Sunday, December 2, 2012

MPC: The outline of our theory

J.M. Keynes, The General Theory, Chapter 3: The Principle of Effective Demand:
The outline of our theory can be expressed as follows. When employment increases aggregate real income is increased. The psychology of the community is such that when aggregate real income is increased aggregate consumption is increased, but not by so much as income. Hence employers would make a loss if the whole of the increased employment were to be devoted to satisfying the increased demand for immediate consumption. Thus, to justify any given amount of employment there must be an amount of current investment sufficient to absorb the excess of total output over what the community chooses to consume when employment is at the given level. For unless there is this amount of investment, the receipts of the entrepreneurs will be less than is required to induce them to offer the given amount of employment. It follows, therefore, that, given what we shall call the community’s propensity to consume, the equilibrium level of employment, i.e. the level at which there is no inducement to employers as a whole either to expand or to contract employment, will depend on the amount of current investment.

"Our" theory. I like that.


Ralph Musgrave said...

Typical Keynsian convoluted nonsense. He’s saying (in an unnecessarily complicated way) that when incomes increase, not all of that income is spent. Thus additional demand or stimumlus has to come from somewhere, and he assumes that must take the form of investment spending.

Well investment spending WOULD SOLVE the problem to which he alludes. But there is no particular reason that extra spending has to take the form of investment spending. It can equally well take the form of say having government just print money and spend it on CONSUMPTION items.

And entrepreneurs on spotting that extra spending will AUTOMATICALLY spend more on investment if that extra consumption spending justifies it. If not, they won’t. They don’t need Keynes, or any other economist, or politicians or bureaucrats to tell them how much to spend on investment.

The Arthurian said...

Unfortunately we will never know if you would have thought of those things, if Keynes hadn't said them first.