Prosperity and Depression.pdf

Chap. 8 Recent Discussions on the Trade Cycle 199supply curves of saving are not independent of one another. If,for instance, there appears a new stimulus to investment, if, that isto say, the investment demand curve shifts upward, income will, ingeneral, rise and the supply curve of saving will shift too. Likewise,a shift in the latter will make the demand curve shift.To sum up : the main defect ofthe " classical " theory ofinterest,according to Mr. KEYNES, is that it treats income as a givennlagnitude, as a deternlinant of the system and not as a variable.If this criticism is valid as regards the static or equilibriumtheory of interest,! it would not appear to apply to the short-runor monetary theory of the rate of interest as developed by thefollowers of WICKSELL. In this theory, the variability of incomedepending upon the shifts in the investment-demand and savingsupplycurve is not neglected; for a continuous and sustainedchange in income is an essential feature of the Wicksellian cumulativeprocess. A rise in income is characteristic of an expansionprocess; a fall of income, of a contraction process. Moreover,.this theory allows for the purely monetary influences on the rateofinterest; indeed, these influences operating on the actual marketrate of interest are, as we have seen in Chapter 3, the very essenceof the theory,IWhat, th~n, are 1fr. KEYNES' objections against the theory whichconceives of the r~te of interest as determined by demand for andsupply of credit?A Sugg.ested Interpretation ", in Econom,trictJ, Vol. 5, 1937, and U TheRate of Interest and the Optimum Propensity to Consume It, inEconomica,February 1938), have filled that gap. It would, however, seem to bemore correct to say that the investment demand depends on the rate ofchange rather than on the level of income. That amounts to introducinginto the system the acceleration principle which is a dynamic relationship(in a sense which will be discussed in § 6 of this chapter).1 Whether this theory, in spite of its admitted shortcomings, has notits merits, in relation to long-period equilibrium or as an idea.l case realisab}eunder certain special assumptions or as a purely theoretical standardof reference, we need not discuss in this connection, because we are hereconcerned more with the short-run (monetary) variety of interest theorywhich is used in business-cycle analysis.• Mr. Keynes accuses the" orthodox" theory of having overlookedthese monetary influences; hence he must have the U pure" theory ofinterest in mind. ct. his" The Theory of Interest" in Lessons ot MonetaryExperience, New York, 1937, page 147.