Prosperity and Depression.pdf

Recent Dell,Jopm,ntI in TraJ, eycJ, TheoryPart IIIMr. COLIN CLARK assumes the marginal.propensity to consume to beconstant over considerable periods, and bases this assumption on hisstatistical findings. This assumption is in contradiction to the Keynesiandoctrine according to which the multiplier ought to becomeimaller with rising real income. The justification of Mr. CLARK'S proceduremay be that linearity is a good approximation for the range ofincome changes which occurred during the period covered by his investigations.This is at the same time the only valid justification for usinga money-income rather than a real income multiplier. For if there hadoccurred changes in real income large enough to make the assumptionof a constant income rate of saving untenable, it is pretty clear that, inthe case of divergence between real and money income, precedencemust be given to the former. That is to say, one is more likely (apartfrom transitional disturbances) to find a stable consumption functionwith respect to real rather than to money incomes.!Another question which has caused much difficulty among economistsoutside the group of multiplier addicts is the nature of the "leakages."What happens to the money that leaks out· of circulation at each round?Is it assumed to be all hoarded? ~ The answer IS: not necessarily. Itmust not be forgotten that the multiplier traces incom~ propagation onlythrough one of several possible channels, namely, through successiveconsumer spending. It is not excluded thereby that there are othervehicles of propagation, although most multiplier enthusiasts pay littleor no attention to them. If, for example, money not 'spent on consumptionfound an outlet in investment (as it is sometimes assumed), from1 The opposite assumption, if adhered to a outrance Would imply too muchreliance in the power of what older writers called the "money illusion" andwould involve a denial of what is· now called "the homogeneity postulate", thatis, the postulate "that all supply and demand functions with prices taken as independentvariables and quantity as dependent one, are homogeneous functionsof the zero degree" (see W. Leontief, "The Fundamental Assumption of Mr.Keynes' Monetary Theory of Unemployment" in Quarterly Journal of Econom;cs,November 1936, page 192). Mr. Tobin, in his "Note on the Money WageProblem" (Quarterly Journal of Econom;a, Vol. 55, May 1941), has calledattention to the fact that Me. Keynes assumes a somewhat contradictory behaviourof the same people in their capacity .as wage earners and as savers. "WhereasKeynes' wage-earners are codcerned with· their money wages and .are not at allconscious of the price level, Keynes' consumers keep an eagle eye on the pricelevel and are solely concerned with their real incomes." (page 51 4).2 The leakage through imports will be considered in connection with theforeign trade multiplier in the following section.