The General Theory of Employment, Interest, and Money

Marginal Propensity to Consume and the Multiplier

• Analysis of single years in isolation yields erratic results regarding the multiplier effect.
• When grouped in pairs, the multiplier in the United States during the period studied appears to have been less than 3, stabilizing around 2.5.
• This suggests a marginal propensity to consume between 60% and 70% (0.6 - 0.7).
  • This figure is plausible during boom periods.
  • Surprisingly low for economic slumps.
• The extreme financial conservatism of corporate finance in the U.S. may explain the low marginal propensity to consume during the slump.
  • Even when investment falls due to a failure to undertake repairs and replacements, financial provisions made for such wastage can prevent the rise in the marginal propensity to consume that would otherwise occur.
  • This factor might have aggravated the recent slump in the United States.
• The statistics might overstate the decline in investment, which allegedly fell by more than 75% in 1932 compared to 1929, while net "capital formation" declined by more than 95%.
  • A moderate change in these estimates could substantially alter the multiplier.

Involuntary Unemployment and Wasteful Loan Expenditure

• When involuntary unemployment exists, the marginal disutility of labor is less than the utility of the marginal product.

  • For the long-term unemployed, labor may even have a positive utility.

• "Wasteful" loan expenditure may enrich the community on balance in situations of involuntary unemployment.

• The term "loan expenditure" includes public investment financed by borrowing and other current public expenditure financed similarly.

  • The latter should be considered negative saving, but official action is not driven by the same psychological motives as private saving.
  • It's a convenient expression for net borrowings of public authorities, whether on capital account or to meet a budgetary deficit.
  • One form of loan expenditure increases investment, while the other increases the propensity to consume.

• Examples of wasteful loan expenditure:

  • Pyramid-building.
  • Earthquakes.
  • Wars.
  • These can increase wealth if classical economics prevent better alternatives.

• Common sense often prefers wholly wasteful forms of loan expenditure to partly wasteful forms because the latter are judged on strict "business" principles.

  • Unemployment relief financed by loans is more accepted than financing improvements at a charge below the current rate of interest.
  • Digging holes in the ground for gold-mining is the most acceptable solution, despite adding nothing to real wealth.

• Hypothetical scenario:

  • The Treasury fills old bottles with banknotes, buries them in disused coal mines, fills the mines with rubbish, and allows private enterprise to dig them up.
  • This would eliminate unemployment and increase real income and capital wealth.
  • Building houses would be more sensible, but the hypothetical is better than nothing if political and practical difficulties exist.

Gold-Mining and Its Significance

• Analogy between the hypothetical scenario and gold mines in the real world.

  • When gold is readily available, the world's real wealth increases rapidly.
  • When gold is scarce, wealth stagnates or declines.
  • Gold mines are valuable to civilization.
  • Wars and gold-mining have been justified as forms of large-scale loan expenditure and have played a part in progress.

• The tendency for the price of gold to rise in terms of labor and materials during slumps aids recovery by increasing the depth at which gold-digging pays and lowering the minimum grade of ore that is payable.

• Gold-mining is a practical form of investment if increasing employment by increasing useful wealth is not possible.

  • It is carried on without close regard to the ruling rate of interest due to its gambling attractions.
  • The increased stock of gold does not diminish its marginal utility like houses, where each new house lessens the attraction of further similar investment.
  • A check can only come through a rise of the wage-unit in terms of gold, which is unlikely until employment improves.
  • There is no subsequent reverse effect on account of provision for user and supplementary costs, as with less durable forms of wealth.

Historical Examples and Critique

• Ancient Egypt was fortunate to have pyramid-building and the search for precious metals.
  • These activities did not suffer from diminishing returns since their fruits were not consumed.
• The Middle Ages built cathedrals and sang dirges.
• Two pyramids or masses for the dead are better than one, but not so two railways from London to York.
• Society is too prudent and takes careful thought before adding to the "financial" burdens of posterity by building houses.
• Unemployment is accepted as an inevitable result of applying maxims that enrich individuals by enabling them to accumulate claims to enjoyment without a definite time to exercise them.