestheequationfx=cxandwhenwehavethusfoundthatthevalueofxisequaltosayn1，ymustbeequaltocn1-n1，andtotalemploymentnisequalton1。
Itisworthpausingforamomenttoconsiderwhatthisinvolves。Itmeansthat，ifthesupplyfunctionoflabourchanges，morelabourbeingavailableatagivenrealwagesothatn1dn1isnowthevalueofxwhichsatisfiestheequationfx
=cx，thedemandfortheoutputofthenon-wage-goodsindustriesissuchthatemploymentintheseindustriesisboundtoincreasebyjusttheamountwhichwillpreserveequalitybetweenfn1dn1
andcn1dn1。
Theonlyotherwayinwhichitispossibleforaggregateemploymenttochangeisthroughamodificationofthepropensitytopurchasewage-goodsandnon-wage-goodsrespectivelysuchthatthereisanincreaseofyaccompaniedbyagreaterdecreaseofx。
Theassumptionthatn=xymeans，ofcourse，thatlabourisalwaysinapositiontodetermineitsownrealwage。Thus，theassumptionthatlabourisinapositiontodetermineitsownrealwage，meansthatthedemandfortheoutputofthenon-wage-goodsindustriesobeystheabovelaws。Inotherwords，itisassumedthattherateofinterestalwaysadjustsitselftothescheduleofthemarginalefficiencyofcapitalinsuchawayasto[Page275]APPENDIX