Prosperity and Depression.pdf

Chap. 3 The Over-investment Theories 35or deflated. l WICKSELL goes on'-1:0 argue that, if the market rateis below the natural rate, prices will rise : if it is above, prices willtend to fall.There is, however, a fallacy in this last pro­Two meanings position, as was pointed out for the first time by theoffhe concept Swedish economist DAVIDSON. 2 In a progressive"natllral rate". economy, 'where the volume of production andtransactions rises, the flow of money must be increasedin order to keep the price level stable. Therefore, therate of interest must be kept at a level low enough to induce a netinflow of money into circulation. The rate which stabilises theprice level is below the rate" at which thedem~d for loancapital just equals the supply of savings ".Making allowance for this discrepancy, we may formulate thetheorem as follows. If the banks lower the interest rate, f1feriJparibus the flow ofmoney incomes will expand or, ifitwas shrinking,1 Inasmuch as money loaned out is supposed to be used for productivepurposes (that is to say, is invested), we can also say that the equilibriumrate is that rate at which savings-voluntary savings as distinct' from"forced savings"-become equal to investment. If the market rate isbelow the equilibrium rate, investments exceed savings : if it is above,investments fall short of savings. Saving, in this 'context, has not to beinterpreted according to the unusual definition adopted by Mr. Keynesin the Treatise on M onev, and later discarded by him in the GeneralTheory of ·Employment, Interest and Money. Mr. Keynes nowemploys a definition of saving according to which aggregate saving isonly another aspect of aggregate investment, both being defined as thedifference between the money valueof outputandexpenditure onconsumption.This is not the sense, however, in which saving is used by theauthors now under consideration. For them, additions to the value ofcurrent output do not immediately constitute disposable income; and itis thus open to them to regard saving as something different from investment.When they say that investment exceeds saving, they mean thatthere is in progress an inflationary increase in the money value of outputwhich is not immediately translated into increased incoules. When theysay that investment falls short of current saving, they mean that thereis in progress a process of hoarding, a deflationary decrease in the moneyvalue of output. Which terminology is the more convenient-whetherit is better to regard saving as necessarily equal to investment or not-isat present still an open question which will he discussed at some lengthin Chapter 8, below.• Cf. Brinley Thomas, "TheMonetary Doctrines ofProfessor Davidson "in Economic Journal, Vol. 45, 1935, pages, 36 et seq., and F. A. Hayek,Monetary Theory and the Trade Cycle, passim.