Re: General Theory Seminar--the Multiplier

["William B. Ryan" <william_b_ryan@xxxxxxxxx>]

"If...the public are in the habit of spending nine-tenths of their
income on consumption goods, it follows that if entrepreneurs were to
produce consumption goods at a cost more than nine times the cost of
the investment goods they are producing, some part of their output
could not be sold at a price which would cover its cost of
production." [from attachment below]
-----//

This one sentence, it seems to me, contains not one but two
demonstrably false assumptions.

First is the false assumption that not all income expressed
financially is consumed, which I attempted to refute in my post of 7
September http://csf.colorado.edu/forums/pkt/2000/msg01916.html .

Second is the false assumption that the cost of investment goods is
not charged into the cost of consumer goods.  It is in fact charged
against consumer goods through depreciation and amortization.

And thirdly, I might add, Keynes' formulation leaves open the question
as to the source of profit on investment goods.

william_b_ryan@xxxxxxxxxxx



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J. M. Keynes, "The General Theory of Employment," *The Quarterly Journal of Economics,* February 1937. "Incomes are created partly by entrepreneurs producing for investment and partly by their producing for consumption. The amount that is consumed depends on the amount of income thus made up. Hence the amount of consumption goods which it will pay entrepreneurs to produce depends on the amount of investment goods which they are producing. If, for example, the public are in the habit of spending nine-tenths of their income on consumption goods, it follows that if entrepreneurs were to produce consumption goods at a cost more than nine times the cost of the investment goods they are producing, some part of their output could not be sold at a price which would cover its cost of production. For the consumption goods on the market would have cost more than nine-tenths of the aggregate income of the public and would therefore be in excess of the demand for consumption goods, which by hypothesis is only the nine-tenths. Thus entrepreneurs will make a loss until they contract their output of consumption goods down to an amount at which it no longer exceeds nine times their current output of investment goods. "The formula is not, of course, quite so simple as in this illustration. The proportion of their incomes which the public will choose to consume will not be a constant one, and in the most general case other factors are also relevant. But there is always a formula, more or less of this kind, relating the output of consumption goods which it pays to produce to the output of investment goods; and I have given attention to it in my book under the name of the multiplier..." RETURN to INDEX

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