Prosperity and Depression.pdf

Chap. 8Recent Discussions on .the Trade CycleIt remains to enquire why Mr. KEYNES finds itSaving and necessary to distinguish between saving and investment.investmentWe have· seen that the formal definitionsinMr. Keynes'system.which he gives on page 63 of his· General Theory aresuch that, for society as a whole, S and I are notonly equal, but identical; viz., the value' of unconsumedoutput. If that definition were strictlyadhered to, S and J would be synonymous symbols, they could beused interchangeably and there would be no necessity-in factit would be rather misleacling-toretain both expressions.Now this is not Mr. KEYNES' practice. He uses both terms,deliberately and not for purely stylistic reasons. Moreover, hepoints out that the acts of saving and of investment are usuallyperformed independently by different people. 1 He insists that aprocess is required to make S and I equal, and sees the " initialnovelty" of his theory in his " maintaining that it is not the rateof interest, but the level of incomes, which ensures equalitybetween saving and investment". 21 General Theory, pages 20 and 21, 210.I Economic Journal, Vol. 47, 1937, page 250. It is misleading to saythat income must change, in order to ensure the equality of S and I.Whatever the level of income may be, 5 and I must be equal, becausethey are made so by definition. The change of level of income comesin as a condition only because Mr. Keynes takes the I multiplier '­I the marginal propensity to consume' (compare § 4 below for adefinition of these concepts)-as a constant quantity. He assumes thatthere is a certain relationship between a (small) increase in investmentand in income. Suppose, for example, the multiplier is 3 (in otherwords, the marginal propensity to consume is 2/3)-that is, to any smalli1?-crement in I, corresponds an increment in Y three times as great. Ifthat· assumption is to be borne out by the facts, we must find that,whenever a change in investment has occurred, income must have changedby three times as much. But the multiplier (alternatively expressed : themarginal propensity to consume) need not be a stable magnitude, independentof the nature of the change in I and the surrounding conditions.(This, Mr. Keynes himself has recognised.) Hence, if in a concrete casewe find that income did not change as we expected on the basis of whatwe assumed about the multiplier, we shall not say , this is impossible,because 5 is not equal to I " or'S can now not be equal to I " but weshall say the multiplier (marginal propensity to consume) was differentfrom what we expected.The same in slightly different formulation : If we assume (expect)something about the magnitude of the multiplier, we implicitly assume