keynes respuesta a viner

8/13/2019 Keynes Respuesta a Viner

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The General Theory of EmploymentAuthor(s): J. M. KeynesSource: The Quarterly Journal of Economics, Vol. 51, No. 2 (Feb., 1937), pp. 209-223Published by: Oxford University PressStable URL: http://www.jstor.org/stable/1882087.

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THEQUARTERLY JOURNALOFE ONOM S

FEBRUARY, 1937THE GENERAL THEORY OF EMPLOYMENT

SUMMARY1. Commentson the four discussions in the previous issue of pointsin the GeneralTheory, 209. - I. Certaindefinitepoints on which thewriter diverges from previous theories, 212. -The theory of interestrestated, 215. - Uncertainties and fluctuations of investment, 217. -III. Demand and Supply for output as a whole, 219. - The output ofcapital goods and of consumption,221.

II am much indebted to the Editors of the QuarterlyJournal for the four contributionsrelatingto my GeneralTheoryof Employment,InterestandMoneywhichappearedin the issue for November, 1936. They contain detailedcriticisms,muchof whichI acceptand fromwhichI hopetobenefit. There is nothing in ProfessorTaussig's commentfromwhichI disagree. Mr. Leontiefis right, I think,in thedistinctionhe drawsbetween my attitude and that of the"orthodox" theory to what he calls the "homogeneitypostulate." I should have thought,however,that therewasabundantevidence fromexperience o contradict his postu-late; and that, in any case, it is for those who makea highlyspecialassumption o justify it, ratherthan forone whodis-penses with it, to prove a generalnegative. I would alsosuggest that his idea might be applied more fruitfullyandwith greater heoreticalprecisionn connectionwith the partplayedby the quantity of moneyin determininghe rate ofinterest.1Forit is here,I think, that the homogeneitypostu-late primarilyentersinto the orthodox heoreticalscheme.

1. Cf. my paper on "The Theory of the Rate of Interest" to appearin the volume of Essays in honor of Irving Fisher.209

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210 QUARTERLY JOURNAL OF ECONOMICSMy differences,such as they are, from Mr. Robertsonchieflyarise out of my convictionthat both he and I differmorefundamentallyrom ourpredecessorshan his piety willallow. With many of his points I agree,without, however,being conscious n several instancesof having said (or, any-how, meant) anything different. I am surprisedhe shouldthink that those who make sport with the velocity of thecirculationof money have muchin commonwith the theoryof the multiplier. I fully agreewith the importantpoint he

makes (pp. 180-183) that the increaseddemandfor moneyresultingfrom an increase n activity has a backwashwhichtends to raise the rate of interest; and this is, indeed, asignificantelementin my theory of why booms carrywithinthem the seeds of their own destruction. But this is, essen-tially, a partof the liquiditytheoryof the rateof interest,andnot of the "orthodox" heory. Wherehe states (p. 183) thatmy theory must be regarded "not as a refutation of acommon-senseaccount of events in terms of supply anddemandfor loanablefunds, but as an alternative versionofit," I must ask, before agreeing, or at least one reference owherethis common-sense ccountis to be found.There remainsthe most importantof the four comments,namely,ProfessorViner's. In regardto his criticismsof mydefinitionand treatmentof involuntaryunemployment, amready to agree that this partof my bookis particularlyopento criticism. I already feel myself in a position to makeimprovements,and I hope that, when I do so, ProfessorViner will feel more content, especially as I do not thinkthat there is anythingfundamentalbetweenus here. In thecaseof his secondsection,however,entitled "The Propensityto Hoard"I am preparedto debate his points. There arepassageswhich suggest that ProfessorVineris thinkingtoomuch in the more familiarterms of the quantity of moneyactually hoarded,and that he overlooks he emphasisI seekto place on the rate of interestas being the inducementnotto hoard. It is preciselybecause the facilities for hoardingare strictly limitedthat liquiditypreferencemainly operatesby increasing he rate of interest. I cannot agree that "in



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THE GENERAL THEORY OF EMPLOYMENT 211modernmonetary heory the propensity o hoard s generallydealt with,with resultswhich n kind aresubstantially denti-cal with Keynes', as a factor operating to reduce the'velocity' of money." On the contrary,I am convinced hatthe monetary heoristswhotry to dealwith it in this way arealtogetheron the wrongtrack.2Again, whenProfessorVinerpoints out that most peopleinvest their savingsat the bestrate of interestthey can get and asksfor statistics to justifythe importanceI attach to liquidity-preference, e is over-looking the point that it is the marginal potential hoarderwho has to be satisfiedby the rate of interest,so as to bringthe desire for actual hoardswithin the narrow imits of thecash available for hoarding. When, as happensin a crisis,liquidity-preferences re sharply raised,this shows tselfnotso muchin increasedhoards forthereis little, if any, morecashwhich s hoardablehantherewasbefore as in a sharprise in the rate of interest, i.e. securitiesfall in price untilthose,whowould nowliketo get liquidif they could do so atthe previousprice,arepersuaded o giveup the idea as beingno longerpracticableon reasonable erms. A risein the rateof interestis a meansalternativeto an increaseof hoardsforsatisfyingan increased iquidity-preference.Nor is my argu-ment affectedby the admitted fact that different types ofassetssatisfythe desirefor liquidityin differentdegrees.Themischiefis done when the rate of interest corresponding othe degreeof liquidity of a given asset leads to a market-capitalizationof that asset which is less than its cost ofproduction.Thereare other criticismsalsowhichI should be ready todebate. But tho I might be ableto justifymy own language,I am anxiousnot to be led, throughdoing so in too muchdetail, to overlookthe substantialpoints whichmay, never-theless,underliethe reactionswhichmy treatmenthas pro-ducedin the minds of my critics. I am more attached to thecomparativelysimple fundamental deas which underliemytheorythan to the particularorms n whichI have embodiedthem, and I have no desirethat the latter should be crystal-

2. See below.



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212 QUARTERLY JOURNAL OF ECONOMICSlized at the present stage of the debate. If the simple basicideas can become familiar and acceptable, time and experi-ence and the collaboration of a number of minds will discoverthe best way of expressing them. I would, therefore, prefer tooccupy such further space, as the Editor of this Journal canallow me, in trying to reexpress some of these ideas, than indetailed controversy which might prove barren. And I believethat I shall effect this best, even tho this may seem to some asplunging straight off into the controversial mood from whichI purport to seek escape, if I put what I have to say in theshape of a discussion as to certain definite points where I seemto myself to be most clearly departing from previous theories.

IIIt is generally recognized that the Ricardian analysis was

concerned with what we now call long-period equilibrium.Marshall's contribution mainly consisted in grafting on tothis the marginal principle and the principle of substitution,together with some discussion of the passage from one positionof long-period equilibrium to another. But he assumed, asRicardo did, that the amounts of the factors of production inuse were given and that the problem was to determine theway in which they would be used and their relative rewards.Edgeworth and Professor Pigou and other later and con-temporary writers have embroidered and improved thistheory by considering how different peculiarities in the shapesof the supply functions of the factors of production wouldaffect matters, what will happen in conditions of monopolyand imperfect competition, how far social and individualadvantage coincide, what are the special problems of exchangein an open system and the like. But these more recent writerslike their predecessors were still dealing with a system inwhich the amount of the factors employed was given and theother relevant facts were known more or less for certain.This does not mean that they were dealing with a system inwhich change was ruled out, or even one in which the disap-pointment of expectation was ruled out. But at any giventime facts and expectations were assumed to be given in



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THE GENERAL THEORY OF EMPLOYMENT 213a definite and calculableform; and risks, of which, thoadmitted, not much notice was taken, were supposedto becapable of an exact actuarialcomputation.The calculusofprobability,tho mention of it was kept in the background,was supposedto be capable of reducinguncertaintyto thesame calculablestatus as that of certaintyitself; just as inthe Benthamitecalculusof painsand pleasuresor of advan-tage and disadvantage,by whichthe Benthamitephilosophyassumed men to be influenced in their general ethicalbehavior.Actually, however,we have, as a rule, only the vaguestidea of any but the most direct consequencesof our acts.Sometimeswe are not much concernedwith their remoterconsequences, ven tho time and chancemay make much ofthem. But sometimeswe areintenselyconcernedwith them,moreso, occasionally,han withthe immediateconsequences.Now of all human activities which are affected by thisremoter preoccupation,it happens that one of the mostimportant is economicin character,namely, Wealth. Thewhole object of the accumulationof Wealth is to produceresults,or potentialresults, at a comparativelydistant, andsometimesat an indefinitely istant,date. Thusthe fact thatourknowledgeof the futureis fluctuating,vague and uncer-tain, rendersWealth a peculiarlyunsuitablesubjectfor themethodsof the classicaleconomic heory. This theorymightwork very well in a world in which economicgoods werenecessarily consumedwithin a short interval of their beingproduced.But it requires, suggest,considerable mendmentif it is to be appliedto a worldin whichthe accumulationofwealth for an indefinitelypostponedfuture is an importantfactor;andthe greater he proportionate artplayedby suchwealth-accumulationhe more essential does such amend-ment become.By "uncertain"knowledge, et me explain,I do not meanmerelyto distinguishwhat is knownfor certainfromwhat isonly probable. The game of rouletteis not subject, in thissense, to uncertainty;nor is the prospectof a Victorybondbeingdrawn. Or,again,the expectationof lifeis onlyslightly



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214 QUARTERLY JOURNAL OF ECONOMICSuncertain. Even the weatheris only moderatelyuncertain.The sensein whichI am usingthe termis that in whichtheprospectof a Europeanwaris uncertain,orthe priceof copperand the rate of interest twenty years hence, or the obsoles-cence of a new invention,or the positionof private wealth-ownersin the social system in 1970. About these mattersthere is no scientificbasis on which to form any calculableprobabilitywhatever. We simply do not know. Neverthe-less, the necessity for action and for decisioncompels us aspracticalmen to do our best to overlookthis awkward actand to behave exactly as we should if we had behind us agoodBenthamitecalculationof a seriesof prospectiveadvan-tages and disadvantages,each multipliedby its appropriateprobability,waiting to be summed.How do we managein such circumstanceso behavein amannerwhichsavesourfacesas rational,economicmen? Wehavedevisedforthe purposea varietyof techniques,of whichmuchthe most importantare the threefollowing:(1) Weassume hat the present s a muchmoreserviceableguide to the future than a candid examination of pastexperiencewould show it to have been hitherto. In otherwordswe largely gnorethe prospectof futurechangesaboutthe actual characterof which we know nothing.

(2) We assume that the existing state of opinion asexpressedin prices and the characterof existing output isbased on a correctsummingup of futureprospects, o that wecan accept it as such unless and until somethingnew andrelevantcomesinto the picture.(3) Knowing that our own individualjudgmentis worth-less, we endeavorto fall back on the judgment of the restof the worldwhich is perhapsbetter informed. That is, weendeavor o conformwith the behaviorof the majorityor theaverage. The psychologyof a society of individualseach ofwhom s endeavoring o copythe others eads to whatwemaystrictly term a conventionaljudgment.Now a practicaltheory of the futurebasedon these threeprincipleshas certainmarkedcharacteristics.In particular,beingbasedon so flimsy a foundation, t is subjectto sudden



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THE GENERAL THEORY OF EMPLOYMENT 215and violent changes. The practiceof calmness and immo-bility, of certainty andsecurity,suddenlybreaksdown. Newfearsandhopeswill, withoutwarning, ake chargeof humanconduct. The forces of disillusionmay suddenly impose anew conventionalbasis of valuation. All these pretty, politetechniques, made for a well-panelledBoard Room and anicely regulatedmarket,are liable to collapse. At all timesthe vague panic fears and equally vague and unreasonedhopes arenot reallylulled,and lie but a little way belowthesurface.Perhapsthe reader feels that this general,philosophicaldisquisitionon the behaviorof mankind s somewhatremotefrom the economic heory underdiscussion. But I thinknot.Tho this is howwe behave in the marketplace,the theory wedevise in the study of how we behave in the marketplaceshould not itself submit to market-placedols. I accusetheclassicaleconomictheory of beingitself one of these pretty,polite techniqueswhich tries to deal with the present byabstracting romthe fact that we knowvery little about thefuture.I daresay that a classicaleconomist wouldreadily admitthis. But, even so, I think he has overlookedthe precisenature of the differencewhichhis abstractionmakesbetweentheory and practice,and the characterof the fallaciesintowhichhe is likely to be led.This is particularly he case in histreatmentof MoneyandInterest. Andourfirststep must be to elucidatemoreclearlythe functions of Money.Money, it is well known, serves two principalpurposes.By actingas a money of account t facilitatesexchangeswith-out its beingnecessary hat it shouldeveritself come nto thepicture as a substantiveobject. In this respectit is a con-veniencewhichis devoidof significanceor realinfluence. Inthe secondplace, it is a store of wealth. So we are told, with-out a smile on the face. But in the world of the classicaleconomy,what an insane use to which to put it For it is arecognized haracteristic f money as a store of wealththat itis barren;whereas practicallyevery other form of storing



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216 QUARTERLY JOURNAL OF ECONOMICSwealth yields some interest or profit. Why should anyoneoutside a lunatic asylum wish to use money as a store ofwealth?Because, partly on reasonable and partly on instinctivegrounds, our desire to hold Money as a store of wealth is abarometer of the degree of our distrust of our own calculationsand conventions concerning the future. Even tho this feelingabout Money is itself conventional or instinctive, it operates,so to speak, at a deeper level of our motivation. It takescharge at the moments when the higher, more precarious con-ventions have weakened. The possession of actual moneylulls our disquietude; and the premium which we require tomake us part with money is the measure of the degree of ourdisquietude.The significance of this characteristic of money has usuallybeen overlooked; and in so far as it has been noticed, theessential nature of the phenomenon has been misdescribed.For what has attracted attention has been the quantity ofmoney which has been hoarded; and importance has beenattached to this because it has been supposed to have a directproportionate effect on the price-level through affecting thevelocity of circulation. But the quantity of hoards can onlybe altered either if the total quantity of money is changed orif the quantity of current money-income (I speak broadly) ischanged; whereas fluctuations in the degree of confidence arecapable ofhaving quite a differenteffect, namely, in modifyingnot the amount that is actually hoarded, but the amount ofthe premium which has to be offered to induce people not tohoard. And changes in the propensity to hoard, or in thestate of liquidity-preference as I have called it, primarilyaffect, not prices, but the rate of interest; any effect on pricesbeing produced by repercussion as an ultimate consequenceof a change in the rate of interest.This, expressed in a very general way, is my theory of therate of interest. The rate of interest obviously measures -just as the books on arithmetic say it does - the premiumwhich has to be offered to induce people to hold their wealthin some form other than hoarded money. The quantity of



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THE GENERAL THEORY OF EMPLOYMENT 217money and the amount of it requiredn the active circulationfor the transactionof currentbusiness (mainlydependingonthe level of money-income)determinehowmuchis availablefor inactive balances,i.e. for hoards. The rate of interest isthe factorwhichadjustsat the margin he demand orhoardsto the supply of hoards.Now let us proceed o the next stage ofthe argument. Theownerof wealth,whohasbeeninducednot to holdhiswealthin the shape of hoarded money, still has two alternativesbetween which to choose. He can lend his money at thecurrentrate of money-interestor he canpurchasesome kindof capital-asset. Clearly n equilibriumhese two alternativesmust offer an equal advantage to the marginal nvestorineach of them. This is broughtaboutby shifts in the money-pricesof capital-assetsrelative to the pricesof money-loans.The pricesof capital-assetsmoveuntil, having regard o theirprospectiveyields and accountbeing taken of all those ele-mentsof doubtand uncertainty, nterestedand disinterestedadvice, fashion, conventionand what else you will whichaffectthe mind of the investor,they offer an equalapparentadvantageto the marginal nvestor who is waveringbetweenone kind of investmentand another.This, then, is the firstrepercussion f the rate of interest,as fixed by the quantity of money and the propensitytohoard, namely,on the pricesof capital-assets. This doesnotmean,of course,that the rate of interestis the only fluctuat-ing influenceontheseprices. Opinionsas to theirprospectiveyield are themselvessubject to sharpfluctuations,preciselyfor the reasonalready given, namely, the flimsinessof thebasis ofknowledgeon whichthey depend. It is theseopinionstaken in conjunctionwith the rate of interestwhich fix theirprice.Now forstagethree. Capital-assets recapable, n general,of being newly produced. The scale on whichthey are pro-duceddepends,of course,on the relationbetween their costsof productionand the prices which they are expected torealize n the market. Thusif the level of the rateof interesttaken in conjunctionwith opinionsabout their prospective



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218 QUARTERLY JOURNAL OF ECONOMICSyield raise the prices of capital-assets, the volume of currentinvestment (meaning by this the value of the output of newlyproduced capital-assets) will be increased; while if, on theother hand, these influences reduce the prices of capital-assets,the volume of current investment will be diminished.It is not surprising that the volume of investment, thusdetermined, should fluctuate widely from time to time. Forit depends on two sets of judgments about the future, neitherof which rests on an adequate or secure foundation - on thepropensity to hoard and on opinions of the future yield ofcapital-assets. Nor is there any reason to suppose that thefluctuations in one of these factors will tend to offset thefluctuations in the other. When a more pessimistic view istaken about future yields, that is no reason why there shouldbe a diminished propensity to hoard. Indeed, the conditionswhich aggravate the one factor tend, as a rule, to aggravatethe other. For the same circumstances which lead to pessi-mistic views about future yields are apt to increase the pro-pensity to hoard. The only element of self-righting in thesystem arises at a much later stage and in an uncertain degree.If a decline in investment leads to a decline in output as awhole, this may result (for more reasons than one) in a reduc-tion of the amount of money required for the active circu-lation, which will release a larger quantity of money for theinactive circulation, which will satisfy the propensity tohoard at a lower level of the rate of interest, which will raisethe prices of capital-assets, which will increase the scale ofinvestment, which will restore in some measure the level ofoutput as a whole.This completes the first chapter of the argument, namely,the liability of the scale of investment to fluctuate for reasonsquite distinct (a) from those which determine the propensityof the individual to save out of a given income and (b) fromthose physical conditions of technical capacity to aid pro-duction which have usually been supposed hitherto to be thechief influence governing the marginal efficiency of capital.If, on the other hand, our knowledge of the future wascalculable and not subject to sudden changes, it might be



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THE GENERAL THEORY OF EMPLOYMENT 219justifiableto assumethat the liquidity-preference urvewasboth stable and very inelastic. In this case a small declinein money-incomewould lead to a large fall in the rate ofinterest, probablysufficient o raiseoutput and employmentto the full.3 In theseconditionswemight reasonably upposethat the whole of the availableresourceswould normallybeemployed; and the conditions required by the orthodoxtheory wouldbe satisfied.

IIIMy next differenceromthe traditional heoryconcernstsapparentconvictionthat there is no necessityto work out atheoryof the demandand supplyof outputas a whole. Willa fluctuation in investment, arising for the reasons justdescribed, have any effect on the demand for output as awhole,and consequentlyon the scale of output andemploy-ment? What answercan the traditional heorymaketo thisquestion? I believe that it makes no answerat all, neverhaving given the matter a single thought; the theory ofeffectivedemand,that is the demandfor output as a whole,havingbeen entirelyneglected ormorethan a hundredyears.My own answerto this question nvolves fresh considera-tions. I say that effectivedemand s madeup of two items -investment-expendituredetermined in the manner justexplainedand consumption-expenditure.Now what governsthe amountof consumption-expenditure?t dependsmainlyon the level of income. People'spropensityto spend (as Icallit) is influencedby many factors suchas the distributionof income, their normal attitude to the future and- thoprobably n a minordegree by the rate of interest. But inthe main the prevailingpsychological aw seems to be thatwhen aggregate ncomeincreases,consumption-expenditurewill also increasebut to a somewhat esserextent. This is avery obvious conclusion. It simplyamountsto saying that

3. When Professor Viner charges me with assigning to liquidity-preference"a grossly exaggerated importance,"he must mean that Iexaggerateits instability and its elasticity. But if he is right, a smalldecline in money-incomewould lead, as stated above, to a large fall inthe rate of interest. I claim that experience ndicates the contrary.



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220 QUARTERLY JOURNAL OF ECONOMICSan increasein incomewill be dividedin some proportionoranother between spendingand saving, and that when ourincome is increasedt is extremelyunlikelythat this will havethe effect of making us either spend less or save less thanbefore. This psychologicalaw was of the utmost importancein the developmentof my own thought, and it is, I think,absolutelyfundamental o the theoryof effectivedemandasset forthin my book. But few criticsor commentators o farhave paid particularattention to it.

There follows from this extremely obvious principle animportant,yet unfamiliar,conclusion. Incomesare createdpartlyby entrepreneurs roducing or investmentand partlyby their producing orconsumption.The amountthat is con-sumed depends on the amount of income thus made up.Hence the amount of consumption-goodswhich it will payentrepreneurso producedependson the amountof invest-ment-goodswhich they are producing. If, for example,thepublicarein the habitof spendingnine-tenthsof theirincomeon consumption-goods,t follows that if entrepreneurswereto produceconsumption-goodst a cost morethanninetimesthe cost of the investment-goodsthey are producing,somepartof theiroutput could not be sold at a pricewhichwouldcoverits cost of production. For the consumption-goodsnthe market would have cost more than nine-tenths of theaggregateincome of the public and would therefore be inexcess of the demand for consumption-goods,which byhypothesisis only the nine-tenths. Thus entrepreneurswillmake a loss until they contracttheir outputof consumption-goodsdown to an amountat whichit no longerexceedsninetimes their currentoutput of investmentgoods.

The formula is not, of course, quite so simple as in thisillustration. Theproportion f theirincomeswhichthe publicwill chooseto consumewill not be a constantone, andin themostgeneralcase other factors are also relevant. But thereisalwaysa formula,more or less of this kind, relatingthe out-put of consumption-goodswhich it pays to produceto theoutputof investment-goods;and I have given attentionto itin my bookunder the nameof the Multiplier. The fact that



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THE GENERAL THEORY OF EMPLOYMENT 221an increasein consumption s apt in itself to stimulatethisfurther investment merely fortifiesthe argument.That the level of output of consumption-goods,which isprofitable o the entrepreneur, houldbe relatedby a formulaof this kind to the output of investment-goodsdepends onassumptionsof a simple and obvious character. The conclu-sion appears to me to be quite beyond dispute. Yet theconsequenceswhich follow from it are at the same timeunfamiliarand of the greatest possible importance.

The theory can be summed up by saying that, given thepsychologyof the public,the levelof outputandemploymentas a whole dependson the amountof investment. I put it inthis way, not becausethis is the only factor on whichaggre-gate output depends,but because it is usual in a complexsystem to regardas the causa causans that factor which ismost prone to sudden and wide fluctuation. More compre-hensively, aggregate output depends on the propensitytohoard,on the policy of the monetary authorityas it affectsthe quantity of money,on the state of confidence oncerningthe prospectiveyield of capital-assets,on the propensitytospend and on the social factorswhich influencethe level ofthe money-wage. But of these several factors it is thosewhich determine the rate of investment which are mostunreliable, ince it is they which are influencedby our viewsof the futureaboutwhich we know so little.This that I offer is, therefore,a theory of why output andemploymentare so liable to fluctuation. It does not offeraready-made emedyas to how to avoid these fluctuationsandto maintain output at a steady optimum level. But it is,properly speaking, a Theory of Employment because itexplains why, in any given circumstances,employment iswhat it is. NaturallyI am interestednot only in the diag-nosis, but also in the cure; and many pages of my bookaredevotedto the latter. But I consider hat my suggestions ora cure, which, avowedly,arenot workedout completely,areon a differentplane from the diagnosis. They arenot meantto be definitive; they are subject to all sorts of specialassumptions and are necessarilyrelated to the particular



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222 QUARTERLY JOURNAL OF ECONOMICSconditions of the time. But my main reasonsfor departingfrom the traditional heory go much deeperthan this. Theyare of a highly generalcharacterand are meant to be defin-itive.I sum up, therefore, he maingroundsof my departureasfollows:(1) The orthodoxtheory assumes that we have a knowl-edge of the future of a kind quite different rom that whichwe actually possess. This false rationalization ollows thelines of the Benthamitecalculus. The hypothesis of a cal-culablefuture leads to a wrong interpretationof the prin-ciples of behaviorwhich the need for action compelsus toadopt, and to an underestimation f the concealed actorsofutter doubt, precariousness,hope and fear. The result hasbeena mistakentheoryof the rate of interest. It is truethatthe necessity of equalizing the advantages of the choicebetween owning loans and assets requires that the rate ofinterestshould be equal to the marginalefficiencyof capital.But this does not tell us at what level the equality will beeffective. The orthodox theory regardsthe marginaleffi-ciency of capital as setting the pace. But the marginalefficiencyof capital depends on the price of capital-assets;andsincethis pricedetermines he rate of newinvestment, tis consistent in equilibriumwith only one given level ofmoney-income. Thus the marginalefficiencyof capitalis notdetermined,unlessthe level of money-income s given. In asystem in which the level of money-incomeis capable offluctuating, the orthodoxtheory is one equation short ofwhat is required o give a solution. Undoubtedlythe reasonwhy the orthodox system has failed to discover this dis-crepancy is because it has always tacitly assumed thatincome is given, namely, at the level correspondingo theemploymentof all the availableresources. In otherwords tis tacitly assumingthat the monetarypolicy is such as tomaintainthe rateof interest at that levelwhich is compatiblewith full employment. It is, therefore, ncapableof dealingwiththe generalcasewhereemployment s liable to fluctuate.Thus, instead of the marginalefficiencyof capital determin-



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THE GENERAL THEORY OF EMPLOYMENT 223ing the rate of interest, it is truer (tho not a full statementofthe case)to say that it is the rate of interestwhichdeterminesthe marginalefficiencyof capital.(2) The orthodox heorywould by now have discoveredthe above defect, if it had not ignoredthe need for a theoryof the supply and demand of output as a whole. I doubt ifmanymoderneconomistsreallyacceptSay'sLaw that supplycreates ts own demand. But they have not beenawarethatthey were tacitly assuming it. Thus the psychological awunderlying the Multiplier has escaped notice. It has notbeen observedthat the amountof consumption-goods hichit pays entrepreneurso produce s a functionof the amountof investment-goodswhich it pays them to produce. Theexplanation s to be found,I suppose, n the tacit assumptionthat every individual spendsthe whole of his incomeeitheron consumptionor on buying, directly or indirectly,newlyproduced capital goods. But, here again, whilst the oldereconomistsexpressly believed this, I doubt if many con-temporaryeconomists really do believe it. They have dis-carded these older ideas without becoming aware of theconsequences.

J. M. KEYNES.KING'S COLLEGE, CAMBRIDGE

keynes respuesta a viner

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