Prosperity and Depression.pdf

AnalYsis of TheoriesPart Iprimarily to depressions oflonger duration; since, however, that isnot always quite clear, we shall simply speak of periods of underemployment.Let us first consider the description, in Mr. KEYNES' terms, ofan equilibrium with less than full employment. Such situationsare described in earlier parts of Mr. KEYNES' book, before allrelationships (especially the liquidity-preference) have beenintroduced, and hence are there presented without all the necessaryqualifications. This fact makes the theory appear morecontradictory to traditional views than it really is. Suppose theliquidity-preference and the quantity of money are given. Hencethe rate of interest is given. If the schedule of marginal efficiencyof capital is given, the amount of investment is determined. Andif the schedule of the marginal propensity to consume (multiplier)is known, the level ofincome and employment is also determined.Let us now consider the interrelation ofthe last two schedulestheliquidity.;;preference schedule, the quantity of money and hencethe interest rate being given and remaining unchanged. In wealthycommunities, the propensity to save (consume) is great (small).Therefore much investment is needed to " fill the gap " betweentotal output and that part of it which the ". community chooses "to consume. There is no guarantee that at full employment thereare enough opportunities to invest (at the given rate of interest)to maintain full employment.! If, as frequently happens, notenough investment is forthcoming, the level of employment andincome must fall. This fall will induce people to save less oftheir income; some may even draw on accumulated resources andconsume more than their income-i.e., may dissave. Likewise," the Government will be liable, willingly or unwillingly, to runinto a budgetary deficit", in order tq provide for relief, etc.,which is equivalent to a strengthening ofthe propensity to consumeof society as a whole. Thus a new equilibrium will be reachedwhen saving has fallen sufficiently for investment to fill thegap between ouput and consumption. It is not difficult tointroduce here the liquidity-preference schedule: when income falls,money is liberated from the transaction sphere, M Ifalls, M 2rises}1 Compare, for example, General Theory, pages 31, 98 and 105.