eng Corner stone of modern macroeconomics|
eng Corner stone of modern macroeconomics
Today this masterpiece of John Maynard Keynes hits the head of the nail as accurately as it did 80 years ago despite of so complete changes both in the pane, nail and hammer. But the changes are valid only in the appearance. The essential forces behind the economic process remain the same: supply and demand. How these universal elements get reconciled? That is and was the question.
Keynes takes the bold grip and proposes not less than a General Theory as the solution of this big question. So pretending in Economics the positon of Einstein with his Theory of Relativity. Not without comparable success. Einstein's Relativity and Keynes's General are perhaps not the very ultimate truths, but they are at least not easily repudiable hypotheses, anyway.
The crux of the General Theory is unemployment, the moment of friction between supply and demand. Easily defined, but everything else, but easily suppressed. In his General Theory Keynes concentrates above all to the role of interest and investment as the tools of restoring full employment. Despite of these factors being mentioned in the heading of the
General theory and being discussed extensively in the text with rich and remarkably polite references to contemporary and recent colleagues they are not considered the main levers to full employment.
The central role is played by the propensity to consume. This is made clear in several passages of the text.
"It is no new thing, however, to ascribe the evils of unemployment to the insuffidency of the other constituent, namely, the insufficiency of the propensity to consume."
"(Mandeville concludes:) The great art to make a nation happy, and what we call flourishing, consists in giving everybody an opportunity of being employed; which to compass, let a Government's first care be to promote as great a variety of Manufacures, Arts and holdings of money..,"
"Thus, since the expectation of consumption is the only raison d'être of employment, there should be nothing paradoxical in the conclusion that a diminished propensity to consume has cet.par. a depressing effect on employment."
And further, referring to the other giant of the field: "Adam Smith has stated that capitals are increased by parsimony, that every frugal man is a public benefactor, and that the increase of wealth depends upon the balance of produce above consumption."
We are thus brought to the conclusion that the basis on which all economic teaching since Adam Smith has stood, viz. that the quantity annually produced is determined by the aggregates of Natural Agents, Capital, and Labour available, is erroneous, and that, on the contrary, the quantity produced, while it can never exceed the limits imposed by these aggregates, may be, and actually is, reduced far below this maximum by the check that undue saving and the consequent accumulation of over-supply exerts on production; i.e. that in the normal state of modern industrial Communities, consumption limits production and not production consumption. Finally he notices the bearing of his theory on the validity of the orthodox Free Trade arguments: "We also note that the charge of commercial imbecility, so freely launched by orthodox economists against our American cousins and other Protectionist Communities, can no longer be maintained by any of the Free Trade arguments hitherto adduced, since all these are based on the assumption that over-supply is impossible."
His most succulent and most relevant remarks from the point of view of our time Keynes presents in the last chapter of his book when discussing business cycles and international trade. - Five stars most respectfully.
|Parametre lines at the beginning of the reader notes|
|1. Keynes-General Theory-ajk,$# en||???|
|2. 1,4807,267,eco,eng,20150216,20150415,5,John Maynard Keynes:The General Theory of Employment, Intertrest and Money||???|
|3. ama Link to source of purchased ebook...||???|
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|3||01||BOOK I INTRODUCTION|
|3||0101||Chapter 1 THE GENERAL THEORY|
|4||0102||Chapter 2 THE POSTULATES OF THE CLASSICAL ECONOMICS|
|4||010201||I. The wage is equal to the marginal product of labour|
|4||010202||II. The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment.|
|16||0103||Chapter 3 THE PRINCIPLE OF EFFECTIVE DEMAND|
|24||02||BOOK II DEFINITIONS AND IDEAS|
|24||0201||Chapter 4 THE CHOICE OF UNITS|
|29||0202||Chapter 5 EXPECTATION AS DETERMINING OUTPUT AND EMPLOYMENT|
|34||0203||Chapter 6 THE DEFINITION OF INCOME, SAVING AND INVESTMENT|
|40||020302||II. Saving and Investment|
|43||0204||APPENDIX ON USER COST|
|50||0205||Chapter 7 THE MEANING OF SAVING AND INVESTMENT FURTHER CONSIDERED|
|52||020501||III We come next to the divergences between Saving and Investment|
|54||020502||V The prevalence of the idea that saving and investment, is to be explained, I think, by an optical illusion due to regarding an individual depositor’s relation to his bank as being a one-sided transaction, instead of seeing it as the two-sided transaction which it actually is.|
|58||03||BOOK III THE PROPENSITY TO CONSUME|
|58||0301||Chapter 8 THE PROPENSITY TO CONSUME:|
|58||030101||I. The Objective Factors|
|60||030102||II The principal objective factors which influence the propensity to consume|
|60||03010201||(1) A change in the wage-unit.|
|60||03010202||(2) A change in the difference between income and net income.|
|61||03010203||(3) Windfall changes in capital-values not allowed for in calculating net income.|
|61||03010204||(4) Changes in the rate of time-discounting,|
|62||03010205||(5) Changes in fiscal policy.|
|63||03010206||(6) Changes in expectations of the relation between the present and the future level of income.|
|64||030103||III Granted, then, that the propensity to consume is a fairly stable function|
|65||03010301||IV (net income being equal to consumption plus net investment).|
|75||0302||Chapter 10 THE MARGINAL PROPENSITY TO CONSUME AND THE MULTIPLIER|
|88||04||BOOK IV THE INDUCEMENT TO INVEST|
|88||0401||Chapter 11 THE MARGINAL EFFICIENCY OF CAPITAL|
|90||040101||II How is the above definition of the marginal efficiency of capital related to common usage?|
|96||0402||Chapter 12 THE STATE OF LONG-TERM EXPECTATION|
|98||040201||III The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.|
|100||040202||IV In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention.|
|100||040203||V Some of the factors which accentuate this precariousness may be briefly mentioned.|
|101||04020301||(1) As a result of the gradual increase in the proportion of the equity in the community’s aggregate capital investment|
|101||04020302||(2) Day-to-day fluctuations in the profits of existing investments, which are obviously of an ephemeral and non-significant character,|
|101||04020303||(3) A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion|
|102||04020304||(4) But there is one feature in particular which deserves our attention.|
|104||04020305||(5) So far we have had chiefly in mind the state of confidence of the speculator or speculative investor himself and may have seemed to be tacitly assuming that, if he himself is satisfied with the prospects, he has unlimited command over money|
|109||0403||Chapter 13 THE GENERAL THEORY OF THE RATE OF INTEREST|
|123||0404||Appendix to Chapter 14 APPENDIX ON THE RATE OF INTEREST IN MARSHALL’S “PRINCIPLES OF ECONOMICS”, RICARDO’S “PRINCIPLES OF POLITICAL ECONOMY”, AND ELSEWHERE|
|129||0405||Chapter 15 THE PSYCHOLOGICAL AND BUSINESS INCENTIVES TO LIQUIDITY|
|130||04050006||(i) The Income-motive.|
|130||04050007||(ii) The Business-motive.|
|130||04050008||(iii) The Precautionary-motive.|
|130||04050009||(iv) There remains the Speculative-motive.|
|137||040501||III We can sum up the above in the proposition that in any given state of expectation there is in the minds of the public a certain potentiality towards holding cash beyond what is required by the transactions-motive or the precautionary-motive, which will realise itself in actual cash-holdings in a degree which depends on the terms on which the monetary authority is willing to create cash.|
|141||0406||Chapter 16 SUNDRY OBSERVATIONS ON THE NATURE OF CAPITAL|
|150||0407||Chapter 17 THE ESSENTIAL PROPERTIES OF INTEREST AND MONEY|
|152||040701||II Let us consider what the various commodity-rates of interest over a period of (say) a year|
|155||040702||III In attributing, therefore, a peculiar significance to the money-rate of interest,|
|163||040703||V As a footnote to the above, it may be worth emphasising what has been already stated above, namely, that “liquidity” and “carrying-costs” are both a matter of degree;|
|165||040704||VI In my Treatise on Money I defined what purported to be a unique rate of interest,|
|167||0408||Chapter 18 THE GENERAL THEORY OF EMPLOYMENT RESTATED|
|174||05||BOOK V MONEY-WAGES AND PRICES|
|174||0501||Chapter 19 CHANGES IN MONEY-WAGES|
|193||0502||Chapter 20 THE EMPLOYMENT FUNCTION|
|201||0503||Chapter 21 THE THEORY OF PRICES|
|214||06||BOOK VI SHORT NOTES SUGGESTED BY THE GENERAL THEORY|
|215||0601||Chapter 22 NOTES ON THE TRADE CYCLE|
|228||0602||Chapter 23 NOTES ON MERCANTILISM, THE USURY LAWS, STAMPED MONEY AND THEORIES OF UNDER-CONSUMPTION|
|235||06020001||(1) Mercantilist thought never supposed that there was a self-adjusting tendency by which the rate of interest would be established at the appropriate level. On the contrary they were emphatic that an unduly high rate of interest was the main obstacle to the growth of wealth; and they were even aware that the rate of interest depended on liquidity-preference and the quantity of money.|
|238||06020002||(2) The mercantilists were aware of the fallacy of cheapness and the danger that excessive competition may turn the terms of trade against a country.|
|239||06020003||(3) The mercantilists were the originals of “the fear of goods” and the scarcity of money as causes of unemployment which the classicals were to denounce two centuries later as an absurdity:|
|240||06020004||(4) The mercantilists were under no illusions as to the nationalistic character of their policies and their tendency to promote war. It was national advantage and relative strength at which they were admittedly aiming.|
|257||0603||Chapter 24 CONCLUDING NOTES ON THE SOCIAL PHILOSOPHY TOWARDS WHICH THE GENERAL THEORY MIGHT LEAD|
1 1: 201502160248@ r Table of Contents BOOK I ? Introduction 6 BOOK II - Definitions and Ideas. 19 BOOK III - The Propensity to Consume. 40 BOOK IV - The Inducement to Invest. 58 BOOK V - Money-Wages and Prices. 110
Most treatises on the theory of Value and Production are primarily concerned with the distribution of a given volume of employed resources between different uses and with the conditions which, assuming the employment of this quantity of resources, determine their relative rewards and the relative values of their products.
This postulate is compatible with what may be called “frictional” unemployment.
Is it true that the above categories are comprehensive in view of the fact that the population generally is seldom doing as much work as it would like to do on the basis of the current wage?
So long, indeed, as this proposition holds, any means of increasing employment must lead at the same time to a diminution of the marginal product and hence of the rate of wages measured in terms of this product.
What constitutes the means of payment for commodities is simply commodities. Each person’s means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers.
Contemporary thought is still deeply steeped in the notion that if people do not spend their money in one way they will spend it in another.
(1) that the real wage is equal to the marginal disutility of the existing employment;
(2) that there is no such thing as involuntary unemployment in the strict sense;
(3) that supply creates its own demand in the sense that the aggregate demand price is equal to the aggregate supply price for all levels of output and employment.
These three assumptions, however, all amount to the same thing in the sense that they all stand and fall together, any one of them logically involving the other two.
output. Thus Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile.
We shall discover, however, that money plays an essential part in our theory of the rate of interest; and we shall attempt to disentangle the peculiar characteristics of money which distinguish it from other things.
postulates. It may well be that the classical theory represents the way in which we should like our Economy to behave. But to assume that it actually does so is to assume our difficulties
In this and the next three chapters we shall be occupied with an attempt to clear up certain perplexities which have no peculiar or exclusive relevance to the problems which it is our special purpose to examine.
It follows that we shall measure changes in current output by reference to the number of hours of labour paid for (whether to satisfy consumers or to produce fresh capital equipment) on the existing capital equipment, hours of skilled labour being weighted in proportion to their remuneration.
Meanwhile the entrepreneur (including both the producer and the investor in this description) has to form the best expectations he can as to what the consumers will be prepared to pay when he is ready to supply them (directly or indirectly) after the elapse of what may be a lengthy period; and he has no choice but to be guided by these expectations, if he is to produce at all by processes which occupy time.
individuals or firms being specialised in the business of framing the first type of expectation and others in the business of framing the second.
It is upon these various expectations that the amount of employment which the firms offer will depend.
Now, in general, a change in expectations (whether short-term or long-term) will only produce its full effect on employment over a considerable period.
level of employment at any time depends, in a sense, not merely on the existing state of expectation but on the states of expectation which have existed over a certain past period.
Accordingly it is sensible for producers to base their expectations on the assumption that the most recently realised results will continue, except in so far as there are definite reasons for expecting a change.
In the previous chapter Saving and Investment have been so defined that they are necessarily equal in amount, being, for the community as a whole, merely different aspects of the same thing.
Let us take Investment first. In popular usage it is common to mean by this the purchase of an asset, old or new, by an individual or a corporation.
Thus, assuming that income in the popular sense corresponds to my net income, aggregate investment in the popular sense coincides with my definition of net investment, namely the net addition to all kinds of capital equipment, after allowing for those changes in the value of the old capital equipment which are taken into account in reckoning net income.
Investment, thus defined, includes, therefore, the increment of capital equipment, whether it consists of fixed capital, working capital or liquid capital;
We come next to the much vaguer ideas associated with the phrase “forced saving”.
Thus “forced saving” has no meaning until we have specified some standard rate of saving. If we select (as might be reasonable) the rate of saving which corresponds to an established state of full employment, the above definition would become: “Forced saving is the excess of actual saving over what would be saved if there were full employment in a position of long-period equilibrium”.
there is a corresponding new investment: in the second alternative someone else must be dis-saving an equal sum.
It follows that the aggregate saving of the first individual and of others taken together must necessarily be equal to the amount of current new investment.
Both these propositions follow merely from the fact that there cannot be a buyer without a seller or a seller without a buyer.
This is the vital difference between the theory of the economic behaviour of the aggregate and the theory of the behaviour of the individual unit, in which we assume that changes in the individual’s own demand do not affect his income.
The ultimate object of our analysis is to discover what determines the volume of employment. So far we have established the preliminary conclusion that the volume of employment is determined by the point of intersection of the aggregate supply function with the aggregate demand function.
aggregate demand function that we shall devote Books III and IV.
rate of interest. any rise in the rate of interest would appreciably diminish consumption.
There are not many people who will alter their way of living because the rate of interest has fallen from 5 to 4 per cent,
The fact that, given the general economic situation, the expenditure on consumption in terms of the wage-unit depends in the main, on the volume of output and employment is the justification for summing up the other factors in the portmanteau function “propensity to consume”.
The fundamental psychological law, upon which we are entitled to depend with great confidence both a priori from our knowledge of human nature and from the detailed facts of experience, is that men are disposed, as a rule and on the average, to increase their consumption as their income increases,
i.e. dCw/ dYw is positive and less than unity.
But, apart from short-period changes in the level of income, it is also obvious that a higher absolute level of income will tend, as a rule, to widen the gap between income and consumption.
Consumption is satisfied partly by objects produced currently and partly by objects produced previously, i.e. by disinvestment.
On the contrary, every weakening in the propensity to consume regarded as a permanent habit must weaken the demand for capital as well as the demand for consumption.
The rise in the rate of interest might induce us to save more, if our incomes were unchanged.
Thus, once again, the tribute that classical economists pay to her is due to their concealed assumption that the rate of interest always is so governed.
but the price which would just induce a manufacturer newly to produce an additional unit of such assets, i.e. what is sometimes called its replacement cost
The greatest of these marginal efficiencies can then be regarded as the marginal efficiency of capital in general.
ambiguity whether we are concerned with the increment of physical product per unit of time due to the employment of one more physical unit of capital, or with the increment of value due to the employment of one more value unit of capital.
Secondly, there is the question whether the marginal efficiency of capital is some absolute quantity or a ratio.
Finally, there is the distinction, the neglect of which has been the main cause of confusion and misunderstanding, between the increment of value obtainable by using an additional quantity of capital in the existing situation, and the series of increments which it is expected to obtain over the whole life of the additional capital asset; i.e. the distinction between Q1 and the complete series Q1 , Q2 , … Qr , … .This involves the whole question of the place of expectation in economic theory. Most discussions of the marginal efficiency of capital seem to pay no attention to any member of the series except Q1
Professor Fisher uses his “rate of return over cost” in the same sense and for precisely the same purpose as I employ “the marginal efficiency of capital”.
the scale of investment depends on the relation between the rate of interest and the schedule of the marginal efficiency of capital corresponding to different scales of current investment, whilst the marginal efficiency of capital depends on the relation between the supply price of a capital-asset and its prospective yield. In this chapter we shall consider in more detail some of the factors which determine the prospective yield of an asset.
The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention.
In former times, when enterprises were mainly owned by those who undertook them or by their friends and associates, investment depended on a sufficient supply of individuals of sanguine temperament and constructive impulses
Decisions to invest in private business of the old-fashioned type were, however, decisions largely irrevocable,
the Stock Exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual (though not to the community as a whole) to revise his commitments.
no sense in building up a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased;
Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere,
Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable.
it is better for reputation to fail conventionally than to succeed unconventionally.
This is only another way of saying that, when he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favourable change in the conventional basis of valuation, i.e. that he is, in the above sense, a speculator.
a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic.
yet the marginal efficiency of capital is, in itself; a different thing from the ruling rate of interest. The schedule of the marginal efficiency of capital may be said to govern the terms on which loanable funds are demanded for the purpose of new investment; whilst the rate of interest governs the terms on which funds are being currently supplied.
Does he want to hold it in the form of immediate, liquid command (i.e. in money or its equivalent)? Or is he prepared to part with immediate command for a specified or indefinite period, leaving it to future market conditions to determine on what terms he can, if necessary, convert deferred command over specific goods into immediate command over goods in general?
For the rate of interest is, in itself; nothing more than the inverse proportion between a sum of money and what can be obtained for parting with control over the money in exchange for a debt for a stated period of time.
reward for parting with liquidity,
if we are to control the activity of the economic system by changing the quantity of money, it is important that opinions should differ Thus this method of control is more precarious in the United States, where everyone tends to hold the same opinion at the same time, than in England where differences of opinion are more usual.
If, however, we are tempted to assert that money is the drink which stimulates the system to activity, we must remind ourselves that there may be several slips between the cup and the lip.
The habit of overlooking the relation of the rate of interest to hoarding may be a part of the explanation why interest has been usually regarded as the reward of not-spending, whereas in fact it is the reward of not-hoarding.
that this is a self-regulatory process of adjustment which takes place without the necessity for any special intervention or grandmotherly care on the part of the monetary authority.
The mistake originates from regarding interest as the reward for waiting as such, instead of as the reward for not-hoarding; just as the rates of return on loans or investments involving different degrees of risk, are quite properly regarded as the reward, not of waiting as such, but of running the risk.
derive the rate of interest from it involves a circular argument, as Marshall discovered after he had got half-way into giving an account of the rate of interest along these lines.
A decreased readiness to spend will be looked on in quite a different light If, instead of being regarded as a factor which will, cet. par., increase investment, it is seen as a factor which will, cet. par., diminish employment.
Once again the assumption required is the usual classical assumption, that there is always full employment; so that, assuming no change in the supply curve of labour in terms of product, there is only one possible level of employment in long-period equilibrium.
With most of his successors common sense cannot help breaking in with injury to their logical consistency.
Professor Alvin Hansen: “It has been suggested by some economists that the net effect of reduced spending will be a lower price level of consumers” goods than would otherwise have been the case and that, in consequence, the stimulus to investment in fixed capital would thereby tend to be minimised. This view is, however, incorrect and is based on a confusion of the effect on capital formation of (i) higher or lower prices of consumers’ goods, and (2) a change in the rate of interest. It is true that in consequence of the decreased spending and increased saving, consumers’ prices would be low relative to the prices of producers’ goods.
H analysis of the motives to liquidity-preference which were introduced in a preliminary way in Chapter 13.
differences in knowledge and interpretation of the new situation.
M = M1 + M2 = L1( Y) + L2( r)
where L1 is the liquidity function corresponding to in income Y, which determines M1, and L2 is the liquidity function of the rate of interest r, which determines M2. It follows that there are three matters to investigate: (i) the relation of changes in M to Y and r, (ii) what determines the shape of L1, (iii) what determines the shape of L2.
magnitude of M2 and at the same time to stimulate a rise in Y to such an extent that the new money is absorbed either in M2 or in the M1 which corresponds to the rise in Y caused by the fall in r.
(3) The most striking examples of a complete breakdown of stability in the rate of interest, due to the liquidity function flattening out in one direction or the other, have occurred in very abnormal circumstances. In Russia and Central Europe after the war a currency crisis or flight from the currency was experienced,
whilst in the United States at certain dates in 1932 there was a crisis of the opposite kind a financial crisis or crisis of liquidation, when [scarcely anyone could be induced to part with holdings of money
Thus, since the expectation of consumption is the only raison d’? tre of employment, there should be nothing paradoxical in the conclusion that a diminished propensity to consume has cet. par. a depressing effect on employment.
I sympathise, therefore, with the pre-classical doctrine that everything is produced by labour, aided by what used to be called art and is now called technique, by natural resources
In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed.
It seems, then, that the rate of interest on money plays a peculiar part in setting a limit to the level of employment, since it sets a standard to which the marginal efficiency of a capital-asset must attain if it is to be newly produced.
peculiarity of money lies as distinct from other assets, whether it is only money which has a rate of interest,
since the future contract is quoted in terms of money for forward delivery and not in terms of wheat for spot delivery, it also brings in the money-rate of interest. The exact relationship is as follows:
what is the wheat-rate of interest? ?100 spot will buy ?105 for forward delivery, and ?105 for forward delivery will buy 105/ 107 × 100 ( = 98) quarters for forward delivery. Alternatively ?100 spot will buy 100 quarters of wheat for spot delivery. Thus 100 quarters of wheat for spot delivery will buy 98 quarters for forward delivery. It follows that the wheat-rate of interest is minus 2 per cent., per annum.
here also the difference between the “spot” and “future” contracts for a foreign money in terms of sterling are not, as a rule, the same for different foreign moneys.
the peculiarity of money that its utility is solely derived from its exchange-value, so that the two rise and fall pari passu, with the result that as the exchange value of money rises there is no motive or tendency, as in the case of rent-factors, to substitute some other factor for it.
In particular, a reduction of the wage-unit will release cash from its other uses for the satisfaction of the liquidity-motive; whilst, in addition to this, as money-values fall, the stock of money will bear a higher proportion to the total wealth of the community.
We have shown above that for a commodity to be the standard of value is not a sufficient condition for that commodity’s rate of interest to be the significant rate of interest.
That the world after several millennia of steady individual saving, is so poor as it is in accumulated capital-assets, is to be explained, in my opinion, neither by the improvident propensities of mankind, nor even by the destruction of war,
Everyone is aware that the accumulation of wealth is held in check, and the rate of interest so far sustained, by the preference which the great mass of humanity have for present over deferred gratifications, or, in other words, by their unwillingness to “wait”.
And, similarly, for every rate of interest there is a level of employment for which that rate is the “natural” rate, in the sense that the system will be in equilibrium with that rate of interest and that level of employment.
We have now reached a point where we can gather together the threads of our argument. To begin with, it may be useful to make clear which elements in the economic system we usually take as given, which are the independent variables of our system and which are the dependent variables.
The conditions of stability which the foregoing analysis suggests to us as capable of explaining the observed results are the following: (i) The marginal propensity to consume is such that, when the output of a given community increases (or decreases) because more (or less) employment is being applied to its capital equipment, the multiplier relating the two is greater than unity but not very large. (ii) When there is a change in the prospective yield of capital or in the rate of interest, the schedule of the marginal efficiency of capital will be such that the change in new investment will not be in great disproportion to the change in the former; i.e. moderate changes in the prospective yield of capital or in the rate of interest will not be associated with very great changes in the rate of investment. (iii) When there is a change in employment, money-wages tend to change in the same direction as, but not in great disproportion to, the change in employment; i.e. moderate changes in employment are not associated with very great changes in money-wages. This is a condition of the stability of prices rather than of employment. (iv) We may add a fourth condition, which provides not so much for the stability of the system as for the tendency of a fluctuation in one direction to reverse itself in due course; namely, that a rate of investment, higher (or lower) than prevailed formerly, begins to react unfavourably (or favourably) on the marginal efficiency of capital if it is continued for a period which, measured in years, is not very large.
(i) Our first condition of stability, namely, that the multiplier, whilst greater than unity, is not very great, is highly plausible as a psychological characteristic of human nature.
(ii)second condition provides that a moderate change in the prospective yield of capital-assets or in the rate of interest will not involve an indefinitely great change in the rate of investment.
(iii) Our third condition accords with our experience of human nature.
(iv) Our fourth condition, which is a condition not so much of stability as of alternate recession and recovery, is merely based on the presumption that capital-assets are of various ages, wear out with time and are not all very long-lived;
Thus our four conditions together are adequate to explain the outstanding features of our actual experience; namely, that we oscillate, avoiding the gravest extremes of fluctuation in employment and in prices in both directions, round an intermediate position appreciably below full employment and appreciably above the minimum employment a decline below which would endanger life.
changes in the value of money; but this leaves the general tendency of the argument unchanged, since prices certainly do not change in exact proportion to changes in money-wages.
There is no method of analysing the effect of a reduction in money-wages, except by following up its possible effects on these three factors.
it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter.
(ii) If money-wages are inflexible, such changes in prices as occur (i.e. apart from “administered” or monopoly prices which are determined by other considerations besides marginal cost) will mainly correspond to the diminishing marginal productivity of the existing equipment as the output from it is increased.
(iii) The method of increasing the quantity of money in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt;
In the light of these considerations I am now of the opinion that the maintenance of a stable general level of money-wages is, on a balance of considerations, the most advisable policy for a closed system; whilst the same conclusion will hold good for an open system, provided that equilibrium with the rest of the world can be secured by means of fluctuating exchanges.
scientific theory cannot require the facts to conform to its own assumptions.
aggregate supply function Z = f( N), which relates the employment N with the aggregate supply price of the corresponding output.
prices are governed by the conditions of supply and demand; and, in particular, changes in marginal cost and the elasticity of short-period supply have played a prominent part.
The right dichotomy is, I suggest, between the Theory of the Individual Industry or Firm and of the rewards and the distribution between different uses of a given quantity of resources on the one hand, and the Theory of
Output and Employment as a whole on the other hand.
In a single industry its particular price-level depends partly on the rate of remuneration of the factors of production which enter into its marginal cost, and partly on the scale of output.
Quantity Theory of Money, let us now consider the possible complications which will in fact influence events: (1) Effective demand will not change in exact proportion to the quantity of money. (2) Since resources are not homogeneous, there will be diminishing, and not constant, returns as employment gradually increases. (3) Since resources are not interchangeable, some commodities will reach a condition of inelastic supply whilst there are still unemployed resources available for the production of other commodities. (4) The wage-unit will tend to rise, before full employment has been reached. (5) The remunerations of the factors entering into marginal cost will not all change in the same proportion.
different elasticities of supply in response to changes in the money-rewards offered. If it were not for this, we could say that the price-level is compounded of two factors, the wage-unit and the quantity of employment.
The view that any increase in the quantity of money is inflationary (unless we mean by inflationary merely that prices are rising) is bound up with the underlying assumption of the classical theory that we are always in a condition where a reduction in the real rewards of the factors of production will lead to a curtailment in their supply.
To-day and presumably for the future the schedule of the marginal efficiency of capital is, for a variety of reasons, much lower than it was in the nineteenth century.
But the most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners.
the long-run relationship between the national income and the quantity of money will depend on liquidity-preferences. And the long-run stability or instability of prices will depend on the strength of the upward trend of the wage-unit (or, more precisely, of the cost-unit) compared with the rate of increase in the efficiency of the productive system.
Since we claim to have shown in the preceding chapters what determines the volume of employment at any time, it follows, if we are right, that our theory must be capable of explaining the phenomena of the Trade Cycle.
of the crisis is, not primarily a rise in the rate of interest, but a sudden collapse in the marginal efficiency of capital.
which the economists who have put their faith in a “purely monetary” remedy have underestimated.
regularity of habit between, let us say, three and five years.
The disillusion comes because doubts suddenly arise concerning the reliability of the prospective yield, perhaps because the current yield shows signs of falling off, as the stock of newly produced durable goods steadily increases.
definite relationship to the length of life of durable assets and to the normal rate of growth in a given epoch. carrying-costs of surplus stocks which
after the lowest point has been passed there is likely to be a further disinvestment in stocks which partially offsets reinvestment in working-capital; and, finally, after the recovery is well on its way,
There is, indeed, force in the argument that a high rate of interest is much more effective against a boom than a low rate of interest against a slump.
state of unemployment in which the investments, which would have yielded 2 per cent. in conditions of full employment, in fact yield less than nothing. We reach a condition where there is a shortage of houses, but where nevertheless no one can afford to live in the houses that there are.
Except during the war, I doubt if we have any recent experience of a boom so strong that it led to full employment.
Some “bottle-necks” were reached, but output as a whole was still capable of further expansion.
Another school of thought finds the solution of the trade cycle, not in increasing either consumption or investment, but in diminishing the supply of labour seeking employment; i.e. by redistributing the existing volume of employment without increasing employment or output.
A point comes where every individual weighs the advantages of increased leisure against increased income. But at present the evidence is, I think, strong that the great majority of individuals would prefer increased income to increased leisure; and I see no sufficient reason for compelling those who would prefer more income to enjoy more leisure.
Mr. D. H. Robertson, who assumes, in effect, that full employment is an impracticable ideal and that the best that we can hope for is a level of employment much more stable than at present and averaging, perhaps, a little higher.
supply price usually increases with increasing output, on account either of the physical fact of diminishing return or of the tendency of the cost-unit to rise in terms of money when output increases. If the conditions were those of constant supply-price,
Jevons’s theory, that the trade cycle was primarily due to the fluctuations in the bounty of the harvest, can be restated as follows.
Thus it is natural that we should find the upward turning-point to be marked by bountiful harvests and the downward turning-point by deficient harvests. The further theory, that there are physical causes for a regular cycle of good and bad harvests, is, of course, a different matter with which we are not concerned here.
The agricultural causes of fluctuation are, however, much less important in the modern world for two reasons. In the first place agricultural output is a much smaller proportion of total output. And in the second place the development of a world market for most agricultural products, drawing upon both hemispheres, leads to an averaging out of the effects of good and bad seasons,
The “New Deal” partly consisted in a strenuous attempt to reduce these stocks by curtailment of current output and in all sorts of ways. The reduction of stocks to a normal level was a necessary process a phase which had to be endured. But so long as it lasted, namely, about two years, it constituted a substantial offset to the loan expenditure which was being incurred in other directions. Only when it had been completed was the way prepared for substantial recovery.
Generally speaking, modern economists have maintained not merely that there is, as a rule, a balance of gain from the international division of labour sufficient to outweigh such advantages as mercantilist practice can fairly claim, but that the mercantilist argument is based, from start to finish, on an intellectual confusion.
“If there is one thing that Protection can not do, it is to cure Unemployment … There are some arguments for Protection, based upon its securing possible but improbable advantages, to which there is no simple answer. But the claim to cure Unemployment involves the Protectionist fallacy in its grossest and crudest form.” As
advantages claimed are avowedly national advantages and are unlikely to benefit the world as a whole.
In conditions in which the quantity of aggregate investment is determined by the profit motive alone, the opportunities for home investment will be governed, in the long run, by the domestic rate of interest; whilst the volume of foreign investment is necessarily determined by the size of the favourable balance of trade.
For this and other reasons the reader must not reach a premature conclusion as to the practical policy to which our argument leads up. There are strong presumptions of a general character against trade restrictions unless they can be justified on special grounds.
Thus, the weight of my criticism is directed against the inadequacy of the theoretical foundations of the laissez-faire doctrine upon which I was brought up and which for many years I taught; against the notion that the rate of interest and the volume of investment are self-adjusting at the optimum level, so that preoccupation with the balance of trade is a waste
commodities)”. Locke explains that money has two values: (i) its value in use which is given by the rate of interest and in this it has the Nature of Land, the Income of one being called Rent, of the other, Use”, and (2) its value in exchange “and in this it has the Nature of a Commodity”, its value in exchange “depending only on the Plenty or Scarcity of Money in proportion to the Plenty or Scarcity of those things and not on what Interest shall be”.
Mercantilists were conscious that their policy, as Professor Heckscher puts it, “killed two birds with one stone”. “On the one hand the country was rid of an unwelcome surplus of goods, which was believed to result in unemployment, while on the other the total stock of money in the country was increased”, with the resulting advantages of a fall in the rate of interest.
Even Adam Smith was extremely moderate in his attitude to the usury laws. For lie was well aware that individual savings may be absorbed either by investment or by debts, and that there is no security that they will find an outlet in the former. Furthermore, he favoured a low rate of interest as increasing the chance of savings finding their outlet in new investment rather than in debts; and for this reason, in a passage for which he was severely taken to task by Bentham,
constituent of effective demand which depends on the sufficiency of the inducement to invest. It is no new thing, however, to ascribe the evils of unemployment to the insufficiency of the other constituent, namely, the insufficiency of the propensity to consume.
Saving, is in private families the most certain method to increase an estate, so some imagine that, whether a country be barren or fruitful, the same method if generally pursued (which they think practicable) will have the same effect upon a whole nation, and that, for example, the English might be much richer than they are, if they would be as frugal as some of their neighbours. This, I think, is an error.
Mandeville concludes: The great art to make a nation happy, and what we call flourishing, consists in giving everybody an opportunity of being employed; which to compass, let a Government’s first care be to promote as great a variety of Manufacures, Arts and Handicrafts as human wit can invent;
Adam Smith has stated that capitals are increased by parsimony, that every frugal man is a public benefactor, and that the increase of wealth depends upon the balance of produce above consumption.
For a long time I sought to counter his arguments by the use of the orthodox economic weapons. But at length he convinced me and I went in with him to elaborate the over-saving argument in a book entitled The Physiology of Industry, which was published in 1889. This was the first open step in my heretical career, and I did not in the least realise its momentous consequences.
We are thus brought to the conclusion that the basis on which all economic teaching since Adam Smith has stood, viz. that the quantity annually produced is determined by the aggregates of Natural Agents, Capital, and Labour available, is erroneous, and that, on the contrary, the quantity produced, while it can never
The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of
For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist to-day.
stakes, it may still be wise and prudent statesmanship to allow the game to be played, subject to rules and limitations, so long as the average man, or even a significant section of the community, is in fact strongly addicted to the money-making passion.
argument which has a bearing on the future of inequalities of wealth; namely, our theory of the rate of interest. The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save.
Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest to-day rewards no genuine sacrifice, any more than does the rent of land.
The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far. But,
contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative.
The authoritarian state systems of to-day seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and, in my opinion, inevitably associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.
But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely, the pressure of population and the competitive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.
But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There
International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.
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#eng Corner stone of modern macroeconomics
nail and hammer. But the changes are valid only in the appearance. The essential forces behind the economic process remain the same: supply and demand. How these universal elements get reconciled? That is and was the question.