Prosperity and Depression.pdf

AnalYsis of TheoriesPart IMoreover, with respect to puhJic expenditure,Govern1JJent the distinction between consumption and investconsumptionment is in many cases very arbitrary. Expenditureand connected with the construction of battleships,invest/Dent. river-dams and the like will be classified asinvestment. Dole payments to unemployed andexpenditure for war veterans' bonus will becounted as consumptionexpenditure and, if the Government borrows to meet this expenditure,as dissaving. But how are we to classify money paid tounenlployed workers to perform" publicworks" ofvery doubtfulvalue? Suppose these works consist of digging holes in theground and filling them up again. Or suppose a road is builtat a costwhich far exceeds its value to the community. 1 Evidently,the classification, and still more the estimate of the value ofinvestment involved in such cases, is highly arbitrary and conventional.SBut the magnitude of the multiplier will be influencedby such arbitrary decisions. The fewer are the doubtful casesregarded as investment and the lower is the investment vaIueassumed in each case, the greater will be the multiplier-that is, themarginal propensity to consume ofsociety as a whole. Hence thevalue of the latter will pro tanto depend upon these arbitraryclassifications and not on the· psychological propensities of theconsumer..Fortunately, in order to form an opinion on the probablesecondary effects of public expenditure, classification as consumptionor investment is generally of minor importance.What matters are the factors stressed by traditional theory : themethods used by the Government in raising the money, therapidity with which the successive recipients spend it, the mannerof spending, etc. In this latter respect, individual propensitieswith regard to saving and consumption come into the picture, but1 Compare, for instance, this case with another one where the sameroad is builtwith less labour and at a much lower cost, andtlfe superfluousworkers receive a dole. Part of the total money spent ~is investmentand the other part consumption, whilst, in the case mentioned in thetext, all is counted as investment.t These problems are discussed at great length in various 'contributionsto Studies in Income and Wealth, Vol. I and It (ed. by National Bureauof Economic Research, New York, 1937 and 1938).