Prosperity and Depression.pdf

2.22. Anal)'sis oj' Theories Part I§ 4. THE "MULTIPLIER" AND THE "MARGINAL PROPENSITYTO CONSUME""Three fundamental psychological factors­The "psycho- namely, the psychological propensity to consume,logical" the psychological attitude to liquidity and thedeterfninanls of psychological expectation of future yield fromMr. Kones' capital assets " (which govern, together with" thesystem. given factors ", capital equipment, etc., the marginalefficiency of capital or demand for capital)lconstitutethe skeleton of Mr. KEYNES' theoretical system which" determines the national income and the quantity of employment".Mr. KEYNES is careful to explain that these psychologicalpropensities (together with some non-lJsychological factorssuch as the wage unit and the quantity of money) canonly "sometimes" he regarded as the "ultimate independentvariables " (page 246). He recognises that they are " themselvescomplex and that each is capable of being affected by prospectivechanges in the others"2 and, presumably, a fortiori, by actualchanges in the others. (Thus we have seen that the liquiditypreference is influenced by actual and prospective changes in themarginal efficiency of capital.)As will be illustrated by various examples in the followingpages, we have here a source of frequent misunderstandings.Those who have become accustomed to think in terms of1 General Theory, pages 246 and 247.I Ibid., page 184. In the course of the discussion, Mr. Keynes l~sometimes inclined to forget these limitations of his theory. This hasmisled sorpe econonlists to overlook them altogether. The usefulness ofthe system clearly depends on the degree of independence of thesevariables. If t l 1ey were highly interdependent, they could not be regardedas " ultimate independent variables". This, is, of course, a ditncultywhich any interdependence theory, especially one in macro-economicterms, has to face. It is impossible to build up a theory which explainsnational income and employment in terms of a few complex, strictlyindependent factors without having regard to their internal structure.Such a procedure can yield only rough approximations. ~1r. Keynes iswell aware of these difficulties. See, for example, his remarks, GeneralTheory, page 297.