THEORYOFEMPLOYMENT
alsoincreasesaggregatewealthfailstoallowforthepossibilitythatanactofindividualsavingmayreactonsomeoneelse'ssavingsandhenceonsomeoneelse'swealth。
Thereconciliationoftheidentitybetweensavingandinvestmentwiththeapparent'free-will'oftheindividualtosavewhathechoosesirrespectiveofwhatheorothersmaybeinvesting，essentiallydependsonsavingbeing，likespending，atwo-sidedaffair。Foralthoughtheamountofhisownsavingisunlikelytohaveanysignificantinfluenceonhisownincome，thereactionsoftheamountofhisconsumptionontheincomesofothersmakesitimpossibleforallindividualssimultaneouslytosaveanygivensums。Everysuchattempttosavemorebyreducingconsumptionwillsoaffectincomesthattheattemptnecessarilydefeatsitself。Itis，ofcourse，justasimpossibleforthecommunityasawholetosavelessthantheamountofcurrentinvestment，sincetheattempttodosowillnecessarilyraiseincomestoalevelatwhichthesumswhichindividualschoosetosaveadduptoafigureexactlyequaltotheamountofinvestment。
Theaboveiscloselyanalogouswiththepropositionwhichharmonisestheliberty，whicheveryindividualpossesses，tochange，wheneverhechooses，theamountofmoneyheholds，withthenecessityforthetotalamountofmoney，whichindividualbalancesaddupto，tobeexactlyequaltotheamountofcashwhichthebankingsystemhascreated。Inthislattercasetheequalityisbroughtaboutbythefactthattheamountofmoneywhichpeoplechoosetoholdisnotindependentoftheirincomesorofthepricesofthethingsprimarilysecurities，thepurchaseofwhichisthenaturalalternativetoholdingmoney。Thusincomesandsuchpricesnecessarilychangeuntiltheaggregateoftheamountsofmoneywhichindividualschoosetoholdatthenewlevelofincomesandpricesthusbroughtabouthascometoequalitywiththeamountofmoney[Page85]THEMEANING
OFSAVINGANDINVESTMENT
createdbythebankingsystem。This，indeed，isthefundamentalpropositionofmonetarytheory。
Boththesepropositionsfollowmerelyfromthefactthattherecannotbeabuyerwithoutasellerorasellerwithoutabuyer。Thoughanindividualwhosetransactionsaresmallinrelationtothemarketcansafelyneglectthefactthatdemandisnotaone-sidedtransaction，itmakesnonsensetoneglectitwhenwecometoaggregatedemand。Thisisthevitaldifferencebetweenthetheoryoftheeconomicbehaviouroftheaggregateandthetheoryofthebehaviouroftheindividualunit，inwhichweassumethatchangesintheindividual'sowndemanddonotaffecthisincome。
TheMeaningofSavingandInvestment[Page74]
Chapter7
THEMEANINGOFSAVINGANDINVESTMENT
FURTHERCONSIDERED
I
Inthepreviouschaptersavingandinvestmenthavebeensodefinedthattheyarenecessarilyequalinamount，being，forthecommunityasawhole，merelydifferentaspectsofthesamething。SeveralcontemporarywritersincludingmyselfinmyTreatiseonMoneyhave，however，givenspecialdefinitionsofthesetermsonwhichtheyarenotnecessarilyequal。
Othershavewrittenontheassumptionthattheymaybeunequalwithoutprefacingtheirdiscussionwithanydefinitionsatall。Itwillbeuseful，therefore，withaviewtorelatingtheforegoingtootherdiscussionsoftheseterms，toclassifysomeofthevarioususesofthemwhichappeartobecurrent。
SofarasIknow，everyoneagreesinmeaningbysavingtheexcessofincomeoverwhatisspentonconsumption。Itwouldcertainlybeveryinconvenientandmisleadingnottomeanthis。Noristhereanyimportantdifferenceofopinionastowhatismeantbyexpenditureonconsumption。Thusthedifferencesofusageariseeitheroutofthedefinitionofinvestmentoroutofthatofincome。
II
Letustakeinvestmentfirst。Inpopularusageitiscommontomeanbythisthepurchaseofanasset，old[Page75]THEMEANING
OFSAVINGANDINVESTMENT
ornew，byanindividualoracorporation。Occasionally，thetermmightberestrictedtothepurchaseofanassetontheStockExchange。Butwespeakjustasreadilyofinvesting，forexample，inahouse，orinamachine，orinastockoffinishedorunfinishedgoods；and，broadlyspeaking，newinvestment，asdistinguishedfromreinvestment，meansthepurchaseofacapitalassetofanykindoutofincome。Ifwereckonthesaleofaninvestmentasbeingnegativeinvestment，i。e。disinvestment，myowndefinitionisinaccordancewithpopularusage；sinceexchangesofoldinvestmentsnecessarilycancelout。Wehave，indeed，toadjustforthecreationanddischargeofdebtsincludingchangesinthequantityofcreditormoney；butsinceforthecommunityasawholetheincreaseordecreaseoftheaggregatecreditorpositionisalwaysexactlyequaltotheincreaseordecreaseoftheaggregatedebtorposition，thiscomplicationalsocancelsoutwhenwearedealingwithaggregateinvestment。Thus，assumingthatincomeinthepopularsensecorrespondstomynetincome，aggregateinvestmentinthepopularsensecoincideswithmydefinitionofnetinvestment，namelythenetadditiontoallkindsofcapitalequipment，afterallowingforthosechangesinthevalueoftheoldcapitalequipmentwhicharetakenintoaccountinreckoningnetincome。
Investment，thusdefined，includes，therefore，theincrementofcapitalequipment，whetheritconsistsoffixedcapital，workingcapitalorliquidcapital；andthesignificantdifferencesofdefinitionapartfromthedistinctionbetweeninvestmentandnetinvestmentareduetotheexclusionfrominvestmentofoneormoreofthesecategories。
MrHawtrey，forexample，whoattachesgreatimportancetochangesinliquidcapital，i。e。toundesignedincrementsordecrementsinthestockofunsoldgoods，hassuggestedapossibledefinitionof[Page76]THEGENERAL
THEORYOFEMPLOYMENT
investmentfromwhichsuchchangesareexcluded。Inthiscaseanexcessofsavingoverinvestmentwouldbethesamethingasanundesignedincrementinthestockofunsoldgoods，i。e。asanincreaseofliquidcapital。MrHawtreyhasnotconvincedmethatthisisthefactortostress；foritlaysalltheemphasisonthecorrectionofchangeswhichwereinthefirstinstanceunforeseen，ascomparedwiththosewhichare，rightlyorwrongly，anticipated。MrHawtreyregardsthedailydecisionsofentrepreneursconcerningtheirscaleofoutputasbeingvariedfromthescaleofthepreviousdaybyreferencetothechangesintheirstockofunsoldgoods。Certainly，inthecaseofconsumptiongoods，thisplaysanimportantpartintheirdecisions。ButIseenoobjectinexcludingtheplayofotherfactorsontheirdecisions；andIprefer，therefore，toemphasisethetotalchangeofeffectivedemandandnotmerelythatpartofthechangeineffectivedemandwhichreflectstheincreaseordecreaseofunsoldstocksinthepreviousperiod。Moreover，inthecaseoffixedcapital，theincreaseordecreaseofunusedcapacitycorrespondstotheincreaseordecreaseinunsoldstocksinitseffectondecisionstoproduce；andIdonotseehowMrHawtrey'smethodcanhandlethisatleastequallyimportantfactor。
Itseemsprobablethatcapitalformationandcapitalconsumption，asusedbytheAustrianschoolofeconomists，arenotidenticaleitherwithinvestmentanddisinvestmentasdefinedaboveorwithnetinvestmentanddisinvestment。Inparticular，capitalconsumptionissaidtooccurincircumstanceswherethereisquiteclearlynonetdecreaseincapitalequipmentasdefinedabove。Ihave，however，beenunabletodiscoverareferencetoanypassagewherethemeaningofthesetermsisclearlyexplained。Thestatement，forexample，thatcapitalformationoccurswhenthereisalengtheningoftheperiodofproductiondoesnotmuchadvancematters。
[Page77]THEMEANING
OFSAVINGANDINVESTMENT
III
Wecomenexttothedivergencesbetweensavingandinvestmentwhichareduetoaspecialdefinitionofincomeandhenceoftheexcessofincomeoverconsumption。MyownuseoftermsinmyTreatiseonMoneyisanexampleofthis。For，asIhaveexplainedonp。60above，thedefinitionofincome，whichIthereemployed，differedfrommypresentdefinitionbyreckoningastheincomeofentrepreneursnottheiractuallyrealisedprofitsbutinsomesensetheir'normalprofit'。ThusbyanexcessofsavingoverinvestmentImeantthatthescaleofoutputwassuchthatentrepreneurswereearningalessthannormalprofitfromtheirownershipofthecapitalequipment；andbyanincreasedexcessofsavingoverinvestmentImeantthatadeclinewastakingplaceintheactualprofits，sothattheywouldbeunderamotivetocontractoutput。
AsInowthink，thevolumeofemploymentandconsequentlyofoutputandrealincomeisfixedbytheentrepreneurunderthemotiveofseekingtomaximisehispresentandprospectiveprofitstheallowanceforusercostbeingdeterminedbyhisviewastotheuseofequipmentwhichwillmaximisehisreturnfromitoveritswholelife；whilstthevolumeofemploymentwhichwillmaximisehisprofitdependsontheaggregatedemandfunctiongivenbyhisexpectationsofthesumoftheproceedsresultingfromconsumptionandinvestmentrespectivelyonvarioushypotheses。InmyTreatiseonMoneytheconceptofchangesintheexcessofinvestmentoversaving，astheredefined，wasawayofhandlingchangesinprofit，thoughIdidnotinthatbookdistinguishclearlybetweenexpectedandrealisedresults。[59]Itherearguedthatchangeintheexcessof[Page78]THEGENERAL
THEORYOFEMPLOYMENT
investmentoversavingwasthemotiveforcegoverningchangesinthevolumeofoutput。Thusthenewargument，thoughasInowthinkmuchmoreaccurateandinstructive，isessentiallyadevelopmentoftheold。ExpressedinthelanguageofmyTreatiseonMoney，itwouldrun:theexpectationofanincreasedexcessofinvestmentoversaving，giventheformervolumeofemploymentandoutput，willinduceentrepreneurstoincreasethevolumeofemploymentandoutput。Thesignificanceofbothmypresentandmyformerargumentsliesintheirattempttoshowthatthevolumeofemploymentisdeterminedbytheestimatesofeffectivedemandmadebytheentrepreneurs，anexpectedincreaseofinvestmentrelativelytosavingasdefinedinmyTreatiseonMoneybeingacriterionofanincreaseineffectivedemand。ButtheexpositioninmyTreatiseonMoneyis，ofcourse，veryconfusingandincompleteinthelightofthefurtherdevelopmentsheresetforth。
MrD。H。Robertsonhasdefinedto-day'sincomeasbeingequaltoyesterday'sconsumptionplusinvestment，sothatto-day'ssaving，inhissense，isequaltoyesterday'sinvestmentplustheexcessofyesterday'sconsumptionoverto-day'sconsumption。Onthisdefinitionsavingcanexceedinvestment，namely，bytheexcessofyesterday'sincomeinmysenseoverto-day'sincome。ThuswhenMrRobertsonsaysthatthereisanexcessofsavingoverinvestment，hemeansliterallythesamethingasImeanwhenIsaythatincomeisfalling，andtheexcessofsavinginhissenseisexactlyequaltothedeclineofincomeinmysense。Ifitweretruethatcurrentexpectationswerealwaysdeterminedbyyesterday'srealisedresults，to-day'seffectivedemandwouldbeequaltoyesterday'sincome。ThusMrRobertson'smethodmightberegardedasanalternative。attempttominebeing，perhaps，afirstapproximationtoittomakethesamedistinction，sovitalforcausalanalysis，thatIhavetried[Page79]THEMEANING
OFSAVINGANDINVESTMENT
tomakebythecontrastbetweeneffectivedemandandincome。[60]
IV
Wecomenexttothemuchvaguerideasassociatedwiththephrase'forcedsaving'。Isanyclearsignificancediscoverableinthese？InmyTreatiseonMoneyvol。1，p。171，footnote[JMK，vol。V，p。154]Igavesomereferencestoearlierusesofthisphraseandsuggestedthattheyboresomeaffinitytothedifferencebetweeninvestmentand'saving'inthesenseinwhichIthereusedthelatterterm。IamnolongerconfidentthattherewasinfactsomuchaffinityasIthensupposed。Inanycase，Ifeelsurethat'forcedsaving'andanalogousphrasesemployedmorerecentlye。g。byProfessorHayekorProfessorRobbinshavenodefiniterelationtothedifferencebetweeninvestmentand'saving'inthesenseintendedinmyTreatiseonMoney。Forwhilsttheseauthorshavenotexplainedexactlywhattheymeanbythisterm，itisclearthat'forcedsaving'，intheirsense，isaphenomenonwhichresultsdirectlyfrom，andismeasuredby，changesinthequantityofmoneyorbank-credit。
Itisevidentthatachangeinthevolumeofoutputandemploymentwill，indeed，causeachangeinincomemeasuredinwage-units；thatachangeinthewage-unitwillcausebotharedistributionofincomebetweenborrowersandlendersandachangeinaggregateincomemeasuredinmoney；andthatineithereventtherewillormaybeachangeintheamountsaved。Since，therefore，changesinthequantityofmoneymayresult，throughtheireffectontherateofinterest，inachangeinthevolumeanddistributionofincomeasweshallshowlater，suchchangesmayinvolve，indirectly，achangeintheamountsaved。Butsuch[Page80]THEGENERAL
THEORYOFEMPLOYMENT
changesintheamountssavedarenomore'forcedsavings'thananyotherchangesintheamountssavedduetoachangeincircumstances；andthereisnomeansofdistinguishingbetweenonecaseandanother，unlesswespecifytheamountsavedincertaingivenconditionsasournormorstandard。Moreover，asweshallsee，theamountofthechangeinaggregatesavingwhichresultsfromagivenchangeinthequantityofmoneyishighlyvariableanddependsonmanyotherfactors。
Thus'forcedsaving'hasnomeaninguntilwehavespecifiedsomestandardrateofsaving。Ifweselectasmightbereasonabletherateofsavingwhichcorrespondstoanestablishedstateoffullemployment，theabovedefinitionwouldbecome:'Forcedsavingistheexcessofactualsavingoverwhatwouldbesavediftherewerefullemploymentinapositionoflong-periodequilibrium'。Thisdefinitionwouldmakegoodsense，butasenseinwhichaforcedexcessofsavingwouldbeaveryrareandaveryunstablephenomenon，andaforceddeficiencyofsavingtheusualstateofaffairs。
ProfessorHayek'sinteresting'NoteontheDevelopmentoftheDoctrineofForcedSaving'[61]showsthatthiswasinfacttheoriginalmeaningoftheterm。'Forcedsaving'or'forcedfrugality'was，inthefirstinstance，aconceptionofBentham's；andBenthamexpresslystatedthathehadinmindtheconsequencesofanincreaseinthequantityofmoneyrelativelytothequantityofthingsvendibleformoneyincircumstancesof'allhandsbeingemployedandemployedinthemostadvantageousmanner'。
[62]Insuchcircumstances，Benthampointsout，realincomecannotbeincreased，and，consequently，additionalinvestment，takingplaceasaresultofthetransition，involvesforcedfrugality'attheexpenseofnationalcomfortandnationaljustice'。Allthenineteenth-century[Page81]THEMEANING
OFSAVINGANDINVESTMENT
writerswhodealtwiththismatterhadvirtuallythesameideainmind。
Butanattempttoextendthisperfectlyclearnotiontoconditionsoflessthanfullemploymentinvolvesdifficulties。Itistrue，ofcourseowingtothefactofdiminishingreturnstoanincreaseintheemploymentappliedtoagivencapitalequipment，thatanyincreaseinemploymentinvolvessomesacrificeofrealincometothosewhowerealreadyemployed，butanattempttorelatethislosstotheincreaseininvestmentwhichmayaccompanytheincreaseinemploymentisnotlikelytobefruitful。AtanyrateI
amnotawareofanyattempthavingbeenmadebythemodernwriterswhoareinterestedin'forcedsaving'toextendtheideatoconditionswhereemploymentisincreasing；andtheyseem，asarule，tooverlookthefactthattheextensionoftheBenthamiteconceptofforcedfrugalitytoconditionsoflessthanfullemploymentrequiressomeexplanationorqualification。
V
Theprevalenceoftheideathatsavingandinvestment，takenintheirstraightforwardsense，candifferfromoneanother，istobeexplained，Ithink，byanopticalillusionduetoregardinganindividualdepositor'srelationtohisbankasbeingaone-sidedtransaction，insteadofseeingitasthetwo-sidedtransactionwhichitactuallyis。Itissupposedthatadepositorandhisbankcansomehowcontrivebetweenthemtoperformanoperationbywhichsavingscandisappearintothebankingsystemsothattheyarelosttoinvestment，or，contrariwise，thatthebankingsystemcanmakeitpossibleforinvestmenttooccur，towhichnosavingcorresponds。
Butnoonecansavewithoutacquiringanasset，whetheritbecashoradebtorcapital-goods；andnoonecanacquireanassetwhichhedidnotpreviouslypossess，unlesseitheranassetofequalvalueisnewlyproducedorsomeoneelse[Page82]THEGENERAL
THEORYOFEMPLOYMENT
partswithanassetofthatvaluewhichhepreviouslyhad。Inthefirstalternativethereisacorrespondingnewinvestment:inthesecondalternativesomeoneelsemustbedis-savinganequalsum。Forhislossofwealthmustbeduetohisconsumptionexceedinghisincome，andnottoalossoncapitalaccountthroughachangeinthevalueofacapital-asset，sinceitisnotacaseofhissufferingalossofvaluewhichhisassetformerlyhad；heisdulyreceivingthecurrentvalueofhisassetandyetisnotretainingthisvalueinwealthofanyform，i。e。hemustbespendingitoncurrentconsumptioninexcessofcurrentincome。Moreover，ifitisthebankingsystemwhichpartswithanasset，someonemustbepartingwithcash。Itfollowsthattheaggregatesavingofthefirstindividualandofotherstakentogethermustnecessarilybeequaltotheamountofcurrentnewinvestment。
Thenotionthatthecreationofcreditbythebankingsystemallowsinvestmenttotakeplacetowhich'nogenuinesaving'correspondscanonlybetheresultofisolatingoneoftheconsequencesoftheincreasedbank-credittotheexclusionoftheothers。Ifthegrantofabankcredittoanentrepreneuradditionaltothecreditsalreadyexistingallowshimtomakeanadditiontocurrentinvestmentwhichwouldnothaveoccurredotherwise，incomeswillnecessarilybeincreasedandataratewhichwillnormallyexceedtherateofincreasedinvestment。Moreover，exceptinconditionsoffullemployment，therewillbeanincreaseofrealincomeaswellasofmoney-income。Thepublicwillexercise'afreechoice'astotheproportioninwhichtheydividetheirincreaseofincomebetweensavingandspending；
anditisimpossiblethattheintentionoftheentrepreneurwhohasborrowedinordertoincreaseinvestmentcanbecomeeffectiveexceptinsubstitutionforinvestmentbyotherentrepreneurswhichwouldhaveoccurredotherwise
atafasterratethanthepublicdecidetoincreasetheir[Page83]THEMEANING
OFSAVINGANDINVESTMENT
savings。Moreover，thesavingswhichresultfromthisdecisionarejustasgenuineasanyothersavings。Noonecanbecompelledtoowntheadditionalmoneycorrespondingtothenewbank-credit，unlesshedeliberatelypreferstoholdmoremoneyratherthansomeotherformofwealth。Yetemployment，incomesandpricescannothelpmovinginsuchawaythatinthenewsituationsomeonedoeschoosetoholdtheadditionalmoney。Itistruethatanunexpectedincreaseofinvestmentinaparticulardirectionmaycauseanirregularityintherateofaggregatesavingandinvestmentwhichwouldnothaveoccurredifithadbeensufficientlyforeseen。Itisalsotruethatthegrantofthebank-creditwillsetupthreetendencies¾；1
foroutputtoincrease，2forthemarginalproducttoriseinvalueintermsofthewage-unitwhichinconditionsofdecreasingreturnmustnecessarilyaccompanyanincreaseofoutput，and3forthewage-unittoriseintermsofmoneysincethisisafrequentconcomitantofbetteremployment；
andthesetendenciesmayaffectthedistributionofrealincomebetweendifferentgroups。Butthesetendenciesarecharacteristicofastateofincreasingoutputassuch，andwilloccurjustasmuchiftheincreaseinoutputhasbeeninitiatedotherwisethanbyanincreaseinbank-credit。
Theycanonlybeavoidedbyavoidinganycourseofactioncapableofimprovingemployment。Muchoftheabove，however，isanticipatingtheresultofdiscussionswhichhavenotyetbeenreached。
Thustheold-fashionedviewthatsavingalwaysinvolvesinvestment，thoughincompleteandmisleading，isformallysounderthanthenew-fangledviewthattherecanbesavingwithoutinvestmentorinvestmentwithout'genuine'saving。Theerrorliesinproceedingtotheplausibleinferencethat，whenanindividualsaves，hewillincreaseaggregateinvestmentbyanequalamount。Itistrue，that，whenanindividualsavesheincreaseshisownwealth。Buttheconclusionthathe[Page84]THEGENERAL
THEORYOFEMPLOYMENT
alsoincreasesaggregatewealthfailstoallowforthepossibilitythatanactofindividualsavingmayreactonsomeoneelse'ssavingsandhenceonsomeoneelse'swealth。
Thereconciliationoftheidentitybetweensavingandinvestmentwiththeapparent'free-will'oftheindividualtosavewhathechoosesirrespectiveofwhatheorothersmaybeinvesting，essentiallydependsonsavingbeing，likespending，atwo-sidedaffair。Foralthoughtheamountofhisownsavingisunlikelytohaveanysignificantinfluenceonhisownincome，thereactionsoftheamountofhisconsumptionontheincomesofothersmakesitimpossibleforallindividualssimultaneouslytosaveanygivensums。Everysuchattempttosavemorebyreducingconsumptionwillsoaffectincomesthattheattemptnecessarilydefeatsitself。Itis，ofcourse，justasimpossibleforthecommunityasawholetosavelessthantheamountofcurrentinvestment，sincetheattempttodosowillnecessarilyraiseincomestoalevelatwhichthesumswhichindividualschoosetosaveadduptoafigureexactlyequaltotheamountofinvestment。
Theaboveiscloselyanalogouswiththepropositionwhichharmonisestheliberty，whicheveryindividualpossesses，tochange，wheneverhechooses，theamountofmoneyheholds，withthenecessityforthetotalamountofmoney，whichindividualbalancesaddupto，tobeexactlyequaltotheamountofcashwhichthebankingsystemhascreated。Inthislattercasetheequalityisbroughtaboutbythefactthattheamountofmoneywhichpeoplechoosetoholdisnotindependentoftheirincomesorofthepricesofthethingsprimarilysecurities，thepurchaseofwhichisthenaturalalternativetoholdingmoney。Thusincomesandsuchpricesnecessarilychangeuntiltheaggregateoftheamountsofmoneywhichindividualschoosetoholdatthenewlevelofincomesandpricesthusbroughtabouthascometoequalitywiththeamountofmoney[Page85]THEMEANING
OFSAVINGANDINVESTMENT
createdbythebankingsystem。This，indeed，isthefundamentalpropositionofmonetarytheory。
Boththesepropositionsfollowmerelyfromthefactthattherecannotbeabuyerwithoutasellerorasellerwithoutabuyer。Thoughanindividualwhosetransactionsaresmallinrelationtothemarketcansafelyneglectthefactthatdemandisnotaone-sidedtransaction，itmakesnonsensetoneglectitwhenwecometoaggregatedemand。Thisisthevitaldifferencebetweenthetheoryoftheeconomicbehaviouroftheaggregateandthetheoryofthebehaviouroftheindividualunit，inwhichweassumethatchangesintheindividual'sowndemanddonotaffecthisincome。
ThePropensitytoConsume:I[Page89]
Chapter8
THEPROPENSITYTOCONSUME:
I。THEOBJECTIVEFACTORS
I
Wearenowinapositiontoreturntoourmaintheme，fromwhichwebrokeoffattheendofBookIinordertodealwithcertaingeneralproblemsofmethodanddefinition。Theultimateobjectofouranalysisistodiscoverwhatdeterminesthevolumeofemployment。Sofarwehaveestablishedthepreliminaryconclusionthatthevolumeofemploymentisdeterminedbythepointofintersectionoftheaggregatesupplyfunctionwiththeaggregatedemandfunction。Theaggregatesupplyfunction，however，whichdependsinthemainonthephysicalconditionsofsupply，involvesfewconsiderationswhicharenotalreadyfamiliar。Theformmaybeunfamiliarbuttheunderlyingfactorsarenotnew。Weshallreturntotheaggregatesupplyfunctioninchapter20，wherewediscussitsinverseunderthenameoftheemploymentfunction。But，inthemain，itisthepartplayedbytheaggregatedemandfunctionwhichhasbeenoverlooked；anditistotheaggregatedemandfunctionthatweshalldevoteBooksIIIandIV。
Theaggregatedemandfunctionrelatesanygivenlevelofemploymenttothe'proceeds'whichthatlevelofemploymentisexpectedtorealise。
The'proceeds'aremadeupofthesumoftwoquantities¾；thesumwhichwillbespentonconsumptionwhenemploymentisatthegivenlevel，andthesumwhichwillbedevoted[Page90]THEGENERAL
THEORYOFEMPLOYMENT
toinvestment。Thefactorswhichgovernthesetwoquantitiesarelargelydistinct。Inthisbookweshallconsidertheformer，namelywhatfactorsdeterminethesumwhichwillbespentonconsumptionwhenemploymentisatagivenlevel；andinBookIVweshallproceedtothefactorswhichdeterminethesumwhichwillbedevotedtoinvestment。
Sincewearehereconcernedindeterminingwhatsumwillbespentonconsumptionwhenemploymentisatagivenlevel，weshould，strictlyspeaking，considerthefunctionwhichrelatestheformerquantityCtothelatterN。Itismoreconvenient，however，toworkintermsofaslightlydifferentfunction，namely，thefunctionwhichrelatestheconsumptionintermsofwage-unitsCwtotheincomeintermsofwage-unitsYwcorrespondingtoalevelofemploymentN。ThissuffersfromtheobjectionthatYwisnotauniquefunctionofN，whichisthesameinallcircumstances。
FortherelationshipbetweenYwandNmaydependthoughprobablyinaveryminordegreeontheprecisenatureoftheemployment。
Thatistosay，twodifferentdistributionsofagivenaggregateemploymentNbetweendifferentemploymentsmightowingtothedifferentshapesoftheindividualemploymentfunctions¾；amattertobediscussedinChapter20belowleadtodifferentvaluesofYw。Inconceivablecircumstancesaspecialallowancemighthavetobemadeforthisfactor。ButingeneralitisagoodapproximationtoregardYwasuniquelydeterminedbyN。WewillthereforedefinewhatweshallcallthepropensitytoconsumeasthefunctionalrelationshipbetweenYwagivenlevelofincomeintermsofwage-units，andCwtheexpenditureonconsumptionoutofthatlevelofincome，sothatCw=Yw
orC=WYw。Theamountthatthecommunityspendsonconsumptionobviouslydependsi
partlyontheamount[Page91]THEPROPENSITY
TOCONSUME:I
ofitsincome，iipartlyontheotherobjectiveattendantcircumstances，andiiipartlyonthesubjectiveneedsandthepsychologicalpropensitiesandhabitsoftheindividualscomposingitandtheprinciplesonwhichtheincomeisdividedbetweenthemwhichmaysuffermodificationasoutputisincreased。Themotivestospendinginteractandtheattempttoclassifythemrunsthedangeroffalsedivision。Neverthelessitwillclearourmindstoconsiderthemseparatelyundertwobroadheadswhichweshallcallthesubjectivefactorsandtheobjectivefactors。Thesubjectivefactors，whichweshallconsiderinmoredetailinthenextchapter，includethosepsychologicalcharacteristicsofhumannatureandthosesocialpracticesandinstitutionswhich，thoughnotunalterable，areunlikelytoundergoamaterialchangeoverashortperiodoftimeexceptinabnormalorrevolutionarycircumstances。Inanhistoricalenquiryorincomparingonesocialsystemwithanotherofadifferenttype，itisnecessarytotakeaccountofthemannerinwhichchangesinthesubjectivefactorsmayaffectthepropensitytoconsume。But，ingeneral，weshallinwhatfollowstakethesubjectivefactorsasgiven；andweshallassumethatthepropensitytoconsumedependsonlyonchangesintheobjectivefactors。
II
Theprincipalobjectivefactorswhichinfluencethepropensitytoconsumeappeartobethefollowing:
1Achangeinthewage-unit。ConsumptionCisobviouslymuchmoreafunctionofinsomesenserealincomethanofmoney-income。Inagivenstateoftechniqueandtastesandofsocialconditionsdeterminingthedistributionofincome，aman'srealincomewillriseandfallwiththeamountofhiscommandoverlabour-units，i。e。
withtheamountofhisincomemeasuredinwage-units；thoughwhentheaggregatevolumeofoutputchanges，hisrealincomewillowing[Page92]THEGENERAL
THEORYOFEMPLOYMENT
totheoperationofdecreasingreturnsriselessthaninproportiontohisincomemeasuredinwage-units。Asafirstapproximation，therefore，wecanreasonablyassumethat，ifthewage-unitchanges，theexpenditureonconsumptioncorrespondingtoagivenlevelofemploymentwill，likeprices，changeinthesameproportion；thoughinsomecircumstanceswemayhavetomakeanallowanceforthepossiblereactionsonaggregateconsumptionofthechangeinthedistributionofagivenrealincomebetweenentrepreneursandrentiersresultingfromachangeinthewage-unit。Apartfromthis，wehavealreadyallowedforchangesinthewage-unitbydefiningthepropensitytoconsumeintermsofincomemeasuredintermsofwage-units。
2Achangeinthedifferencebetweenincomeandnetincome。
Wehaveshownabovethattheamountofconsumptiondependsonnetincomeratherthanonincome，sinceitis，bydefinition，hisnetincomethatamanhasprimarilyinmindwhenheisdecidinghisscaleofconsumption。
Inagivensituationtheremaybeasomewhatstablerelationshipbetweenthetwo，inthesensethattherewillbeafunctionuniquelyrelatingdifferentlevelsofincometothecorrespondinglevelsofnetincome。If，however，thisshouldnotbethecase，suchpartofanychangeinincomeasisnotreflectedinnetincomemustbeneglectedsinceitwillhavenoeffectonconsumption；and，similarly，achangeinnetincome，notreflectedinincome，mustbeallowedfor。Saveinexceptionalcircumstances，however，Idoubtthepracticalimportanceofthisfactor。Wewillreturntoafullerdiscussionoftheeffectonconsumptionofthedifferencebetweenincomeandnetincomeinthefourthsectionofthischapter。
3Windfallchangesincapital-valuesnotallowedforincalculatingnetincome。Theseareofmuchmoreimportanceinmodifyingthepropensitytoconsume，sincetheywillbearnostableorregularrelationshiptotheamountofincome。Theconsumptionofthe[Page93]THEPROPENSITY
TOCONSUME:I
wealth-owningclassmaybeextremelysusceptibletounforeseenchangesinthemoney-valueofitswealth。Thisshouldbeclassifiedamongstthemajorfactorscapableofcausingshort-periodchangesinthepropensitytoconsume。
4Changesintherateoftime-discounting，i。e。intheratioofexchangebetweenpresentgoodsandfuturegoods。Thisisnotquitethesamethingastherateofinterest，sinceitallowsforfuturechangesinthepurchasingpowerofmoneyinsofarastheseareforeseen。Accounthasalsotobetakenofallkindsofrisks，suchastheprospectofnotlivingtoenjoythefuturegoodsorofconfiscatorytaxation。
Asanapproximation，however，wecanidentifythiswiththerateofinterest。
Theinfluenceofthisfactorontherateofspendingoutofagivenincomeisopentoagooddealofdoubt。Fortheclassicaltheoryoftherateofinterest，[63]whichwasbasedontheideathattherateofinterestwasthefactorwhichbroughtthesupplyanddemandforsavingsintoequilibrium，itwasconvenienttosupposethatexpenditureonconsumptioniscet。
par。negativelysensitivetochangesintherateofinterest，sothatanyriseintherateofinterestwouldappreciablydiminishconsumption。
Ithaslongbeenrecognised，however，thatthetotaleffectofchangesintherateofinterestonthereadinesstospendonpresentconsumptioniscomplexanduncertain，beingdependentonconflictingtendencies，sincesomeofthesubjectivemotivestowardssavingwillbemoreeasilysatisfiediftherateofinterestrises，whilstotherswillbeweakened。Overalongperiodsubstantialchangesintherateofinterestprobablytendtomodifysocialhabitsconsiderably，thusaffectingthesubjectivepropensitytospend¾；thoughinwhichdirectionitwouldbehardtosay，exceptinthelightofactualexperience。Theusualtypeofshort-periodfluctuationintherateofinterestisnotlikely，however，tohavemuchdirectinfluenceonspendingeitherway。
[Page94]THEGENERAL
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Therearenotmanypeoplewhowillaltertheirwayoflivingbecausetherateofinteresthasfallenfrom5to4percent，iftheiraggregateincomeisthesameasbefore。Indirectlytheremaybemoreeffects，thoughnotallinthesamedirection。Perhapsthemostimportantinfluence，operatingthroughchangesintherateofinterest，onthereadinesstospendoutofagivenincome，dependsontheeffectofthesechangesontheappreciationordepreciationinthepriceofsecuritiesandotherassets。Forifamanisenjoyingawindfallincrementinthevalueofhiscapital，itisnaturalthathismotivestowardscurrentspendingshouldbestrengthened，eventhoughintermsofincomehiscapitalisworthnomorethanbefore；andweakenedifheissufferingcapitallosses。Butthisindirectinfluencewehaveallowedforalreadyunder3above。Apartfromthis，themainconclusionsuggestedbyexperienceis，Ithink，thattheshort-periodinfluenceoftherateofinterestonindividualspendingoutofagivenincomeissecondaryandrelativelyunimportant，except，perhaps，whereunusuallylargechangesareinquestion。Whentherateofinterestfallsverylowindeed，theincreaseintheratiobetweenanannuitypurchasableforagivensumandtheannualinterestonthatsummay，however，provideanimportantsourceofnegativesavingbyencouragingthepracticeofprovidingforoldagebythepurchaseofanannuity。
Theabnormalsituation，wherethepropensitytoconsumemaybesharplyaffectedbythedevelopmentofextremeuncertaintyconcerningthefutureandwhatitmaybringforth，shouldalso，perhaps，beclassifiedunderthisheading。
5Changesinfiscalpolicy。Insofarastheinducementtotheindividualtosavedependsonthefuturereturnwhichheexpects，itclearlydependsnotonlyontherateofinterestbutonthefiscalpolicyofthegovernment。Incometaxes，especiallywhentheydiscriminateagainst'unearned'income，taxeson[Page95]THEPROPENSITY
TOCONSUME:I
capital-profits，death-dutiesandthelikeareasrelevantastherateofinterest；whilsttherangeofpossiblechangesinfiscalpolicymaybegreater，inexpectationatleast，thanfortherateofinterestitself。
Iffiscalpolicyisusedasadeliberateinstrumentforthemoreequaldistributionofincomes，itseffectinincreasingthepropensitytoconsumeis，ofcourse，allthegreater。[64]
Wemustalsotakeaccountoftheeffectontheaggregatepropensitytoconsumeofgovernmentsinkingfundsforthedischargeofdebtpaidforoutofordinarytaxation。Fortheserepresentaspeciesofcorporatesaving，sothatapolicyofsubstantialsinkingfundsmustberegardedingivencircumstancesasreducingthepropensitytoconsume。Itisforthisreasonthatachange-overfromapolicyofgovernmentborrowingtotheoppositepolicyofprovidingsinkingfundsorviceversaiscapableofcausingaseverecontractionormarkedexpansionofeffectivedemand。
6Changesinexpectationsoftherelationbetweenthepresentandthefuturelevelofincome。Wemustcataloguethisfactorforthesakeofformalcompleteness。But，whilstitmayaffectconsiderablyaparticularindividual'spropensitytoconsume，itislikelytoaverageoutforthecommunityasawhole。Moreover，itisamatteraboutwhichthereis，asarule，toomuchuncertaintyforittoexertmuchinfluence。
Wearelefttherefore，withtheconclusionthatinagivensituationthepropensitytoconsumemaybeconsideredafairlystablefunction，providedthatwehaveeliminatedchangesinthewage-unitintermsofmoney。Windfallchangesincapital-valueswillbecapableofchangingthepropensitytoconsume，andsubstantial[Page96]THEGENERAL
THEORYOFEMPLOYMENT
changesintherateofinterestandinfiscalpolicymaymakesomedifference；
buttheotherobjectivefactorswhichmightaffectit，whilsttheymustnotbeoverlooked，arenotlikelytobeimportantinordinarycircumstances。
Thefactthat，giventhegeneraleconomicsituation，theexpenditureonconsumptionintermsofthewage-unitdependsinthemain，onthevolumeofoutputandemploymentisthejustificationforsumminguptheotherfactorsintheportmanteaufunction'propensitytoconsume'。Forwhilsttheotherfactorsarecapableofvarying{andthismustnotbeforgotten，theaggregateincomemeasuredintermsofthewage-unitis，asarule，theprincipalvariableuponwhichtheconsumption-constituentoftheaggregatedemandfunctionwilldepend。
III
Granted，then，thatthepropensitytoconsumeisafairlystablefunctionsothat，asarule，theamountofaggregateconsumptionmainlydependsontheamountofaggregateincomebothmeasuredintermsofwage-units，changesinthepropensityitselfbeingtreatedasasecondaryinfluence，whatisthenormalshapeofthisfunction？
Thefundamentalpsychologicallaw，uponwhichweareentitledtodependwithgreatconfidencebothapriorifromourknowledgeofhumannatureandfromthedetailedfactsofexperience，isthatmenaredisposed，asaruleandontheaverage，toincreasetheirconsumptionastheirincomeincreases，butnotbyasmuchastheincreaseintheirincome。Thatistosay，ifCwistheamountofconsumptionandYwisincomebothmeasuredinwage-unitsDCwhasthesamesignasDYwbutissmallerinamount，i。e。dCw/dYwispositiveandlessthanunity。
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Thisisespeciallythecasewherewehaveshortperiodsinview，asinthecaseoftheso-calledcyclicalfluctuationsofemploymentduringwhichhabits，asdistinctfrommorepermanentpsychologicalpropensities，arenotgiventimeenoughtoadaptthemselvestochangedobjectivecircumstances。
Foraman'shabitualstandardoflifeusuallyhasthefirstclaimonhisincome，andheisapttosavethedifferencewhichdiscoversitselfbetweenhisactualincomeandtheexpenseofhishabitualstandard；or，ifhedoesadjusthisexpendituretochangesinhisincome，hewillovershortperiodsdosoimperfectly。Thusarisingincomewilloftenbeaccompaniedbyincreasedsaving，andafallingincomebydecreasedsaving，onagreaterscaleatfirstthansubsequently。
But，apartfromshort-periodchangesinthelevelofincome，itisalsoobviousthatahigherabsolutelevelofincomewilltend，asarule，towidenthegapbetweenincomeandconsumption。Forthesatisfactionoftheimmediateprimaryneedsofamanandhisfamilyisusuallyastrongermotivethanthemotivestowardsaccumulation，whichonlyacquireeffectiveswaywhenamarginofcomforthasbeenattained。Thesereasonswilllead，asarule，toagreaterproportionofincomebeingsavedasrealincomeincreases。Butwhetherornotagreaterproportionissaved，wetakeitasafundamentalpsychologicalruleofanymoderncommunitythat，whenitsrealincomeisincreased，itwillnotincreaseitsconsumptionbyanequalabsoluteamount，sothatagreaterabsoluteamountmustbesaved，unlessalargeandunusualchangeisoccurringatthesametimeinotherfactors。Asweshallshowsubsequently，[65]thestabilityoftheeconomicsystemessentiallydependsonthisruleprevailinginpractice。
Thismeansthat，ifemploymentandhenceaggregateincomeincrease，notalltheadditionalemploymentwillberequiredtosatisfytheneedsofadditionalconsumption。
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Ontheotherhand，adeclineinincomeduetoadeclineinthelevelofemployment，ifitgoesfar，mayevencauseconsumptiontoexceedincomenotonlybysomeindividualsandinstitutionsusingupthefinancialreserveswhichtheyhaveaccumulatedinbettertimes，butalsobythegovernment，whichwillbeliable，willinglyorunwillingly，torunintoabudgetarydeficitorwillprovideunemploymentrelief；forexample，outofborrowedmoney。Thus，whenemploymentfallstoalowlevel，aggregateconsumptionwilldeclinebyasmalleramountthanthatbywhichrealincomehasdeclined，byreasonbothofthehabitualbehaviourofindividualsandalsooftheprobablepolicyofgovernments；whichistheexplanationwhyanewpositionofequilibriumcanusuallybereachedwithinamodestrangeoffluctuation。
Otherwiseafallinemploymentandincome，oncestarted，mightproceedtoextremelengths。
Thissimpleprincipleleads，itwillbeseen，tothesameconclusionasbefore，namely，thatemploymentcanonlyincreaseparipassuwithanincreaseininvestment；unless，indeed，thereisachangeinthepropensitytoconsume。Forsinceconsumerswillspendlessthantheincreaseinaggregatesupplypricewhenemploymentisincreased，theincreasedemploymentwillproveunprofitableunlessthereisanincreaseininvestmenttofillthegap。
IV
Wemustnotunderestimatetheimportanceofthefactalreadymentionedabovethat，whereasemploymentisafunctionoftheexpectedconsumptionandtheexpectedinvestment，consumptionis，cet。par。，afunctionofnetincome，i。e。ofnetinvestmentnetincomebeingequaltoconsumptionplusnetinvestment。Inotherwords，thelargerthefinancialprovisionwhichitisthoughtnecessarytomakebeforereckoningnetin-
[Page99]THEPROPENSITY
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come，thelessfavourabletoconsumption，andthereforetoemployment，willagivenlevelofinvestmentprovetobe。
Whenthewholeofthisfinancialprovisionorsupplementarycostisinfactcurrentlyexpendedintheupkeepofthealreadyexistingcapitalequipment，thispointisnotlikelytobeoverlooked。Butwhenthefinancialprovisionexceedstheactualexpenditureoncurrentupkeep，thepracticalresultsofthisinitseffectonemploymentarenotalwaysappreciated。
Fortheamountofthisexcessneitherdirectlygivesrisetocurrentinvestmentnorisavailabletopayforconsumption。Ithas，therefore，tobebalancedbynewinvestment，thedemandforwhichhasarisenquiteindependentlyofthecurrentwastageofoldequipmentagainstwhichthefinancialprovisionisbeingmade；withtheresultthatthenewinvestmentavailabletoprovidecurrentincomeiscorrespondinglydiminishedandamoreintensedemandfornewinvestmentisnecessarytomakepossibleagivenlevelofemployment。
Moreover，muchthesameconsiderationsapplytotheallowanceforwastageincludedinusercost，insofarasthewastageisnotactuallymadegood。
Takeahousewhichcontinuestobehabitableuntilitisdemolishedorabandoned。Ifacertainsumiswrittenoffitsvalueoutoftheannualrentpaidbythetenants，whichthelandlordneitherspendsonupkeepnorregardsasnetincomeavailableforconsumption，thisprovision，whetheritisapartofUorofV；constitutesadragonemploymentallthroughthelifeofthehouse，suddenlymadegoodinalumpwhenthehousehastoberebuilt。
Inastationaryeconomyallthismightnotbeworthmentioning，sinceineachyearthedepreciationallowancesinrespectofoldhouseswouldbeexactlyoffsetbythenewhousesbuiltinreplacementofthosereachingtheendoftheirlivesinthatyear。Butsuchfactorsmaybeseriousinanon-staticeconomy，especially[Page100]THE
GENERALTHEORYOFEMPLOYMENT
duringaperiodwhichimmediatelysucceedsalivelyburstofinvestmentinlong-livedcapital。Forinsuchcircumstancesaverylargeproportionofthenewitemsofinvestmentmaybeabsorbedbythelargerfinancialprovisionsmadebyentrepreneursinrespectofexistingcapitalequipment，upontherepairsandrenewalofwhich，thoughitiswearingoutwithtime，thedatehasnotyetarrivedforspendinganythingapproachingthefullfinancialprovisionwhichisbeingsetaside；withtheresultthatincomescannotriseabovealevelwhichislowenoughtocorrespondwithalowaggregateofnetinvestment。Thussinkingfunds，etc。，areapttowithdrawspendingpowerfromtheconsumerlongbeforethedemandforexpenditureonreplacementswhichsuchprovisionsareanticipatingcomesintoplay；
i。e。theydiminishthecurrenteffectivedemandandonlyincreaseitintheyearinwhichthereplacementisactuallymade。Iftheeffectofthisisaggravatedby'financialprudence'，i。e。byitsbeingthoughtadvisableto'writeoff'theinitialcostmorerapidlythantheequipmentactuallywearsout，thecumulativeresultmaybeveryseriousindeed。
IntheUnitedStates，forexample，by1929therapidcapitalexpansionofthepreviousfiveyearshadledcumulativelytothesettingupofsinkingfundsanddepreciationallowances，inrespectofplantwhichdidnotneedreplacement，onsohugeascalethatanenormousvolumeofentirelynewinvestmentwasrequiredmerelytoabsorbthesefinancialprovisions；anditbecamealmosthopelesstofindstillmorenewinvestmentonasufficientscaletoprovideforsuchnewsavingasawealthycommunityinfullemploymentwouldbedisposedtosetaside。Thisfactoralonewasprobablysufficienttocauseaslump。And，furthermore，since'financialprudence'ofthiskindcontinuedtobeexercisedthroughtheslumpbythosegreatcorporationswhichwerestillinapositiontoaffordit，itofferedaseriousobstacletoearlyrecovery。
[Page101]THE
PROPENSITYTOCONSUME:I
Oragain，inGreatBritainatthepresenttime1935thesubstantialamountofhouse-buildingandofothernewinvestmentssincethewarhasledtoanamountofsinkingfundsbeingsetupmuchinexcessofanypresentrequirementsforexpenditureonrepairsandrenewals，atendencywhichhasbeenaccentuated，wheretheinvestmenthasbeenmadebylocalauthoritiesandpublicboards，bytheprinciplesof'sound'financewhichoftenrequiresinkingfundssufficienttowriteofftheinitialcostsometimebeforereplacementwillactuallyfalldue；withtheresultthatevenifprivateindividualswerereadytospendthewholeoftheirnetincomesitwouldbeaseveretasktorestorefullemploymentinthefaceofthisheavyvolumeofstatutoryprovisionbypublicandsemi-publicauthorities，entirelydissociatedfromanycorrespondingnewinvestment。Thesinkingfundsoflocalauthoritiesnowstand，Ithink，[66]atanannualfigureofmorethanhalftheamountwhichtheseauthoritiesarespendingonthewholeoftheirnewdevelopments。[67]YetitisnotcertainthattheMinistryofHealthareaware，whentheyinsistonstiffsinkingfundsbylocalauthorities，howmuchtheymaybeaggravatingtheproblemofunemployment。Inthecaseofadvancesbybuildingsocietiestohelpanindividualtobuildhisownhouse，thedesiretobeclearofdebtmorerapidlythanthehouseactuallydeterioratesmaystimulatethehouse-ownertosavemorethanheotherwisewould；¾；thoughthisfactorshouldbeclassified，perhaps，asdiminishingthepropensitytoconsumedirectlyratherthanthroughitseffectonnetincome。Inactualfigures，repaymentsofmortgagesadvancedbybuildingsocieties，whichamountedto£；24，000，000in1925，hadrisento[Page102]THE
GENERALTHEORYOFEMPLOYMENT
£；68，000，000by1933，ascomparedwithnewadvancesof£；103，000，000；
andto-daytherepaymentsareprobablystillhigher。
Thatitisinvestment，ratherthannetinvestment，whichemergesfromthestatisticsofoutput，isbroughtoutforciblyandnaturallyinMrColinClark'sNationalIncome，1924-1931。
Healsoshowswhatalargeproportiondepreciation，etc。，normallybearstothevalueofinvestment。Forexample，heestimatesthatinGreatBritain，overtheyears1928-1931，[68]theinvestmentandthenetinvestmentwereasfollows，thoughhisgrossinvestmentisprobablysomewhatgreaterthanmyinvestment，inasmuchasitmayincludeapartofusercost，anditisnotclearhowcloselyhis'netinvestment'
correspondstomydefinitionofthisterm:
£；million
1928192919301931
GrossInvestment-Output791731620482
'Valueofphysicalwastingofoldcapital'433435437439
NetInvestment35829618343MrKuznetshasarrivedatmuchthesameconclusionincompilingthestatisticsoftheGrossCapitalFormationashecallswhatIcallinvestment
intheUnitedStates，1919-1933。Thephysicalfact，towhichthestatisticsofoutputcorrespond，isinevitablythegross，andnotthenet，investment。MrKuznetshasalsodiscoveredthedifficultiesinpassingfromgrossinvestmenttonetinvestment。'Thedifficulty'，hewrites，'ofpassingfromgrosstonetcapitalformation，thatis，thedifficultyofcorrectingfortheconsumptionofexistingdurablecommodities，isnotonlyinthelackofdata。Theveryconceptofannualconsumptionofcommoditiesthatlastoveranumberofyearssuffersfromambiguity'。Hefallsback，therefore，'onthe[Page103]THE
PROPENSITYTOCONSUME:I
assumptionthattheallowancefordepreciationanddepletiononthebooksofbusinessfirmsdescribescorrectlythevolumeofconsumptionofalreadyexisting，finisheddurablegoodsusedbybusinessfirms'[69]。
Ontheotherhand，heattemptsnodeductionatallinrespectofhousesandotherdurablecommoditiesinthehandsofindividuals。HisveryinterestingresultsfortheUnitedStatescanbesummarisedasfollows:[70]
Severalfactsemergewithprominencefromthistable。Netcapitalformationwasverysteadyoverthequinquennium1925-1929，withonlya10percent。
Millionsofdollars
19251926192719281929
Grosscapitalformationafterallowingfornetchangeinbusinessinventories30，70633，57131，15733，93434，491
Entrepreneurs'servicing，repairs，maintenance，depreciationanddepletion7，6858，2888，2238，4819，010
NetcapitalformationonMrKuznets'definition23，02125，28322，93425，45325，481
Millionsofdollars
1930193119321933
Grosscapitalformationafterallowingfornetchangeinbusinessinventories27，53818，7217，78014，879
Entrepreneurs'servicing，repairs，maintenance，depreciationanddepletion8，5027，6236，5438，204
NetcapitalformationonMrKuznets'definition19，03611，0981，2376，675
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increaseinthelatterpartoftheupwardmovement。Thedeductionforentrepreneurs'repairs，maintenance，depreciationanddepletionremainedatahighfigureevenatthebottomoftheslump。ButMrKuznets'methodmustsurelyleadtotoolowanestimateoftheannualincreaseindepreciation，etc。；forheputsthelatteratlessthan1½；percentperannumofthenewnetcapitalformation。Aboveall，netcapitalformationsufferedanappallingcollapseafter1929，fallingin1932toafigurenolessthan95percentbelowtheaverageofthequinquennium1925-1929。
Theaboveis，tosomeextent，adigression。Butitisimportanttoemphasisethemagnitudeofthedeductionwhichhastobemadefromtheincomeofasociety，whichalreadypossessesalargestockofcapital，beforewearriveatthenetincomewhichisordinarilyavailableforconsumption。
Forifweoverlookthis，wemayunderestimatetheheavydragonthepropensitytoconsumewhichexistseveninconditionswherethepublicisreadytoconsumeaverylargeproportionofitsnetincome。
Consumption¾；torepeattheobvious¾；isthesoleendandobjectofalleconomicactivity。Opportunitiesforemploymentarenecessarilylimitedbytheextentofaggregatedemand。Aggregatedemandcanbederivedonlyfrompresentconsumptionorfrompresentprovisionforfutureconsumption。Theconsumptionforwhichwecanprofitablyprovideinadvancecannotbepushedindefinitelyintothefuture。Wecannot，asacommunity，provideforfutureconsumptionbyfinancialexpedientsbutonlybycurrentphysicaloutput。Insofarasoursocialandbusinessorganisationseparatesfinancialprovisionforthefuturefromphysicalprovisionforthefuturesothateffortstosecuretheformerdonotnecessarilycarrythelatterwiththem，financialprudencewillbeliabletodiminishaggregatedemandandthusimpairwell-being，astherearemanyexamples[Page105]THE
PROPENSITYTOCONSUME:I
totestify。Thegrcater，moreover，theconsumptionforwhichwehaveprovidedinadvance，themoredifficultitistofindsomethingfurthertoprovideforinadvance，andthegreaterourdependenceonpresentconsumptionasasourceofdemand。Yetthelargerourincomes，thegreater，unfortunately，isthemarginbetweenourincomesandourconsumption。So，failingsomenovelexpedient，thereis，asweshallsee，noanswertotheriddle，exceptthattheremustbesufficientunemploymenttokeepussopoorthatourconsumptionfallsshortofourincomebynomorethantheequivalentofthephysicalprovisionforfutureconsumptionwhichitpaystoproduceto-day。
Orlookatthematterthus。Consumptionissatisfiedpartlybyobjectsproducedcurrentlyandpartlybyobjectsproducedpreviously，i。e。bydisinvestment。
Totheextentthatconsumptionissatisfiedbythelatter，thereisacontractionofcurrentdemand，sincetothatextentapartofcurrentexpenditurefailstofinditswaybackasapartofnetincome。Contrariwisewheneveranobjectisproducedwithintheperiodwithaviewtosatisfyingconsumptionsubsequently，anexpansionofcurrentdemandissetup。Nowallcapital-investmentisdestinedtoresult，soonerorlater，incapital-disinvestment。Thustheproblemofprovidingthatnewcapital-investmentshallalwaysoutruncapital-disinvestmentsufficientlytofillthegapbetweennetincomeandconsumption，presentsaproblemwhichisincreasinglydifficultascapitalincreases。Newcapital-investmentcanonlytakeplaceinexcessofcurrentcapital-disinvestmentiffutureexpenditureonconsumptionisexpectedtoincrease。Eachtimewesecureto-day'sequilibriumbyincreasedinvestmentweareaggravatingthedifficultyofsecuringequilibriumto-morrow。A
diminishedpropensitytoconsumeto-daycanonlybeaccommodatedtothepublicadvantageifanincreasedpropensitytoconsumeisexpectedtoexistsomeday。Weareremindedof'TheFableoftheBees'¾；thegay[Page106]THE
GENERALTHEORYOFEMPLOYMENT
ofto-morrowareabsolutelyindispensabletoprovidearaisond'ê；treforthegraveofto-day。Itisacuriousthing，worthyofmention，thatthepopularmindseemsonlytobeawareofthisultimateperplexitywherepublicinvestmentisconcerned，asinthecaseofroad-buildingandhouse-buildingandthelike。Itiscommonlyurgedasanobjectiontoschemesforraisingemploymentbyinvestmentundertheauspicesofpublicauthoritythatitislayinguptroubleforthefuture。'Whatwillyoudo，'
itisasked，'whenyouhavebuiltallthehousesandroadsandtownhallsandelectricgridsandwatersuppliesandsoforthwhichthestationarypopulationofthefuturecanbeexpectedtorequire？'Butitisnotsoeasilyunderstoodthatthesamedifficultyappliestoprivateinvestmentandtoindustrialexpansion；particularlytothelatter，sinceitismucheasiertoseeanearlysatiationofthedemandfornewfactoriesandplantwhichabsorbindividuallybutlittlemoney，thanofthedemandfordwelling-houses。
Theobstacletoaclearunderstandingis，intheseexamples，muchthesameasinmanyacademicdiscussionsofcapital，namely，aninadequateappreciationofthefactthatcapitalisnotaself-subsistententityexistingapartfromconsumption。Onthecontrary，everyweakeninginthepropensitytoconsumeregardedasapermanenthabitmustweakenthedemandforcapitalaswellasthedemandforconsumption。
ThePropensitytoConsume:II[Page107]
Chapter9
THEPROPENSITYTOCONSUME:
II。THESUBJECTIVEFACTORS
I
Thereremainsthesecondcategoryoffactorswhichaffecttheamountofconsumptionoutofagivenincome¾；namely，thosesubjectiveandsocialincentiveswhichdeterminehowmuchisspent，giventheaggregateofincomeintermsofwage-unitsandgiventherelevantobjectivefactorswhichwehavealreadydiscussed。Since，however，theanalysisofthesefactorsraisesnopointofnovelty，itmaybesufficientifwegiveacatalogueofthemoreimportant，withoutenlargingonthematanylength。
Thereare，ingeneral，eightmainmotivesorobjectsofasubjectivecharacterwhichleadindividualstorefrainfromspendingoutoftheirincomes:iTobuildupareserveagainstunforeseencontingencies；iiToprovideforananticipatedfuturerelationbetweentheincomeandtheneedsoftheindividualorhisfamilydifferentfromthatwhichexistsinthepresent，as，forexample，inrelationtooldage，familyeducation，orthemaintenanceofdependents；iiiToenjoyinterestandappreciation，i。e。becausealargerrealconsumptionatalaterdateispreferredtoasmallerimmediateconsumption；
[Page108]THE
GENERALTHEORYOFEMPLOYMENTivToenjoyagraduallyincreasingexpenditure，sinceitgratifiesacommoninstincttolookforwardtoagraduallyimprovingstandardofliferatherthanthecontrary，eventhoughthecapacityforenjoymentmaybediminishing；vToenjoyasenseofindependenceandthepowertodothings，thoughwithoutaclearideaordefiniteintentionofspecificaction；viTosecureamassedemanoeuvretocarryoutspeculativeorbusinessprojects；viiTobequeathafortune；viiiTosatisfypuremiserliness，i。e。unreasonablebutinsistentinhibitionsagainstactsofexpenditureassuch。TheseeightmotivesmightbecalledthemotivesofPrecaution，Foresight，Calculation，Improvement，Independence，Enterprise，PrideandAvarice；
andwecouldalsodrawupacorrespondinglistofmotivestoconsumptionsuchasEnjoyment，Shortsightedness，Generosity，Miscalculation，OstentationandExtravagance。
Apartfromthesavingsaccumulatedbyindividuals，thereisalsothelargeamountofincome，varyingperhapsfromone-thirdtotwo-thirdsofthetotalaccumulationinamodernindustrialcommunitysuchasGreatBritainortheUnitedStates，whichiswithheldbycentralandlocalgovernment，byinstitutionsandbybusinesscorporations¾；formotiveslargelyanalogousto，butnotidenticalwith，thoseactuatingindividuals，andmainlythefourfollowing:iThemotiveofenterprise¾；tosecureresourcestocarryoutfurthercapitalinvestmentwithoutincurringdebtorraisingfurthercapitalonthemarket；iiThemotiveofliquidity¾；tosecureliquidresourcestomeetemergencies，difficultiesanddepressions；
[Page109]THE
PROPENSITYTOCONSUME:IIiiiThemotiveofimprovement¾；tosecureagraduallyincreasingincome，which，incidentally，willprotectthemanagementfromcriticism，sinceincreasingincomeduetoaccumulationisseldomdistinguishedfromincreasingincomeduetoefficiency；ivThemotiveoffinancialprudenceandtheanxietytobe'ontherightside'bymakingafinancialprovisioninexcessofuserandsupplementarycost，soastodischargedebtandwriteoffthecostofassetsaheadof；ratherthanbehind，theactualrateofwastageandobsolescence，thestrengthofthismotivemainlydependingonthequantityandcharacterofthecapitalequipmentandtherateoftechnicalchange。Correspondingtothesemotiveswhichfavourthewithholdingofapartofincomefromconsumption，therearealsooperativeattimesmotiveswhichleadtoanexcessofconsumptionoverincome。Severalofthemotivestowardspositivesavingcataloguedaboveasaffectingindividualshavetheirintendedcounterpartinnegativesavingatalaterdate，as，forexample，withsavingtoprovideforfamilyneedsoroldage。Unemploymentrelieffinancedbyborrowingisbestregardedasnegativesaving。
Nowthestrengthofallthesemotiveswillvaryenormouslyaccordingtotheinstitutionsandorganisationoftheeconomicsocietywhichwepresume，accordingtohabitsformedbyrace，education，convention，religionandcurrentmorals，accordingtopresenthopesandpastexperience，accordingtothescaleandtechniqueofcapitalequipment，andaccordingtotheprevailingdistributionofwealthandtheestablishedstandardsoflife。Intheargumentofthisbook，however，weshallnotconcernourselves，exceptinoccasionaldigressions，withtheresultsoffar-reachingsocialchangesorwiththesloweffectsofsecularprogress。Weshall，thatistosay，takeasgiventhemainbackgroundofsubjective[Page110]THE
GENERALTHEORYOFEMPLOYMENT
motivestosavingandtoconsumptionrespectively。Insofarasthedistributionofwealthisdeterminedbythemoreorlesspermanentsocialstructureofthecommunity，thisalsocanbereckonedafactor，subjectonlytoslowchangeandoveralongperiod，whichwecantakeasgiveninourpresentcontext。
II
Since，therefore，themainbackgroundofsubjectiveandsocialincentiveschangesslowly，whilsttheshort-periodinfluenceofchangesintherateofinterestandtheotherobjectivefactorsisoftenofsecondaryimportance，weareleftwiththeconclusionthatshort-periodchangesinconsumptionlargelydependonchangesintherateatwhichincomemeasuredinwage-units
isbeingearnedandnotonchangesinthepropensitytoconsumeoutofagivenincome。
Wemust，however，guardagainstamisunderstanding。Theabovemeansthattheinfluenceofmoderatechangesintherateofinterestonthepropensitytoconsumeisusuallysmall。Itdoesnotmeanthatchangesintherateofinteresthaveonlyasmallinfluenceontheamountsactuallysavedandconsumed。Quitethecontrary。Theinfluenceofchangesintherateofinterestontheamountactuallysavedisofparamountimportance，butisintheoppositedirectiontothatusuallysupposed。Foreveniftheattractionofthelargerfutureincometobeearnedfromahigherrateofinteresthastheeffectofdiminishingthepropensitytoconsume，neverthelesswecanbecertainthatariseintherateofinterestwillhavetheeffectofreducingtheamountactuallysaved。Foraggregatesavingisgovernedbyaggregateinvestment；ariseintherateofinterestunlessitisoffsetbyacorrespondingchangeinthedemand-scheduleforinvestmentwilldiminishinvestment；henceariseintherateofinterestmusthavetheeffectofreducingincomestoalevelatwhichsavingisdecreasedinthe[Page111]THE
PROPENSITYTOCONSUME:II
samemeasureasinvestment。Sinceincomeswilldecreasebyagreaterabsoluteamountthaninvestment，itis，indeed，truethat，whentherateofinterestrises，therateofconsumptionwilldecrease。Butthisdoesnotmeanthattherewillbeawidermarginforsaving。Onthecontrary，savingandspendingwillbothdecrease。
Thus，evenifitisthecasethatariseintherateofinterestwouldcausethecommunitytosavemoreoutofagivenincome，wecanbequitesurethatariseintherateofinterestassumingnofavourablechangeinthedemand-scheduleforinvestmentwilldecreasetheactualaggregateofsavings。Thesamelineofargumentcaneventellusbyhowmuchariseintherateofinterestwill，cet。par。，decreaseincomes。
Forincomeswillhavetofallorberedistributedbyjustthatamountwhichisrequired，withtheexistingpropensitytoconsumetodecreasesavingsbythesameamountbywhichtheriseintherateofinterestwill，withtheexistingmarginalefficiencyofcapital，decreaseinvestment。
Adetailedexaminationofthisaspectwilloccupyournextchapter。
Theriseintherateofinterestmightinduceustosavemore，ifourincomeswereunchanged。Butifthehigherrateofinterestretardsinvestment，ourincomeswillnot，andcannot，beunchanged。Theymustnecessarilyfall，untilthedecliningcapacitytosavehassufficientlyoffsetthestimulustosavegivenbythehigherrateofinterest。Themorevirtuousweare，themoredeterminedlythrifty，themoreobstinatelyorthodoxinournationalandpersonalfinance，themoreourincomeswillhavetofallwheninterestrisesrelativelytothemarginalefficiencyofcapital。Obstinacycanbringonlyapenaltyandnoreward。Fortheresultisinevitable。
Thus，afterall，theactualratesofaggregatesavingandspendingdonotdependonPrecaution，Foresight，Calculation，Improvement，Independence，Enterprise，PrideorAvarice。Virtueandviceplaynopart。Itall[Page112]THE
GENERALTHEORYOFEMPLOYMENT
dependsonhowfartherateofinterestisfavourabletoinvestment，aftertakingaccountofthemarginalefficiencyofcapital。[71]No，thisisanoverstatement。Iftherateofinterestweresogovernedastomaintaincontinuousfullemployment，virtuewouldresumehersway；¾；therateofcapitalaccumulationwoulddependontheweaknessofthepropensitytoconsume。Thus，onceagain，thetributethatclassicaleconomistspaytoherisduetotheirconcealedassumptionthattherateofinterestalwaysissogoverned。
TheMarginalPropensitytoConsume[Page113]