The Summary of the General Theory

My proposed system has the following as a given:

• the existing skill and quantity of available labour
• the existing quality and quantity of available equipment
• the existing technique
• the degree of competition
• the tastes and habits of the consumer
• the disutility of:
  • different intensifies of labour and
  • the activities of supervision and organisation
• the social structure

These:

• determine the distribution of the national income.
• factors are not constant.
• lead to the dependent variables:

1. The volume of employment
2. The national income measured in hourly-common-wages

These given factors and 2 dependent variables influence the 3 independent variables:

1. The propensity to consume
2. The curve of marginal efficiency of capital
3. the interest rate

The marginal efficiency of capital curve depends:

• partly on the existing quantity of equipment
  • This is one of the given factors
• partly on the state of long-term expectation
  • This cannot be inferred from the given factors.

But there are other elements which the given factors determine so completely that they are necessary effects.

For example, from the given factors we can infer what will be the national income (measured in the hourly-common-wage) for a given level of employment.

• This makes the national income depend on the volume of employment
• It answers: What quantity of effort in production will lead to a level of income? [1]

The aggregate supply functions embody the physical conditions of supply for different types of products.

Those factors:

• let us infer the shape of this aggregate supply.
• give us a supply function of labour (or effort) which tells us at what point the employment function[2] for labour as a whole will cease to be elastic.

The marginal efficiency of capital curve depends:

• partly on the given factors
• partly on the prospective yield of different kinds of capital-assets

The interest rate depends:

• partly on the state of the love for cash
• partly on the quantity of money measured in terms of hourly-common-wages.

Thus our ultimate independent variables* are:

1. The 3 fundamental psychological factors which make up the propensity to consume

• the psychological propensity to consume
• the psychological attitude to liquidity
• the psychological expectation of future yield from capital-assets

2. The hourly-common-wage as determined by the bargains reached between employers and employed – this leads to the marginal efficiency of capital

3. The quantity of money as determined by the action of the central bank – this leads to the interest rate

If we take as given the factors specified above, these variables determine the national income (or dividend) and the quantity of employment.

These given factors and independent variables are quite arbitrary.

We want to discover what determines at any time the national income and the amount of its employment.

Our final task might be to select those variables which can be deliberately controlled or managed by central authority.

Governments are induced to promote the rate new investments to force the supply-price of each type of capital-asset in order to equalize the marginal efficiency of capital, with that of the interest rate.

The rate of new investment is determined by:

• the physical supply in the capital-goods industries
• the state of confidence on the prospective yield
• the attitude to liquidity
• the quantity of money

A change in the rate of investment will cause a change in the rate of consumption. This is because people only widen the gap between their income and consumption if their income is being increased. They narrow the gap if their income is decreased.

Changes in the rate of consumption are, in general, in the same direction (though smaller in amount) as changes in the rate of income.

The marginal propensity to consume gives the relation between the increment of consumption which accompanies a given increment of saving.

The investment multiplier gives the ratio between:

• an increment of investment and
• the corresponding increment of aggregate income, both measured in wage-units.

Finally, if we first assume that the employment multiplier is equal to the investment multiplier, we can infer the increment of employment by applying the multiplier to the increment in the rate of investment brought about by the factors first described.

An increment of employment raises the trend of the love for cash.

This trend has 3 ways which will tend to increase the demand for money:

1. The value of output will rise when employment increases even if the hourly-common-wage and prices are unchanged
2. The hourly-common-wage itself will tend to rise as employment improves,
3. The increase in output will be accompanied by a rise of prices owing to increasing cost in the short period

Thus, the position of equilibrium will be influenced by these and other repercussions.

All the above factors can substantially change without much warning. Hence, the extreme complexity* of the actual course of events.

Nevertheless, these are the factors which are useful and convenient to isolate.