Prosperity and Depression.pdf

AnalYsis of TheoriesPart IFor short-run fluctuations, however, itnportantThe,propensity qualifications n1ust be made, even in respect ofto COI1SUIJJe the first-mentioned relationship-viz., that betweenin the the amount of saving and the level of incon1e. Ifshort-rlill. we say that there is widespread agreement amongeconomists to the effect that the amount of savingis positively correlated to the level of income, that refers toindividuals-not necessarily to society as a whole, because ofpossible changes in the distribution ofincome-and under settledconditions. Especially in the case of rapid changes, the rate ofchange of income and recent fluctuations of the income levelundoubtedly play an important role. If, for example, the incomeof a' person rises unexpectedly, at first consumption may not riseat all; later on, the level of consumption will be gradually raised.Furthennore, expectations entertained by the individual about thelevel of income in future periods playa leading role and theseexpectations will be profoundly influenced by the history of recentfluctuations. 1To return to the dependence of the rate of savingInterdependence upon the level of income : for each income level,of demandfor a separate curve showing how much would beaDd supplY saved at different interestrates ought to be drawn. 23of saving. This being agreed upon, the next stepinMr. KEYNES'criticism follows conclusively : the demand and1 These remarks are by no means intended to be exhaustive, Theproblem could be settled only by extensive empirical studies. Somefurther observations will be found in Chapter 10, § 6, below. Here theaim is to caution· the reader against accepting too easily the view nowprevalent that the positive correlation between income and the amounl;of saving can be taken as a secure basis of further deductions for thepurpose of explaining the business cycle as well as for long-run tendencies.2 It would be easy to construct a three-dimensional diagram exhibitingthe dependence of the rate of saving on the two factors : level of incomeand rate of interest. A complete theory would hav.e to take still otherfactors into consideration--e.g., the rate of change of income.• Mr. Keynes has not included in his theoretical scheme (although hehas made some slight allusions to it) the obvious fact that investment(demand for capital), must be assumed to depend, not only on the rate ofinterest, but also on the level of income.Mr. J. R. Hicks and Mr. O. Lange, in their respective diagrammaticexpositions of the Keynesian theory (H Mr. Keynes and the ' Classics ' ;