Prosperity and Depression.pdf

Chap. 8 H.ece/it DiJcussiofu on the TrJde C;ycJe 2. 1 5volume ofemployment, then our outlook on the mechanism of theeconomic system will be profoundly changed. A decreasedreadiness to spend will be looked on in a quite different light if,instead of being regarded as a factor which will, ceteris paribus,increase investment, it is seen as a factor which will, ceteris paribus,diminish employment." 1Some misunderstanding seenlS to have arisen in this connectionfroln different interpretations of the ceteris-paribus clause. Theclassical writers, when they are not dealing with money and thebusiness cycles, are in the habit of taking total monetary outlay asconstant; it is included in the cetera that remain the same. Thena decrease in one division (consumption spending) implies anincrease in. the other (investment). Assuming the marginalefficiency of capital to be constant, this implies a fall in the interestrate. Mr. KEYNES, on the other hand, includes liquidity preferenceamong the other things- that remain unchanged; then, since M hasremained unchanged, the rate of interest cannot fall. 2Now the loanable-fund theorists would not deny that this mighthappen, but they would describe it differently: people may hoardthe money which they fail to spend. In l\fr. KEYNES' theory, thishas to be described as a rise in liquidity preference proper; 8 demandfor money for "speculative purposes", M 2, has risen. Thisimplies a decrease in M , 1which is connected with the fall in activity.Thus total demand for money and the quantity ofmoney remainingunchanged, the rate ofinterest remains unchanged too.If, however, the producers of consumers' goods who experiencea decrease in demand try to maintain activity by selling securities,the rate ofinterest will rise, and these sales will have to be construedas an increase in their liquidity preference.There may be a difficulty in the timing of the processes; it is,however, clearly possible to conceive of a case where people spend1 General Theory, page 185. This passage conveys the incorrectimpression that, in Mr. Keynes' opinion. ::tn increase in investment doesnot tend to raise the interest rate.2 This point was also made by T. W. Hutchinson: The Sign'ificance andBasic Postulates of Economic Th~')'YY, London, 1938, pages 44 and 45­a Compare the definition of this concept given above on page 210.