Investment, saving, and employment
Introduction
The modern economic system is unable to provide permanent employment for all those who wish to work. This is generally regarded as one of the system’s principal weaknesses, and remedies for it are constantly being proposed. Diagnosis must, however, precede prescription, and the following pages seek to assist the reader in taking the first steps towards understanding the illness.
The reader may perhaps ask: “If it is indeed possible to understand how economic life can be made to flourish, why do we not immediately set about ensuring that it does?” This is truly a difficult question. Economic life places us in a situation of continuous choice, where no single policy is best for everyone. There are always those who regard the illness itself as preferable to the possible treatments, so remedies remain contested even when agreement on the diagnosis is reached. The first chapter therefore aims to guide the reader towards understanding the problem itself, without yet telling them what should be done about it.
In an economic system based on private enterprise, the decisions of employers — primarily industrial entrepreneurs — unambiguously and clearly determine the number of employment opportunities available to the working population, while entrepreneurs are themselves subject to influences that affect their decisions in one way or another, and each person’s decisions in turn affect the decisions of others. Since there is no centralised control or plan of action, the actual events of economic life are the consequence of countless independent decisions. The best way for each individual to pursue their own interests only rarely coincides with what is judged to be the best way of advancing the interests of society as a whole. If our economic system sometimes seems incomprehensible or even sick — for example when foodstuffs are destroyed while people walk around hungry at the same time — it should be remembered that it is not in the least surprising that the interaction of free individual decisions frequently leads to irrational, clumsy, and confusing outcomes.
In this system, goods and services are produced because they can be sold at a profit. The total output of goods and services to be produced therefore depends on the demand for them. “Demand” means monetary expenditure, not desire or need. Even if a person’s need for food, clothing, and entertainment were unlimited, they cannot make producing these things profitable for anyone unless they have money to pay for them. Need therefore does not constitute “demand” unless it is accompanied at the same time by monetary expenditure. As we know all too well, it frequently happens in our economic system that at the same time as productive resources lie idle — men without work, machines standing dormant, land out of cultivation — there is unlimited need for the goods that these resources would be capable of producing. Total output falls below its potential maximum, not because needs have been satisfied, but because of insufficient demand.
How, then, does demand become insufficient? The demand for goods by individual consumers is determined primarily by their incomes. The greater an individual’s income, the greater their current consumption expenditure. But income is at the same time also the result of expenditure. People earn their incomes by satisfying each other’s demand. One person’s expenditure generates another’s income, and one person’s income arises from the expenditure of others. On this basis we might perhaps argue that idle resources at any given moment are due purely to chance or mismanagement, since all that would be necessary would be to increase economic activity, as a result of which incomes would grow and create demand for the additional goods to be produced.
Not everyone, however, spends their entire income on current consumption. If an individual’s standard of living is above a certain strict minimum threshold, they may wish to save part of their income in order to accumulate wealth. This is accumulated to create security against future emergencies, to satisfy the desire for ownership, or to generate new income by lending it at interest. For reasons of this kind, individuals set aside part of their income and accumulate wealth by consuming less than what their income could buy. This would not cause difficulties if saving decisions led directly to demand for real capital — houses, machines, ships, and so forth. In that case, the saved portion of income would provide employment in the production of capital goods in exactly the same way as the portion spent on consumption provides employment in the production of consumer goods. In that case, the propensity to save would not be a cause of unemployment.
The demand for capital goods does not, however, arise from saving; rather, this demand is generated within the firms that use these goods in their production. No entrepreneur wishes to acquire capital goods unless they expect it to yield a profit. The mere fact that individuals wish to save part of their income in order to increase their private wealth does not in any way encourage entrepreneurs to expect greater profit on their capital. The profitability of capital goods depends on the demand for the consumer goods produced with them. If individuals therefore decide to save — that is, refrain from spending their income on immediate consumption — they reduce rather than increase entrepreneurs’ willingness to acquire new capital goods. Saving decisions thus contract the demand for consumer goods without at the same time increasing the demand for capital goods.
Unemployment can arise for this reason. It arises, then, when entrepreneurs’ monetary decisions about how much new capital goods it is profitable for them to acquire fall short of private saving. Saving reduces the demand for consumer goods, since it means foregoing current consumption. Entrepreneurs, for their part, are unable to fill the gap that has arisen or to generate sufficient demand for capital goods to bridge it. Demand is therefore insufficient. Men and machines stand idle, not because humanity has no need for their services, but because demand is insufficient for the entrepreneurs who could make profits by employing them.
The following four chapters pursue the thread we have discovered: that the level of demand and consequently employment depend on the interaction between the propensity to save and the willingness to invest in real capital. The second chapter (Investment and Saving) outlines this conceptual framework. The third chapter (The Multiplier Effect) describes in greater detail the effect of a change in investment on employment. The fourth chapter deals with the causes of fluctuations in investment. The fifth chapter (Changes in the Propensity to Save) is devoted to the propensity to save. After this we have the main body of the theory of employment, but there are still some pieces to be put in place to form the complete picture.
Prices and the monetary system must also be examined. After a brief glance at miscellaneous topics in the sixth chapter, we turn to the price level in the seventh chapter. The eighth chapter introduces the important topic of the rate of interest and shows how the functioning of the monetary system is connected to the factors determining employment. The next two chapters (The Effects of the Rate of Interest and Changes in the Money Supply) represent in a certain sense a digression from our main theme, although the matters they deal with are of great importance. The eleventh chapter (Foreign Trade) addresses only superficially a subject that deserves a book of its own, and shows how the matters we have examined from the perspective of the whole world look different when viewed from the perspective of a single country. The twelfth chapter (Changes in Employment) brings the pieces together and offers a picture of fluctuations in employment in the modern economic system. Certain contested points are dealt with specifically in the appendices to the tenth chapter (The Quantity Theory of Money) and the eleventh chapter (Free Trade). Some reflections of contentious economic questions are finally presented in the last chapter. (AI translation)
- ISSN: 1236-7176
- ISBN: 951-9282-92-0
