TOWARDS

A DYNAMIC ECONOMICS

Some Recent Developments

of Economic Theory
and their Application to Policy

BY

R. F. H A R R O D

LONDON

M A P . M I L L A N & GO. L T D
1 948
 TOWARDS
A DYNAMIC ECONOMICS
 Books by R. F. Harrod

I N T E R N A T I O N A L ECONOMICS ( 2 N D E D I T I O N I939)

TRADE CYCLE (1936)

A P A G E O F BRITISH F O L L Y (1946)

A R E T H E S E HARDSHIPS N E C E S S A R Y ? (1947)
 COPYRIGHT

P R I N T E D IN G R E A T BRITAIN
 FOREWORD

T H E S E lectures w e r e c o m p o s e d d u r i n g t h e a u t u m n of
1 9 4 6 a n d delivered i n t h e University of L o n d o n i n
F e b r u a r y 1 9 4 7 . W h e n I received t h e i n v i t a t i o n to give
this course, it seemed to m e t h a t this w o u l d b e a fitting
occasion for m e to r e s u m e the t h r e a d of m y t h i n k i n g ,
w h i c h h a d b e e n b r o k e n in 1 9 3 9 , a n d c o m p o s e a r e c a p i t u -
lation covering c e r t a i n b r o a d aspects of t h e d e v e l o p m e n t
of economic t h e o r y a n d its a p p H c a t i o n to policy.
I was conscious, h o w e v e r , of a h a n d i c a p . T h e w a r
h a d m e a n t for m e a total i n t e r r u p t i o n , lasting for m o r e
t h a n six years, to m y r e a d i n g a n d s t u d y . I n t h e m a i n
m y official w o r k h a d lain q u i t e outside m y n o r m a l field
of interests, a l t h o u g h it was m y good fortune to h a v e t h e
o p p o r t u n i t y of following t h e A n g l o - A m e r i c a n discussions
o n p o s t - w a r r e c o n s t r u c t i o n closely. I was a w a r e t h a t
i m p o r t a n t books a n d articles h a d a p p e a r e d a b r o a d d u r i n g
this period, a n d t h a t , in the brief t i m e a v a i l a b l e a n d w i t h
t h e pressure of p o s t - w a r a c a d e m i c duties allowing little
leisure, I should n o t b e a b l e to m a k e u p leeway. I o w e
a n apology to those writers overseas whose r e c e n t c o n t r i -
butions to t h e subject m a y a p p e a r to h a v e b e e n neglected
in these pages.
T h e i d e a w h i c h underlies these lectures is t h a t s o o ^ r
o r l a t e r we shall b e faced once m o r e with t h e p r o b l e m o:
s t a g n a t i o n , a n d t h a t it is to this p r o b l e m t h a t economist:
s h o u l d devote their m a i n a t t e n t i o n . M e a n w h i l e the'perioc
of transition c o n t i n u e s to stretch out before us. I n d e e c
n o w at t h e outset of 1948 "the p a t h still to b e tcaverSec
 TOWARDS A DYNAMIC ECONOMICS

a p p e a r s longer t h a n it did in the a u t u m n of 1946. N o n e

t h e less it is m y opiniorj t h a t the triore c o m p l e x tlie p r o -
blems of the transition b e c o m e , the g r e a t e r clarity o u g h t
w e to try to achieve a b o u t the c h a r a c t e r of t h a t m o r e
n o m i a l regime t h a t we h o p e we are a p p r o a c h i n g ,
albeit haltingly. If wc are sorely perplexed a b o u t t h e
p r o b l e m s arising from d a y to d a y , t h a t m a y be in large
p a r t d u e to o u r n o t seeing t h e goal of o u r e n d e a v o u r s
clearly. If t h a t is so, then it is alt the m o r e i n c u m b e n t
u p o n us to give o u r m i n d s to the kind of p r o b l e m s with
which these lectures d e a l .
A m o r e far-reaching d o u b t m a y o c c u r to the r e a d e r .
If it is t r u e t h a t there is a secular t e n d e n c y t o w a r d s a
decline in the propensity to save, a n d if the stress of t h e
w a r has given a severe shock to t h a t propensity in Britain,
t h e n it is possible t h a t we h e r e c a n look forward to a
considerable period in w h i c h the i n t e r - w a r difficulties
d u e to over-saving d o not r e c u r . I n fact, it m a y be t h a t
j u s t w h e n we h a v e at long last b e c o m e c o n v e r t e d to t h e
need for a " full e m p l o y m e n t " policy, n o such policy will
in fact be r e q u i r e d , a n d t h a t in Britain it will b e possible
to r u n a successful e c o n o m y of free enterprise w i t h o u t
those controlling devices for m a i n t a i n i n g e m p l o y m e n t to
which so m u c h t h o u g h t has been given ! T h i s is, n o
d o u b t , a n exaggeration, since t h e p r o b l e m s of periodic
depression will surely b e with us in a n y case.
But the U n i t e d St;ites is not likely to b e e x e m p t from
the p r o b l e m of c h r o n i c depression. W h a t h a p p e n s in t h a t
K ^ a t civilization is n o t only of i n h e r e n t interest on its
own a c c o u n t , b u t is of direct interest to t h e rest of the
world, since o u r prosperity is interlocked. I believe t h a t
the follciwing analysis is of u r g e n t a n d vi^tal relevance to
the i m m e d i a t e p r o b l e m s c^ the U n i t a d States.
' S a v » for the ^addition o f a few p a r a g r a p h s which
 FOREWORD

elaborate certain arguments, I a m publishing the lectures

as they were delivered. I must express my gratitude
to M r . T . Wilson, who has read through the proofs and
made a number of valuable suggestions.
R . F. H .
January 3 1 , 1948
 CONTENTS
LECTURE ONE

THE NEED FOR A DYNAMIC

E C O N O M I C S , p. I

LECTURE TWO

THE SUPPLY OF SAVING.^ 35

LECTURE THREE

FUNDAMENTAL DYNAMIC
T H E O R E M S , p. 63

LECTURE FOUR

(a) T H E FOREIGN B A L A N C E , p. 101

{b) CONTRA-CYCLICAL POLICY, p. 115

LECTURE FIVE

IS INTEREST OBSOLETE? p. 129

A P P E N D I X , p. 161
 LECTURE ONE

T H E N E E D F O R A D Y N A M I C
E C O N O M I C S

T H E title of these l e c t u r e s ' leaves m e m u c h l a t i t u d e ,

e n a b l i n g m e to dwell o n t h e ideas c o n c e r n i n g e c o n o m i c
t h e o r y a n d e c o n o m i c policy t h a t h a v e recently b e e n
o c c u p y i n g m y m i n d . T h i s seems wise in a course of this
k i n d in w h i c h y o u will wish m e to avoid t h e trite, if
possible, a n d d o m y best to give pointers t o w a r d s t h e
future d e v e l o p m e n t of o u r subject.
I p r o p o s e to lead i n t o t h e discussion by referring to a
t o p i c w h i c h I h a v e t r e a t e d on m a n y previous occasions,
b u t briefly a n d w i t h o u t e l a b o r a t i o n , a n d , p e r h a p s for t h a t
reason, w i t h o u t , it seems, influence o r effect on t h e course
of c u r r e n t w r i t i n g . T h i s topic is t h e p r o p e r definition of
t h e terms static a n d d y n a m i c w h e n a p p l i e d in e c o n o m i c
science.
I a m convinced t h a t a n a d e q u a t e a c c o u n t of t h e con-
tents of these t w o b r a n c h e s of t h e subject a n d t h e correct
c h a r t i n g of a line of d e m a r c a t i o n b e t w e e n t h e m s h o u l d
h a v e beneficial results o n t h e progress of economics, a n d
t h a t t h e absence of recognition of such a line, e v e n of a n
u n d e r s t a n d i n g of t h e necessity for it, has led to m u c h
confusion a n d fallacy in r e c e n t work, particularly*cjii
r e g a r d to t h e t r a d e cycle.
N o w it is t r u e t h a t the use of these t e r m s h a s
'•'•""ently b e c o m e m o r e a n d m o r e frequent. B u t , w e h a v e
O r i g i n a l l y dclivcrccf under l^je title o f " S o m e R e c e n t F''-
in EcongiT^f T h e o r y a n d their A p p l i c a t i o n l o P c l x y " ,
I
 TOWARDS A DYNAMIC ECONOMICS

lacked a full methodological consideration of their p r o p e r

a p p l i c a t i o n . F a i h n g this, their use m a y t e n d to m a k e
confusion worse c o n f o u n d e d . U n h a p p i l y usage is slowly
b e c o m i n g crystallized in a d v a n c e of this necessary p r e -
liminary consideration, a n d I fear t h a t it is developing
in a form t h a t serves n o useful p u r p o s e . I find m u c h that
is unsatisfactory in the t e n d e n c y to n a r r o w the scope of
statics, by Imposing ever m o r e n u m e r o u s a n d rigorous
restrictions o n the alleged sphere a n d validity of t h a t
b r a n c h , w i t h t h e c o n s e q u e n t d a n g e r t h a t w h a t is true,
v a l u a b l e a n d of practical m o m e n t in the t r a d i t i o n a l static
t h e o r y m a y escape a t t e n t i o n a n d pass o u t of view. I find
still m o r e t h a t is unsatisfactory i n the use of the t e r m
d y n a m i c . I d o not refer only to t h e v u l g a r abuse of t h e
w o r d — for t h e merely descriptive, for the empirical, for
t h e p h e n o m e n a of the short period, a n d , finally, for
a n y t h i n g t h a t is outside the t r a d i t i o n a l corpus — but also
to its use by o u r most distinguished authorities, such as
M r . Kalecki a n d the e c o n o m e t r i c i a n s , a n d M r . Hicks.
If a certain usage seems to be g r o w i n g a n d developing
n a t u r a l l y a n d spontaneously, it is usually unwise to kick
a g a i n s t the pricks. W o r d s a r e in some respects o u r
masters.' T h e r e m a y b e m o r e semi-conscious wisdom i n
a s p o n t a n e o u s d e v e l o p m e n t t h a n c a n be p r e c i p i t a t e d b y
t h e deliberate a n d studied classification of a m e t h o d o -
logist. A w o r d is i n d e e d in all t r u t h one of those " spon-
t a n e o u s social p r o d u c t s " so m u c h extolled by Professor
v o n H a y e k , a n d I feel that I m a y b e falling i n t o the v u l g a r
fijprtcy of centralist p l a n n i n g in seeking to impose m y will
o n the d e v e l o p m e n t of l a n g u a g e . A m I not t h r e a t e n i n g
a c a r d i n a l freedom, the freedom of speech itself? It is
q u i t e certain t h a t economists a b o v e all will refuse lo b e
' serfs " .
iTon strives to^determine iftage s o m e w h a t against t h e
2
 THE NEED FOR A D Y N A M I C ECONOMICS

c u r r e n t t r e n d , it is clearly i n c u m b e n t u p o n o n e to s h o w
a very g o o d reason w h y . It is i n c u m b e n t u p o n m e to
show t h a t fruitful results will flow from the d i c h o t o m y
as I seek to define it. If w e let the w o r d s t a k e c h a r g e
a n d a d i c h o t o m y h a r d e n s on different lines, t h a t m a y
actually p r e v e n t , or a t least r e t a r d , a general recognition
of the d i c h o t o m y w h i c h strikes m e as the i m p o r t a n t o n e .
I c a n p l e a d o n behalf of m y o w n view, t h o u g h this of
course should b y n o m e a n s be a decisive consideration,
t h a t it w o u l d p r o v i d e a definition in t h e e c o n o m i c field
a n a l o g o u s to the division b e t w e e n Statics a n d D y n a m i c s
in physical science.
Statics there is c o n c e r n e d w i t h a state of rest. N o w
t h e w o r d Statics being a l r e a d y t h o r o u g h l y estabUshed i n
economics, w e m a y p r o p e r l y ask in w h a t sense a " static "
e c o n o m y c a n be r e g a r d e d as a n a l o g o u s to a state of rest
in t h e physical w o r l d . W e d o not m e a n b y it o n e i n
w h i c h n o o n e does a n y t h i n g at a l l ! T h a t is i n d e e d p e r h a p s
t h e u n k i n d suggestion of those w h o h a v e affirmed t h a t t h e
t r u t h s of static economics will only a p p l y w h e n w e a r e
all d e a d . N o ; in a static e q u i l i b r i u m c e r t a i n values a r e
d e e m e d to r e m a i n s t a t i o n a r y in t h e absence of fresh dis-
t u r b i n g causes. T h e s e values a r e t h e quantities of t h e
various factors of p r o d u c t i o n a p p l y i n g themselves to
various kinds of o u t p u t , the q u a n t i t i e s of t h e various kinds
of o u t p u t forthcoming p e r a n n u m a n d t h e prices of t h e
factors a n d of t h e various kinds of o u t p u t . Thu;s a static
e q u i l i b r i u m by n o m e a n s implies a state of idleness, b u t
one in w h i c h w o r k is steadily going forward d a y b y »:£->,y^
a n d y e a r by year, b u t w i t h o u t increase o r d i m i n u t i o n .
" R e s t " m e a n s t h a t the level of these various q u a n t i t i e s
remains c o n s t a n t , a n d t h a t the e c o n o m y c o n t i n u e s t o
c h u m over. I n a c e r t a i n sense, Aerefore, t h e r e is m o v e m e n t •
— t h u s ^ e a n a l o g y is not* q u i t e perfect — a n d «his fact
3
 TOWARDS A DYNAMIC ECONOMICS

m a y be responsible for th? confusions t h a t h a v e arisen.

But it is surely perfectly clear if we r e a d the classic treatises
of m a t u r e v i n t a g e , of M a r s h a l ] a n d his A m e r i c a n a n d
c o n t i n e n t a l c o n t e m p o r a r i e s , t h a t it is to this active b u t
u n c h a n g i n g process t h a t the expression static economics
should be a p p l i e d . If this r o u g h s t a t e m e n t of the field of
a p p l i c a t i o n of Statics is accepted, a n d J suggest t h a t it
must be, t h e n D y n a m i c s would b e c o n c e r n e d w i t h a n
e c o n o m y in which t h e rates of o u t p u t a r e c h a n g i n g ; we
should have as t h e c o r r e s p o n d e n t c o n c e p t of velocity in
Physics a steady rate of c h a n g e (of increase or of decrease}
in the r a t e of o u t p u t p e r a n n u m ; acceleration (or de-
celeration) would be a c h a n g e in this rate of c h a n g e .
I n e c o n o m i c Statics we take certain f u n d a m e n t a l con-
ditions to be given a n d k n o w n , t h e size a n d ability of the
p o p u l a t i o n , the a m o u n t of land, tastes, etc., a n d these are
d e e m e d to d e t e r m i n e the values of certain u n k n o w n s ,
the, rates of o u t p u t p e r a n n u m of each of the various goods
a n d ser\'ices, the prices of the factors a n d of the goods a n d
services. I n D y n a m i c s , on t h e o t h e r hand, t h e f u n d a m e n t a l
conditions will themselves be c h a n g i n g , a n d the unknowns
in t h e e q u a t i o n s to be solved will n o t be rates of o u t p u t
p e r a n n u m b u t increases or decreases in the rates of o u t p u t
per a n n u m .
Havirjg given this r o u g h indication of the lines on which
a d e m a r c a t i o n should be a t t e m p t e d , f will p a u s e to de-
velop the p o i n t t h a t the scope of Statics h a s in m y j u d g -
m e n t been too m u c h n a r r o w e d of late. I believe t h a t
tbft arises from a certain tendency to d e n i g r a t e the work
of the older economists. Static assumptions are often
m a d e so far-reaching in recent discussions that a l a w b a s e d
u p o n t h e m seems i n c a p a b l e of h a v i n g ^ny a p p h c a t i o n
to the world of reality. A h d so the m o r a l is t h a t all these
laboriofiiS researches a n d findings of t h e older school h a v e
 THE NEED FOR A D Y N A M I C ECONOMICS

little p r a c t i c a l a p p l i c a t i o n a n d i n fact c a n b e largely dis-

c a r d e d . If w e seek t o f o r m u l a t e a precise notion of t h e
scope of D y n a m i c s , to take t h e p l a c e of the v a g u e n o t i o n
t h a t it stands for e v e r y t h i n g t h a t is n e w a n d t h e r e b y good,
this m a y serve n o t only to show us t h e l i m i t a t i o n of
D y n a m i c s — t h o u g h of course m y w h o l e a r g u m e n t will
be t h a t a t t e n t i o n to it is of g r e a t i m p o r t a n c e — b u t also
s o m e w h a t to r e i n s t a t e Statics.
I a m sure t h a t Statics will r e m a i n a n i m p o r t a n t p a r t
of the w h o l e . T h e g e n e r a l case for F r e e T r a d e i n its widest
aspect will c o n t i n u e to rest u p o n the static analysis. T h e
p r i n c i p l e t h a t it is m a r g i n a l a n d n o t a v e r a g e cost of p r o -
d u c t i o n t h a t s h o u l d govern t h e use of p r o d u c t i v e resources
also rests u p o n it. W e shall h a v e to b e p a r t i c u l a r l y
vigilant in r e g a r d to t h e p r a c t i c a l i m p o r t a n c e of t h a t
principle n o w t h a t t h e s p h e r e of n a t i o n a l i z e d p r o d u c t i o n
or p l a n n i n g is b e c o m i n g e n l a r g e d , the m o r e so since w e
d o not seem to b e q u i t e as rich as w e s h o u l d wish to b e ,
a n d c a n ill afford the losses t h a t neglect of t h e m a r g i n a l
principle m u s t entail. I m a y cite some words u t t e r e d by
L o r d S t a m p in this place as long ago as 1 9 2 3 , o n the con-
trast b e t w e e n t h e a d m i n i s t r a t i o n of business a n d p u b l i c
a f f a i r s : " . . . the t h i r d e c o n o m i c principle is t h e p r i n c i p l e
of the m a r g i n a l r e t u r n . T h e business, as every s t u d e n t
of economics knows, pushes its e x p e n d i t u r e along a p a r -
t i c u l a r line as far as it is profitable to d o it. . . . But t h a t
is not t h e principle of g o v e r n m e n t ; it n e v e r c a n b e . "
P e r h a p s o u r friends in the e c o n o m i c section of t h e C a b i n e t
S e c r e t a r i a t w o u l d n o t acquiesce i n this w i d e s w e e p i r g
n e g a t i v e . B u t it -will t a k e m a n y years, p e r h a p s d e c a d e s ,
of powerful a d v o c a c y , to secure such a far-reaching a n d
f u n d a m e n t a l c h a n g e of principle as is involved, by t h e
use of t h e m a r g i n a l ^a-lterion, i r t a l l the d e t a i l e d p r o c e d u r e s
of publicly o p e r a t e d enterprise.

5
 TOWARDS A DYNAMIC ECONOMICS

S t a t i c economics gives a c a d e m i c expression to w h a t

the o r d i n a r y person has in m i n d w h e n h e talks o f " e c o n o -
mizing " , that is, m a k i n g one's resources go as far as
possible. While not suggesting t h a t the classic definition
of economics supplied by Professor R o b b i n s as " the
science which studies h u m a n b e h a v i o u r as a relationship
b e t w e e n ends a n d scarce m e a n s which have a l t e r n a t i v e
uses " h a s n o relevance to m a t t e r s studied in D y n a m i c s ,
I t h i n k t h a t t h e c e n t r a l core of d o c t r i n e a n d p r i n c i p l e
which is related to t h a t definition will c o n t i n u e to be
found in the sphere of Statics.
As instance of the e r o d i n g process, l e n d i n g to n a r r o w
d o w n static economics, t a k i n g the life o u t of it a n d d e p a r t -
ing widely from the intentions of its a u t h o r s , m a y be cited
t h e notion t h a t it has to m a k e such assumptions as perfect
mobility, perfect k n o w l e d g e , perfect foresight, etc. F o r
the p u r p o s e of m a k i n g an intensive s t u d y of some p a r -
ticular special p r o b l e m within the field of Statics, it m a y
from t i m e to time be convenient t o m a k e alt these a s s u m p -
tions in Order lo isolate Ihc matter to be considered. But
from the fact t h a t these assumptions are often m a d e ,
q u i t e p r o p e r l y , in c e r t a i n exercises in Statics it does n o t
follow t h a t they a r e implicit in t h e general b o d y of static
t h e o r y or in the p r a c t i c a l r e c o m m e n d a t i o n s that How
( r o m it.
F o r instance, it is q u i t e w r o n g to suppose that in general
t h e r e is a n y a s s u m p t i o n in statics of perfect mobility. O n
the c o n t r a r y the whole d o c t r i n e of i n t e r n a t i o n a l t r a d e ,
a.fvery key section of static economics, rests u p o n t h e
a s s u m p t i o n of i m m o b i l i t y . A n d , as h a s often been p o i n t e d
o u t , the principles e n u n c i a t e d u n d e r the h e a d " inter-
n a t i o n a l t r a d e " can be applied t o t h e i n t e r n a l e c o n o m y ,
in so far as a n observed la^k of m o b i l i t y in t h a t e c o n o m y
wafrante such appfication. 'in e l a b o r a t i n g a c o m p r e -
6
 THE NEED FOR A D Y N A M I C ECONOMICS

hensive t h e o r y u n d e r the g e n e r a l a s s u m p t i o n of i m m o b i l -
ity Statics is by n o m e a n s d e p a r t i n g from its p r o p e r
sphere.
N o r a g a i n docs Statics i m p l y a n y a s s u m p t i o n of perfect
competition, still less of perfect k n o w l e d g e . T h e efforts
t h a t some of us m a d e in the early 'thirties to evolve a b o d y
of t h e o r y as r e g a r d s t h e b e h a v i o u r of firms o p e r a t i n g in
sticky m a r k e t s w i t h differentiated p r o d u c t s w e r e q u i t e
clearly essays in e c o n o m i c statics.
I suggest a g a i n t h a t it w o u l d b e w r o n g to r e g a r d c h a n g e
as such as belonging to t h e d y n a m i c field. P r o b l e m s aris-
i n g from a once-over c h a n g e c a n , I believe, be satisfactorily
h a n d l e d b y the a p p a r a t u s of static t h e o r y . It is w h e n w e
c o m e to a steadily c o n t i n u i n g c h a n g e t h a t w e h a v e to
consider a different t e c h n i q u e . W h e n a once-over c h a n g e ,
say of taste, occurs, t h e familiar static e q u a t i o n s define
t h e n e w position of static e q u i l i b r i u m . It is a c o m m o n -
p l a c e t h a t t h e whole system is i n t e r d e p e n d e n t a n d t h a t
a c h a n g e of taste in r e g a r d to one article m a y in c e r t a i n
circumstances cause a d i s t u r b a n c e affecting every v a l u e
in t h e system, a n d Statics is designed to h a n d l e this. I t
h a s b e e n a r g u e d t h a t these e q u a t i o n s d o n o t suffice to
define t h e p a t h s by which t h e various m a g n i t u d e s m o v e
to their n e w equifibrium positions, t h a t Statics only deals
with t h e position a t e a c h e n d of t h e m o v e m e n t a n d n o t
t h e forces o p e r a t i n g d u r i n g the m o v e m e n t o r consequently
t h e precise lines of m o v e m e n t . T h e r e is some justice in
this c r i t i c i s m ; b u t I a m inclined to t h i n k , a l t h o u g h I d o
n o t wish to d o g m a t i z e , t h a t this is m a k i n g m u c h ado
a b o u t a s o m e w h a t trivial m a t t e r . O f course, if it c a n b e
shown t h a t o w i n g to forces set in m o t i o n d u r i n g t h e
m o v e m e n t the n e w position as defined by t h e static
e q u a t i o n s will neve» b e r e a c h e d , t h e m a t t e r becomes
i m p o r t a n t . T h e questions,*however, oj" the stabfcty or

7
 TOWARDS A DYNAMIC ECONOMICS

instability of a n equilibrium a n d possiblr regions of in-

d e t e r m i n a c y are studied by t h e static t e c h n i q u e s . I a m
inclined to believe t h a t w h e n a d y n a m i c economics h a s
been developed — a n d o u r present difficulty is t h a t it
h a r d l y exists — it will b e found convenient to leave the
p r o b l e m s connected w i t h the m o v e m e n t s to new positions
of e q u i l i b r i u m after a once-over c h a n g e to the field of
Statics. D y n a m i c s will specifically be c o n c e r n e d w i t h
the effects of c o n t i n u i n g changes a n d with rates of c h a n g e
in the values t h a t h a v e to be d e t e r m i n e d . W h e r e ex-
p o n e n t s of Statics m a k e a n u n d u e e n c r o a c h m e n t is w h e n
they try to analyse the effects of c o n t i n u i n g changes b y
m e t h o d s a p p r o p r i a t e to once-over changes.
Since c h a n g e a n d r o u n d a b o u t p r o d u c t i o n involve
u n c e r t a i n t y — a n d a oncc-ovcr c h a n g e generates m o r e
u n c e r t a i n t y t h a n a c o n t i n u i n g c h a n g e — I conceive tlie
theory of profit lo lie within the field of Statics. I d o not
see a n y t h i n g specifically d y n a m i c , for instance, in the
theory of profit e l a b o r a t e d b y Professor F . H . K n i g h t .
T h e i n t r o d u c t i o n of t h e inl^uence of expectation is
sometimes d e e m e d to i n t r o d u c e a d y n a m i c factor. I
c a n n o t see t h a t this has good g r o u n d s . E x p e c t a t i o n is
always one of the d e t e r m i n a n t s of a static e q u i l i b r i u m .
A once-over c h a n g e in expectation is n o different i n
principle from a once-over c h a n g e of taste. It is, h o w -
ever, possible that w h e n wc have a well-developed corpus
of d y n a m i c principles the most i m p o r t a n t p a r t of the
theory of expectations will be found to lie in the d y n a m i c
field. T h e d e t e r m i n a n t in a d y n a m i c system will not b e
t h e existence of a certain expectation or a once-over
c h a n g e in t h a t expectation, b u t a r a t e of c h a n g e of ex-
p e c t a t i o n . T h i s of course m a y itself be d e t e r m i n e d by
a r a t e of c h a n g e in some other futadamental condition.
T*he effects of a qpce-over chAnge in expectation are likelv
8
 T H E NEED FOR A D Y N A M I C ECONOMICS

to c o n t i n u e to b e h a n d l e d b y t h e t e c h n i q u e of static
economics.
G r e a t l y as I a d m i r e M r . Hicks's n o t a b l e treatise o n
Value and Capital, of w h i c h a second edition h a s recently
a p p e a r e d , for its elegance a n d its logical precision, a n d
fully recognizing t h e w i d e r a n g e a n d interest of t h e c o n -
t r i b u t i o n s it makes to t h e o r y , I h a v e to r e c o r d t h a t P a r t s
I I I a n d I V , w h i c h allegedly d e a l w i t h d y n a m i c econ-
omics, d o not fall within m y definition of D y n a m i c s .
T h r o u g h o u t M r . Hicks a p p e a r s to b e a n a l y s i n g t h e efiects
of a once-over c h a n g e in f u n d a m e n t a l conditions. T h e r e
is n o recognition t h a t a different t e c h n i q u e m a y b e r e -
q u i r e d for a n a l y s i n g t h e effects of c o n t i n u i n g c h a n g e s ,
A n d , while by his fine h a n d l i n g of the w o r k i n g of e x p e c t a -
tion elasticities a n d to some e x t e n t of lags (of w h i c h m o r e
hereafter), h e d e m o n s t r a t e s t h e possibility of a d j u s t m e n t s
n o t considered in t r a d i t i o n a l statics a n d w a r n s us of t h e
hkeUhood of instability in c e r t a i n circumstances, his final
goal is always to show w h a t m a n n e r , if a n y , of stable
e q u i l i b r i u m of t h e old-fashioned t y p e will b e established.
T h e r e is ng h i n t w h a t e v e r t h a t w h a t w e o u g h t to be looking
for, b e y o n d or b e n e a t h t h e oscillations, as t h e p r o p e r or
n o r m a l effect of c o n t i n u i n g c h a n g e s , is a steady r a t e of
c h a n g e i n e a c h of t h e d e p e n d e n t variables. I t m a y b e
t h a t in fact in a n a d v a n c i n g (or declining) e c o n o m y t h e r e
is a persistent failure to a c h i e v e those steady trends of
increase w h i c h t h e c h a n g i n g f u n d a m e n t a l conditions
r e q u i r e , j u s t as in a generally static e c o n o m y there m a y ,
o w i n g to t h e c o n t i n u e d i m p a c t of detailed c h a n g e s or som.e
oscillation, b e persistent failure to a c h i e v e t h e stable
e q u i l i b r i u m w h i c h f u n d a m e n t a l conditions i n d i c a t e . B u t
j u s t as it is i m p o r t a n t to k n o w w h a t the stable e q u i l i b r i u m
w o u l d b e , e v e n if it is not achieved from m o m e n t to
m o m e n t <o in t h e dynamli? field it is qecessary t» k n o w

9
 TOWARDS A DYNAMIC ECONOMICS

w h a t t h e steady lines of a d v a n c e w o u l d b e , as a basis for

analysing w h y a c t u a l lines of a d v a n c e d e p a r t from t h e m
a n d b e h a v e as t h e y d o . O f all this t h e r e is n o h i n t in M r ,
Hicks's treatise.
I stress t h a t his t r e a t m e n t of expectation c h a n g e s b o t h
as causes a n d effects, which is n o t a b l e a n d plays a n i m -
p o r t a n t p a r t in his w h o l e a r g u m e n t , is definitely static in
character.
H e defines d y n a m i c economics as t h a t b r a n c h of theory
in w h i c h every q u a n t i t y must b e d a t e d , recognizing fairly
t h a t t h e d i c h o t o m y so g e n e r a t e d has little in c o m m o n
with t h a t of mechanics. T h e definition is a n interesting
o n e a n d 1 h a v e the impression that it m a y well b e a
g e n u i n e m a r k of t h e study of oscillation. I n D y n a m i c s
as I conceive it d a t i n g is n o more necessary t h a n in Statics.
I n t h e formulation a n d h a n d l i n g of its s u b j e c t - m a t t e r
Keynes's General Theory is essentially static. I n v o l u n t a r y
u n e m p l o y m e n t is i n d e e d a c o n c e p t alien to the classical
system of t h o u g h t , but it is a static c o n c e p t . So is liquidity
preference. L i q u i d i t y preference is g o v e r n e d by a n u m b e r
of f u n d a m e n t a l conditions all of w h i c h m a y be d e e m e d
quite conformably with the K e y n e s i a n system of ideas
to be u n c h a n g i n g , a n d the resultant effect on activity a n d
e m p l o y m e n t m a y take the form of a stable e q u i l i b r i u m .
K e y n e s has m u c h t o say of changes i n expectation w h i c h
lead to changes in liquidity preference, b u t on the whole
his h a n d l i n g of these is such as to i m p l y t h a t they a r e
once-over changes a n d his m e t h o d of t r e a t i n g the effects
of these c h a n g e s is correspondingly statical. T h e r e is o n e
c o n c e p t , however, which plays a c e n t r a l role in t h e General
Theory which is not static, a n d t h a t is w h y the General
Theory will not b e fully satisfactory until \t is b r o u g h t into
relation w i t h D y n a m i c s , f W h i l e m a n y of t h e restrictions
which"'writers hgve tried re'cently to impose on static
10
 THE NEED FOR A D Y N A M I C ECONOMICS

t h e o r y strike m e as vexatious a n d w r o n g - h e a d e d , t h e r e
is a m o r e r a d i c a l restriction w h i c h m u s t b e i m p o s e d b u t
w h i c h is in fact less c o m m o n l y i m p o s e d . | Positive saving,
which plays such a g r e a t role in t h e General Theory, is
essentially a d y n a m i c c o n c e p t . T h i s is f u n d a m e n t a l .
T h e s t e a d y c o n t i n u i n g allocation y e a r by y e a r of o n e -
t e n t h of i n c o m e to house r e n t is n o t a d y n a m i c p h e n o m -
e n o n ; it is consistent w i t h t h e u n a l t e r e d m a i n t e n a n c e
of a s t a b l e e q u i l i b r i u m of prices a n d rates of o u t p u t p e r
a n n u m t h r o u g h o u t t h e e c o n o m y . ,'But a s t e a d y allocation
of o n e - t e n t h of i n c o m e to saving is essentially d y n a m i c , ,
since it involves a c o n t i n u i n g g r o w t h i n o n e of t h e f u n d a -
m e n t a l d e t e r m i n a n t s of the system, n a m e l y the q u a n t i t y
of c a p i t a l a v a i l a b l e . T h i s must entail, even if n o n e of
the o t h e r d e t e r m i n a n t s a r e subject to c h a n g e , c o n t i n u e d ,
c h a n g e s in t h e values of m a n y of t h e d e p e n d e n t v a r i a b l e s .
I n t h e d y n a m i c e q u a t i o n s it will b e these c h a n g e s t h e m -
selves, n o t the values t h a t c h a n g e , t h a t m u s t b e t h e
d e p e n d e n t v a r i a b l e s . I n static economics w e m u s t assume
t h a t saving is z e r o . T h i s is n o t formally inconsistent,
a l t h o u g h it m a y well b e inconsistent i n a n y likely c i r c u m -
stances, with a positive r a t e of interest.
I t is n o t to d e r o g a t e a t all from t h e g r e a t i m p o r t a n c e
of the a d v a n c e m a d e b y the General Theory to say t h a t it
is imperfect by reason of t h e inclusion of this d y n a m i c
concept, viz., positive saving, in a t r e a t m e n t w h i c h in
b r o a d lines follows t h e m e t h o d of static e q u i l i b r i u m
analysis. T h e schedule of the m a r g i n a l efficiency of
capital seems in t h a t w o r k almost to be t a k e n as a d a t u m
externally given a n d not d e p e n d e n t o n the rest of t h e
system, albeit subject to n u m e r o u s c h a n g e s from t i m e to
t i m e ; b u t these a r e all of a once-over c h a r a c t e r , a n d n o t
c o n d n u i n g c h a n g e s g e n e r a t e d Uy t h e special n a t u r e of a
g r o w i n g e c o n o m y . T o p u t ^his in a n o t h e r w a y ; Keynfcs
 TOWARDS A DYNAMIC ECONOMICS

neglects w h a t is usually called — u n h a p p i l y from t h e

p o i n t of view of m y t e r m i n o l o g y — the acceleration
principle, I shall h a v e to r e t u r n to this m a t t e r ,
I should hke to p o i n t o u t in passing, lest I seem to be
c o n d e m n i n g all r e p u t a b l e e c o n o m i c w o r k as u n d y n a m i c ,
that tJie so-called acceleration p r i n c i p l e is essentially a
d y n a m i c principle, since it r e g a r d s the v o l u m e of d e m a n d
for a new capiial as a function of the r a t e of increase of
the e c o n o m y .
T r a d e - c y c ) e theory is on the b o r d e r line. Fluctua-
tion does n o t seem in itself to be inconsistent w i t h a long
r u n c o n s t a n c y in t h e f u n d a m e n t a l d e t e r m i n a n t s . For
e x a m p l e , harvest variations a r e always liable to h a p p e n .
If these o c c u r r e d within a h a m c - w o r k in which the f u n d a -
m e n t a l d e t e r m i n a n t s , size of p o p u l a t i o n , a m o u n t of
capital, e t c . , w e r e s t a t i o n a r y , they m i g h t conceivably
cause a r e g u l a r periodic fluctuation in all t h e m a g n i t u d e s
of the static e q u a t i o n s . 'We m i g h t also h a v e w e a t h e r
variations affecting h e a l t h or psychology, w h i c h m i g h t
set u p vicious spiral m o v e m e n t s . I n fine, a static e c o n o m y
m a y be subject to a t r a d e cycle. B u t there is httle d o u b t
t h a t t h e t r a d e cycle we k n o w is c o n d i t i o n e d by its occur-
rence in a d y n a m i c (growing) economy. In my judgment
m u c h of t h e t r a d e cycle theory of the i n t e r - w a r period,
especially in t h e m o n e t a r y held, fell into confusion for
lack of a clear u n d e r s t a n d i n g w h e t h e r its assumptions
were static or d y n a m i c or w h i c h a s s u m p t i o n s belonged
to wliich category, a n d a r g u m e n t s were a p t to b e vitiated
by t h e intrusion of a n e x t r a dimension or its omission.
R e c e n t l y we h a v e h a d very i m p o r t a n t work by D r s .
T i n b e r g e n , Kalccki a n d others o n t h e influence of l i m e
lags. T h e results achieved h a v e b e e n most promising.
T h i s d e p a r t m e n t of stu<^y is b i d d i n g fair to a c q u i r e a
pYesCiSptive claim to the title of d y n a m i c . As 1 h a v e
 T H E NEED FOR A D Y N A M I C ECONOMICS

suggested, it is vain to quarrel a b o u t words. I d o not

myself think that it is n a t u r a l to regard lags as in essence
dynamic p h e n o m e n a . I think one might well find t h a t
wc h a d one set of lags a n d one kind of cycle in a stationary
economy a n d a different set of lags a n d a different kind
of cycle in an expanding one, a n d that lag study will fall
partly i n t o e a c h division.
This brings me to two further divisions within economic
theory which are different from but have relation with
the division into static a n d d y n a m i c .
T h e r e is the disdnction between the study of partial
equilibrium a n d t h a t of total equilibrium. T h e r e has
always, of course, been a theory of both from A d a m Smith
to Walras. Keynes is felt to break new ground with his
General Theory of Equilibrium. H e certainly broke new
ground, but not in having a theory of general equilibrium.
I n this regard, however, there is a m a r k e d difference
between his theory a n d that which grew u p in the classical
tradition. Whereas in that tradition activity as a whole
was conceived as the result of c o m p o u n d i n g the forces at
work in the estabHshment of all the particular equil-
ibria, the desire for goods, disutility of effort, etc., in the
Keynesian system there is a contrariety. - I n the classical
system individual motives tending in a certain direction
m a y be a d d e d together to m a k e u p an aggregated motive
on the part of the economy as a whole. T h e most notorious
case in which Keynes breaks away from this tradition is
in that of saving. I n the classical theory the increased
propensity to save by an individual increases the aggregate
propensity to save a n d the aggregate saving of the com-
munity. I n the Keynesian system the increased propensity
to save by a n individual leads to less saving altogether.
T h e r e is nothing at -all like thii in the classical system.
This contribution by Keynife m a y well j i r o v e endwring.
13
 TOWARDS A DYNAMIC ECONOMICS

T h e r e is n o t h i n g specifically d y n a m i c in this idea itself.

But it is likely to play a p r o m i n e n t p a r t in the d y n a m i c s of
a steadily a d v a n c i n g economy, w h e n the theory of t h a t
comes to b e evolved.
T h e o t h e r division to w h i c h I wish to refer is b e t w e e n
those principles t h a t d o a n d those t h a t d o not lend them-
selves to e c o n o m e t r i c verification. Static t h e o r y lends
itself r a t h e r poorly. It is n o t t r u e to say t h a t it does not
lend itself at all, for we h a v e S c h u l t z ' s a t t e m p t s on stat-
istical a n d , I should a d d , s t a d c d e m a n d curves. A large
p a r t of static theory is of course merely truistic ; it c a n
be used to verify figures a n d c a n n o t b e verified b y t h e m .
Similarly with Keynes's General Theory : it contains m u c h
t h a t is truistic, a n d a n alleged statistical refutation of
some of the principles there set out w o u l d merely refute
the figures on which the a r g u m e n t was based. S o m e of
his global concepts do, it is true, seem to lend themselves
well to e c o n o m e t r i c m e t h o d s . T h e r e m a y be d a n g e r ,
however, i n a t t e m p t i n g to m e a s u r e m a r g i n a l propensities
(essential static concepts) b y t i m e series derived from
observations in a n e x p a n d i n g e c o n o m y . K a l d o r , a n d ,
across t h e water, H a g e n , b o t h k n o w q u i t e well t h a t they
are o n perilous g r o u n d .
I a m c o n v i n c e d t h a t e c o n o m i c theory will only m a k e
good progress to the extent t h a t it c a n transform itself into
econometrics. But econometrics must have p r o p e r tools.
T h e K c y n e s i a n c o n c e p t s arc not e n o u g h . A n d the c r y i n g
n e e d is for the formulation of d y n a m i c concepts a n d the
e n u n c i a t i o n of a m i n i m u m set of truistic d y n a m i c p r i n -
ciples.
I h a v e p r o c e e d e d far e n o u g h in a critical vein a n d m u s t
begin to m a k e some constructive suggestions. W h a t I
h o p e to offer in all humility is only a beginning, a p o i n t e r
i n a wertain direction.
14
 T H E N E E D FOR A D Y N A M I C ECONOMICS

I n order to go forward I wish first to m a k e a retrospect.

I should claim that the old classical economics contains
in roughly equal proportions what I define as static a n d
dynamic elements. T h e d y n a m i c elements have d r o p p e d
out of w h a t we n o w regard as the corpus of economic
principles. As the static analysis came to be refined a n d
perfected by the use of the m a r g i n a l concept a n d by
mathematical expression, the dynamic analysis fell out
of view. This m a y have been particularly due to the fact
that Dynamics did not give such scope to the marginal
analysis. T h e lapse of Dynamics from favour is most
remarkably illustrated by Marshall. W e know well how
lovingly he treasured all the bits a n d pieces of traditional
theory. H e could not bear to a b a n d o n the view t h a t
the rent of land does not enter into the cost of production.
Even the iron law uf wages reappears ; its guise is softened
a n d rendered kindly, but it is there all the same. T o make
sure of my ground I re-read the Principles before composing
these lectures, a n d I c a n find scarcely any trace of that
d y n a m i c theory which occupied at least half of the
attention of the old classical school.'
W e m a y take as an illustration R i c a r d o himself. I n
his preface we can find the famous words " to determine
the laws that regulate this distribution is the principal
problem in Political Economy A modern reader is
g r a m m a d c a l l y entitled to take these words as referring to
what we now know as the static theory of distribution.
But we should regard them in the light of the earlier
words : " I n different stages of society the proportion of the
whole produce of the earth which will be allotted to these
classes u n d e r the n a m e of rent, profit a n d wages —• will
be essentially different " . If one turns back to the preface
' Perhaps I do less i h a n justice to Marshall ; Dynamics might liave
appeared, after all, in the fourth volume which he.never completed.

15
 TOWARDS A DYNAMIC ECONOMICS

after r e a d i n g the book one is c e r t a i n l y driven to i n t e r p r e t

t h e first q u o t e d passage in t h e Hght of the o t h e r o n e , t h a t
is, to i n t e r p r e t distribution i n a d y n a m i c sense, t h e
economist's first task being n o t to d e t e r m i n e h o w t h e
p r o d u c t will b e a p p o r t i o n e d a m o n g the factors at o n e
t i m e b u t h o w progress successively r e a p p o r t i o n s t h e
p r o d u c t a m o n g the factors. M a y I r e m i n d y o u of the
b a r e bones of R i c a r d o s D y n a m i c T h e o r y ? I t was a
large p a r t of his whole t h e o r y . T h e p r i m e m o t i v e force
for him was the t e n d e n c y to a c c u m u l a t e . T h i s m a y be
identified with w h a t wc r e g a r d as saving, a n d is rightly
t r e a t e d b y R i c a r d o as a d y n a m i c c o n c e p t . Fie is n o t
guilty of t h e error w h i c h h a s c r e p t i n t o text-books u p to
the present d a y of bringing saving i n t o a static system of
e q u a t i o n s . So long as there is a n y positive saving t h e
shape of society is progressively altering. T h i s t e n d e n c y
to a c c u m u l a t e has the effect, in a c c o r d a n c e w i t h t h e
W a g e s F u n d theory, w h i c h R i c a r d o held in substance,
a l t h o u g h not in n a m e , of raising (he m a r k e t r a t e of wages.
This, in a c c o r d a n c e w i t h M a l t h u s i a n d o c t r i n e , w o u l d
m a k e t h e p o p u l a t i o n increase. By the l a w of d i m i n i s h i n g
returns, the m a r g i n a l p r o d u c t of capital a n d l a b o u r w o u l d
fall t h r o u g h t i m e ; b u t since the p o p u l a t i o n increase
would be geared to m a i n t a i n wages steady at the subsist-
ence — or, as in fairness to R i c a r d o wc m a y call it, at the
equilibrium — l e v e l , the share of l a b o u r in the m a r g i n a l
p r o d u c t w o u l d rise, t h e a m o u n t of real wages r e m a i n i n g
c o n s t a n t . C o n s e q u e n t l y t h e real profit p e r u n i t of c a p i t a l
would fall. T h i s is t r u e w h e t h e r with R i c a r d o w e use a
l a b o u r m e a s u r e of value or a n o u t p u t m e a s u r e . R e n t s
m e a n w h i l e w o u l d rise. T h i s is a c o m p l e t e , if c r u d e ,
d y n a m i c theory. So long as a n y savings exist the distribu-
tion of w e a l t h c o n t i n u e s t» c h a n g e a c c o r d i n g to certain
prihcipies — rents,rise, profits Hall.
i6
 THE NEED FOR A D Y N A M I C ECONOMICS

T h e question was raised — w h a t w o u l d h a p p e n w h e n

profit fell to z e r o ? L o n g before this, R i c a r d o replied, t h e
motive for a c c u m u l a t i o n w o u l d h a v e b e e n r e m o v e d .
T h u s he c o n t e m p l a t e d t h e a d v e n t of a s t a t i o n a r y state
w i t h t h e r a t e of interest still positive.
1 n e e d h a r d l y stress h o w i m p o r t a n t this d y n a m i c
t h e o r y w a s i n t h e c o r p u s of d o c t r i n e t h e n k n o w n as
Political E c o n o m y . T h e p r a c t i c a l m a x i m of F r e e T r a d e
was derivable from static t h e o r y . H a r d l y less i m p o r t a n t
i n t h e m i n d s of c o n t e m p o r a r i e s w e r e those t w o o t h e r
p r a c t i c a l m a x i m s , ( i ) t h a t saving b y those of m e a n s w o u l d
confer m o r e lasting benefit o n t h e l a b o u r i n g p o o r t h a n
c h a r i t y , a n d (2) t h a t the m a i n m e t h o d o p e n to t h e p o o r
for self-improvement was to raise their c o n c e p t of a p r o p e r
s t a n d a r d of living a n d b y c o n s e q u e n c e r e d u c e t h e b i r t h -
r a t e . T h i s of course w e n t w i t h t h e n e g a t i v e d o c t r i n e t h a t
it is useless to struggle for h i g h e r wages b y b a r g a i n i n g or
legislation; o n e c o u l d only affect real wages b y restricting
t h e s u p p l y of l a b o u r , w h i c h m e a n t h o l d i n g t h e p o p u l a t i o n
increase in check.
It is difficult to assess t h e i m p o r t a n c e in s u b s e q u e n t
history of these two practical m a x i m s d e r i v e d from t h e
old d y n a m i c t h e o r y . Historians following W e b e r h a v e
found m o r e a n c i e n t a n d d e e p - s e a t e d causes in P u r i t a n i s m
for t h e h i g h esteem in w h i c h saving was h e l d d u r i n g t h e
h e y d a y of c a p i t a l i s m . B u t surely a little m a y b e allowed
for t h e fact t h a t w e l l - e d u c a t e d persons i n the n i n e t e e n t h
c e n t u r y c o g n i z a n t w i t h political e c o n o m y f o u n d t h e r e
t h e strongest possible e n d o r s e m e n t for t h e view t h a t saving
w a s a v i r t u e . S a v i n g a c c o r d i n g to this d o c t r i n e was not
m e r e l y a self-regarding virtue, b u t a h u m a n e v i r t u e ,
t e n d i n g m o r e t h a n a n y o t h e r form of activity to the better-
m e n t of m a n k i n d . As regards»the second m a x i m , history
h a s certainly t a k e n t h e course prescribed^by t h e ecowomists.
17
 TOWARDS A DYNAMIC ECONOMICS
T h e l a b o u r i n g p o o r d i d in d u e course begin to restrict
their n u m b e r s ; they c o u l d h a r d l y h a v e m a d e t h e great
a d v a n c e s r e c o r d e d in the last half-century, h a d they not
d o n e so. W h e t h e r there is a n y link b e t w e e n the persistent
t e a c h i n g of the economists over several decades a n d the
g r o w t h of the birth-control m o v e m e n t is m o r e difficult
to d e t e r m i n e .
T h e s e p r a c t i c a l doctrines s u b s e q u e n t l y passed i n t o
disfavour, along w i t h the d y n a m i c t h e o r y o n w h i c h they
were based. T h e d y n a m i c theory was c r u d e , in p a r t
u n t e n a b l e as universal law, a n d in p a r t u n t e n a b l e a l t o -
gether. B u t n o t h i n g h a s b e e n p u t in t h e place of this
theory for of the m a x i m s ) , a n d the corpus of theoretical
economics t h a t we teach to-day right u p to a n d i n c l u d i n g
K e y n e s i a n d o c t r i n e r e m a i n s almost exclusively static.
T h e i d e a t h a t K e ^ T i e s is more d y n a m i c t h a n R i c a r d o is
the exact opposite of t h e t r u t h .
T h i s old d y n a m i c theory h a d t w o aspects. T h e r e was
( i ) t h e theory of m o t i v e p o w e r , a n d (2) t h e t h e o r y of
progressive redistribution.
N o w it m i g h t b e objected t h a t there is n o need to lay
m u c h stress o n t h e second p r o b l e m on the g r o u n d t h a t
this merely involves a n e x t r a p o l a t i o n of childlike simplicity
of t h e principles of static d i s t r i b u t i o n . So indeed it
a p p e a r e d to in Book I V of J . S, Mill, w h o e n d e a v o u r e d ,
partly in deference to Positivism, to stake out the claim
of D y n a m i c s for s e p a r a t e t r e a t m e n t , a n d whose definition
of it agrees precisely with m i n e . T h e lack of i m a g i n a t i o n
shown in his t r e a t m e n t , a n d his almost exclusive a t t e n t i o n
to the M a l t h u s i a n principle, m a y h a v e been responsible
for his failure to secure a p e r m a n e n t place for D y n a m i c s
in o u r corpus of doctrine. I submit t h a t there is m o r e in
this p r o b l e m t h a n Mill lehowed. I n static t h e o r y w e
e m p h a s i z e the igterdependefice of t h e whole p r i c i n g
 THE NEED FOR A DYNAMIC ECONOMICS

process a n d the r e q u i r e m e n t t h a t t h e e q u i l i b r i u m s h o u l d
b e s t a b l e . I n a d y n a m i c system t h e q u a n t i t y of re-
sources d e v o t e d to p r o d u c t i o n is steadily g r o w i n g (or
shrinking) a n d we m u s t e x a m i n e critically the m u t u a l
d e p e n d e n c e of t h e steadily c h a n g i n g volumes of s u p p l y
of e a c h factor a n d the steadily c h a n g i n g rates of r e m u n e r a -
tion. W e c a r m o t j u s t assume t h a t t h e i n t r o d u c t i o n of
m o v e m e n t does n o t i n t r o d u c e a new set of p r o b l e m s .
I n t h e old economics a c c u m u l a t i o n was the m o t i v e !
p o w e r . H e r e w e h a v e a stark c o n t r a d i c t i o n to K e y n e s i a n
d o c t r i n e in w h i c h saving is always t e n d i n g to r e t a r d
a d v a n c e . T h i s p r o b l e m will h a v e to b e reconsidered from
the beginning.
C o n f r o n t e d with t h e m e n t a l h a b i t , e n g e n d e r e d b y
neglect of t h e subject over a n u m b e r of d e c a d e s , of s u p -
posing t h a t t h e r e is n o p r o b l e m h e r e of g r e a t interest o r
difficulty, I u r g e m y o p i n i o n t h a t this g r o u n d is very
sUppery a n d t r e a c h e r o u s , a n d t h a t most careful s t u d y of
a p p a r e n t l y simple m a t t e r s is necessary. As a b e g i n n i n g ,
therefore, I w a n t to e x a m i n e c e r t a i n m a t t e r s w h i c h are
m o r e simple t h a n either of t h e two p r o b l e m s I h a v e j u s t
referred to, n a m e l y t h e necessary relations b e t w e e n t h e
rates of g r o w t h of t h e different e l e m e n t s i n a g r o w i n g
economy.
I n this a p p r o a c h there are t w o propositions in the
classical system w h i c h c a n be t e n t a t i v e l y d i s c a r d e d . O n e
is t h e p o p u l a t i o n d o c t r i n e , t h e proposition t h a t t h e s u p p l y
of l a b o u r is infinitely elastic a t a c e r t a i n real w a g e , t h a t
w a g e being d e t e r m i n e d b y w h a t the l a b o u r i n g cla.sscs of
t h e c o u n t r y r e g a r d as their m i n i m u m s t a n d a r d of living
w i t h sufficient firmness to influence their c o n d u c t in
reproduction. T h i s d o c t r i n e m a y still h a v e relevance
to large poverty-stricken a r e a s of t h e w o r l d of t o - d a j .
It is o n t ; of t h e d o c t r i n e s t i l a t m a y p e r t i a p s b e r e g a r d e d
 TOWARDS A DYNAMIC ECONOMICS

as v a l i d in r e l a d o n to c e r t a i n circumstances althougli n o t
universally v a l i d . I a m interested n o w p a r t i c u l a r l y i n
t h e economies of the U n i t e d States, G r e a t Britain, W e s t e r n
E u r o p e a n d other a d v a n c e d countries. I n this context
we m a y r e g a r d t h e size of t h e p o p u l a t i o n not, as i n t h e
old classical system, as a d e p e n d e n t b u t as a n i n d e p e n d e n t
v a r i a b l e . T o put the m a t t e r otherwise, changes in it m a y
, be r e g a r d e d as exogenous c h a n g e s .
Secondly, 1 propose to d i s c a r d the law of d i m i n i s h i n g
r e t u r n s from t h e l a n d as a p r i m a r y d e t e r m i n a n t in a
progressive e c o n o m y . N o t t h a t t h e r e was a n y fallacy in
the classical t r e a t m e n t of this subject. I d i s c a r d it only
because in o u r p a r t i c u l a r context it a p p e a r s t h a t its in-
fluence m a y be q u a n t i t a t i v e l y u n i m p o r t a n t . I shall
e n d e a v o u r to define m y t e r m s , however, so as to leave
r o o m for a n y influence t h a t it m a y h a v e .
I n e x a m i n i n g a n e x p a n d i n g e c o n o m y w e m a y consider
t h e inter-relations b e t w e e n the expansion in three funda-
m e n t a l elements, viz. ( i ) m a n - p o w e r , (a) o u t p u t or i n c o m e
p e r h e a d a n d [3) q u a n t i t y of capital a v a i l a b l e .
O n e m i g h t define a static e c o n o m y by saying t h a t
these t h r e e quantities a r e assumed to be c o n s t a n t . T h e
t h r e e b e i n g constant, saving p e r a n n u m w o u l d be zero.
S u c h a definition is p e r h a p s unnecessarily rigid. I t is
desirable to m a k e t h e definition of a s t a t i o n a r y state as
flexible as possible. T h e definition given m a y be modified
in the directioTi not only of greater flexibility b u t also of
g r e a t e r precision by t a k i n g not the supplies b u t the supply
schedules of m a n - p o w e r a n d c a p i t a l as constant. O n t h e
a s s u m p t i o n thus modified a n occasional bit of saving
might occur Jn a s t a t i o n a r y e c o n o m y , for instance, if
there were a once-over c h a n g e of taste directing d e m a n d
t o w a r d s a service r e q u i r i n g m o r e c a p i t a l t h a n t h e a v e r a g e .
T h i s m i g h t entaij a once-ovel" b u t p e r m a n e n t rise in t h e
20
 THE NEED FOR A DYNAMIC ECONOMICS

r a t e of i n t e r e s t a n d a o n c e - o v e r r e a d j u s t m e n t i n t h e p r i c e s
of g o o d s a n d factors t h r o u g h o u t t h e s y s t e m . I n t h e n e w
equilibrium there might be m o r e capital in existence,
b u t t h e r a t e of s a v i n g p e r a n n u m w o u l d o n c e a g a i n b e
zero.
A f u r t h e r m o d i f i c a t i o n of t h e a s s u m p t i o n s m a y b e
possible a n d d e s i r a b l e still w i t h i n t h e f r a m e w o r k of
S t a t i c s . I f o n e allows o n c c - o v c r c h a n g e s i n t a s t e , w h y
n o t o n c e - o v e r c h a n g e s i n t h e s u p p l y s c h e d u l e s of o n e o r
o t h e r of t h e f a c t o r s ? A o n c e - o v e r e m i g r a t i o n of l a b o u r
o r i n c r e a s e of c a p i t a l o r i m p r o v e m e n t i n a n e x p o r t m a r k e t
o r e v e n a t e c h n o l o g i c a l i n v e n t i o n m a y still b e c a t e r e d
for b y t h e s t a t i c p r i n c i p l e s , w i t h a c o n s e q u e n t r e a d j u s t -
m e n t of v a l u e s a n d q u a n t i t i e s t h r o u g h o u t t h e s y s t e m ,
t h e e c o n o m y again settling d o w n to a n e w equilibrium
w h e n the once-over injection has b e e n assimilated. But
p o s t u l a t e a c o n t i n u i n g s t r e a m of n e w i n v e n t i o n s , a c o n -
t i n u i n g c h a n g e of t a s t e , m o v i n g a l w a y s i n t h e d i r e c t i o n
of services r e q u i r i n g c a p i t a l a b o v e t h e p r e v i o u s a v e r a g e ,
o r a c o n t i n u i n g i n c r e a s e of c a p i t a l a v a i l a b l e a t a g i v e n
r a t e of i n t e r e s t , a n d ( h e n w e a r e i n a d y n a m i c e c o n o m y
a n d t h e s t a t i c e q u a t i o n s will n o t a l o n e suffice to solve
our problems.
O f the three variables which I have mentioned, two
m a y , as a first a p p r o x i m a t i o n , b e r e g a r d e d as i n d e p e n d e n t ,
n a m e l y t h e size of t h e p o p u l a t i o n a n d its p r o d u c t i v i t y p e r
h e a d , a n d t h e o t h e r as i n p a r t a t least d e p e n d e n t , n a m e l y
t h e q u a n t i t y of c a p i t a l . ' T h i s is i n fiat c o n t r a d i c t i o n , of
c o u r s e , to t h e o l d classical s y s t e m . F o r t h e t i m e b e i n g
we m a y neglect p r o b l e m s connected with risk-bearing.
F i r s t w e m a y ask this q u e s t i o n , w h a t b e h a v i o u r of
c a p i t a l is r e q u i r e d t o b e c o n s i s t e n t w i t h g r o w t h i n t h e
' Account is, however, taken in ^he ^..oper place that the quantity .yf
capital Ijccijpiing available may affect produetiviiy.
21
 TOWARDS A DYNAMIC ECONOMICS

o t h e r elements, on the hypothesis that the rate of interest does

not change ?
First consider a steady geometric increase in t h e p o p u l a -
tion, with technical knowledge r e m a i n i n g constant. W i t h
interest constant t h e r e q u i r e m e n t for capital will grow
at the s a m e r a t e as t h e p o p u l a t i o n . T h i s r e q u i r e m e n t
will b e m e t if the p o p u l a t i o n steadily saves a c o n s t a n t
fraction of its total i n c o m e . H o w large this fraction m u s t
be d e p e n d s on t h e ratio of the v a l u e of all capital in use
to the v a l u e of income d u r i n g a period.
If there is n o technological a d v a n c e a n d the r a t e of
interest does not alter, the r a t i o of t h e value of c a p i t a !
in use to income per period, w h i c h we m a y call the c a p i t a l
coefficient, will r e m a i n constant. I a m not considering
for the m o m e n t w h a t will h a p p e n if the requisite fraction
of i n c o m e is not saved, but w h a t saving is requisite to be
consistent with a certain type of progress, if t h e r a t e of
interest does not c h a n g e .
T h e requisite fraction of i n c o m e is e q u a l to the increase
of p o p u l a t i o n in a period r e g a r d e d as a fraction of t h e
whole p o p u l a t i o n m u l t i p l i e d by the capital coefficient.
T h i s v a l u e is i n d e p e n d e n t of the period chosen, since the
l e n g t h of t h e period multiplies t h e p o p u l a t i o n increase
while it divides the capital coefficient. T h u s if o u t s t a n d i n g
capital is four times n a t i o n a l i n c o m e p e r a n n u m a n d the
increase of p o p u l a t i o n i p e r cent p e r a n n u m , t h e saving
r e q u i r e d is 4 p e r cent of i n c o m e . Constancy in the
capital coefficient implies, if the r a t e of interest is constant,
a constant p r o d u c t i o n period.
W i t h a stationary p o p u l a t i o n a n d a steadily a d v a n -
cing technology' we get a similar result. T e c h n o l o g i c a l
a d v a n c e s m a y be labour-saving or capital-saving. T h e
correct definition of a n e u t r a l a d v a n c e has b e e n a m a t t e r
of disiigreement,^and J belief e 1 a m n o t chalJeiiginR a n y
22
 THE NEED FOR A D Y N A M I C ECONOMICS

firmly established position if I p r o v i d e m y o w n . I define

a n e u t r a l a d v a n c e as one w h i c h , a t a c o n s t a n t r a t e of
interest, docs not d i s t u r b t h e v a l u e of the capital co-
efficient ; it does not alter the l e n g t h of t h e p r o d u c t i o n
process.
Clearly in a case of this sort t h e r e is n o question of a
correct definition. O n e ' s definition s h o u l d involve a
r e a s o n a b l e use of l a n g u a g e . As well as being a l m o s t
essential as a tool for t h e kind of a p p r o a c h to t h e d y n a m i c
p r o b l e m w h i c h I a m a t t e m p t i n g , t h e r e is m u c h to be said
for m y definition b o t h o n logical a n d e c o n o m e t r i c a l
g r o u n d s . I t implies, to p u t it r o u g h l y , t h a t t h e p r o -
ductivity of l a b o u r e m b o d i e d in m a c h i n e s is raised in e q u a l
m e a s u r e w i t h t h a t of those e n g a g e d o n m i n d i n g m a c h i n e s ;
it implies a n e q u a l rise of p r o d u c t i v i t y o n t h e p a r t of all
l a b o u r h o w e v e r far b a c k o r forward it m a y b e b e t w e e n
t h e i n c e p t i o n a n d t h e final stage in p r o d u c t i o n . N o o n e
i n v e n t i o n is likely, of course, to h a v e this c h a r a c t e r , b u t
t h e s u m of inventions o c c u r r i n g in a u n i t p e r i o d m i g h t
well h a v e .
A s t r e a m of inventions, w h i c h a r e n e u t r a l as defined,
will, p r o v i d e d t h a t the r a t e of interest is u n c h a n g e d , leave
t h e distribution of t h e total n a t i o n a l p r o d u c t as b e t w e e n
l a b o u r (in the b r o a d e s t sense) a n d c a p i t a l u n c h a n g e d .
T h e prevailing c h a r a c t e r of inventions t h r o u g h a period,
in w h i c h there is n o c u m u l a t i v e c h a n g e in the r a t e of
interest, c a n be m e a s u r e d by c o m p a r i n g t h e g r o w t h i n
t h e v a l u e of c a p i t a l w i t h t h e g r o w t h of i n c o m e . T h i s c a n
also be d o n e in e a c h i n d u s t r y separately a n d in e a c h firm.
I t s h o u l d b e noticed in passing t h a t t h e d e g r e e of
capitalization of a n y i n d u s t r y m u s t b e tested by t h e r a t i o
of t h e interest c h a r g e (which m a y b e t a k e n as p r o p o r t i o n a l
to t h e v a l u e of its r e a l assets) t^o it5 t u r n o v e r . T h i s is (juite^
different f«om t h e ratio of t h e o v e r h e a d charges o n a c c o u n t
23
 TOWARDS A DYNAMIC ECONOMICS

of capital, viz. interest plus a m o r t i z a t i o n , to t u r n o v e r . A

g r o w t h in the s e c o n d - m e n t i o n e d ratio docs not i m p l y a
g r o w t h in t h e first m e n t i o n e d . F o r instance, a firm m a y
substitute m a c h i n e r y w o r t h £ 5 0 , 0 0 0 a n d calculated to
last five years for m a c h i n e r y w o r t h £ 5 0 , 0 0 0 calculated
to last t w e n t y to get a given v o l u m e of o u t p u t . S u c h a
substitution m i g h t h a v e the a p p e a r a n c e of intensifying
m e c h a n i z a t i o n , the n e w m a c h i n e r y t a k i n g c h a r g e of
processes t h a t were formerly d o n e by h a n d ; it w o u l d
raise t h e charges d u e in respect of c a p i t a l ; a n d it w o u l d
increase t h e v a l u e of the firm's orders to m a k e r s of p r o -
d u c e r s ' goods. But it would not involve a h i g h e r degree
of capitalization, n o r w o u l d it give rise to any d e m a n d
for fresh savings. It is i m p o r t a n t to r e m e m b e r t h a t the
p r o p o r t i o n of resources in a c o u n t r y devoted to the p r o -
d u c t i o n of m o r e or less fixed p r o d u c e r s ' goods for the
h o m e m a r k e t is n o index of the degree of capitafization
of industry ; a n increase in t h e ratio of industries m a k i n g
capita] goods to those m a k i n g c o n s u m e r s ' goods n e e d not
Involve a n y d e m a n d for n e w savings.
I n his Theory of Wages M r . Hicks supplied a s o m e w h a t
different definition of a n e u t r a l invention ( p p . 1 2 1 - - 1 2 7 ) .
H e defined it as one which raises t h e m a r g i n a l p r o d u c t i v i t y
of l a b o u r a n d c a p i t a l in e q u a l p r o p o r t i o n s . T h i s com-
m e n d s itself to reason, but there are a n u m b e r of causes
w h i c h m a k e it unsuitable for m y p u r p o s e . T h e special
c h a r a c t e r s of m y definition m a y be b r o u g h t o u t by a
c o m p a r i s o n with his.
I . T h e Hicks definition makes the n e u t r a l i t y of an
invention d e p e n d on various elasticities, n a m e l y elasticities
of substitution as b e t w e e n capital a n d l a b o u r in other
industries a n d of the d e m a n d for o t h e r p r o d u c t s using
t h e m in various proptinions, t h r o u g h o u t the whole
e c o n o m y . T h u o the neutrality of the invention d e p e n d s
24
 THE NEED FOR A DYNAMIC ECONOMICS

on circumstances quite u n r e l a t e d to t h e intrinsic c h a r a c t e r

of t h e invention itself. M y definition d e t e r m i n e s t h e
m a t t e r solely b y reference to t h e i n v e n t i o n itself, a n d is, o n
this a c c o u n t , a h a n d i e r tool in a first a p p r o a c h to a g r e a t
field of study, i n w h i c h the u t m o s t simplicity is d e s i r a b l e .
2. M r . Hicks c o m p a r e s his definition w i t h a n earlier
one given by Professor P i g o u . ' Pigou's definition makes
neutrality depend on what happens on the assumption
t h a t t h e q u a n t i t i e s of capital a n d l a b o u r available to t h e
e c o n o m y a r e unaffected by the invention. Professor
Pigou proceeds to consider, from t h e p o i n t of view of t h e
w i d e r question of the h a r m o n y b e t w e e n t h e interests of
" l a b o u r " a n d society as a whole, w h a t will result if t h e
s u p p l y of the factors is altered i n c o n s e q u e n c e ; b u t this
analysis is not t a k e n to modify t h e definition. M r . Hicks
seems to leave the question w h a t is to b e assumed a b o u t
t h e s u p p l y of t h e factors o p e n . But w h e t h e r h e is t a k e n
to follow Professor Pigou in assuming absolutely inelastic
s u p p l y or n o t , the position is equally unsatisfactory.
T o assume a n absolutely inelastic supply in every case
is s o m e w h a t unrealistic. T o allow, o n t h e o t h e r h a n d ,
t h a t t h e a c t u a l elasticities of supply, w h a t e v e r they m a y
be from t i m e to t i m e , m u s t b e t a k e n i n t o a c c o u n t i n
d e t e r m i n i n g w h e t h e r a n i n v e n t i o n is n e u t r a l o r n o t , a g a i n
makes the definition of n e u t r a l i t y d e p e n d n o t on the
intrinsic n a t u r e of t h e i n v e n t i o n b u t o n q u i t e outside
factors.
F u r t h e r m o r e e i t h e r a s s u m p t i o n a n d i n d e e d this w h o l e
m e t h o d of a p p r o a c h are q u i t e a p p r o p r i a t e in relation to
a once-over invention (static analysis), b u t not to a s t r e a m
of successive n e w inventions c o n t i n u i n g t h r o u g h t i m e .
I n t h e static scheme of t h o u g h t it is p r o p e r to assume
d e t e r m i n a t e supply schedules of the factors a n d to conceive*
' Economics of Welfare (and edition), pp. 03a-t)3d.
25
 TOWARDS A DYNAMIC ECONOMICS

of m a r g i n a l productivities as g o v e r n e d by t h e intersection
of supply a n d d e m a n d curves. A once-over invention
leads to a once-over c h a n g e of price w h i c h d e t e r m i n e s
a n d is d e t e r m i n e d by a once-over c h a r g e in t h e supply
of factors in the o r d i n a r y way, the supply schedules b e i n g
conceived to r e m a i n u n c h a n g e d ,
W h e n wc h a v e to consider a s t r e a m of new inventions
confronting a g r o w t h of capital (viz. positive saving con-
t i n u i n g to accrue) a different t e c h n i q u e is r e q u i r e d . W e
m u s t r e m e m b e r t h a t t h e e q u i h b r a t i n g force m a y not b e ,
as in t h e static analysis, a price (or set of prices), b u t a
certain r a t e of c h a n g e of p r i c e .
3. I n selecting an assumption for t h e p u r p o s e of defining
n e u t r a l i t y one has to choose b e t w e e n the a s s u m p t i o n of
a fixed s u p p l y of factors or t h a t of an increasing o n e . T h e
a s s u m p t i o n of a c o n s t a n t supply schedule of t h e old-
fashioned k i n d is i n a p p r o p r i a t e , since t h a t is related to
a one-over price c h a r g e , w h i c h has no significance in
d y n a m i c s ; to p u t it differently, o n e co-ordinate of t h e
schedule is a price a n d n o t , as is required in d y n a m i c s ,
a r a t e of c h a n g e of p r i c e .
T o assume a c o n s t a n t s u p p l y of the factors t h r o u g h
time is highly unrealistic in r e l a t i o n to a n y of the economics
in w h i c h we a r e interested, a n d at t h e same t i m e sets a
m u c h m o r e c o m p l i c a t e d p r o b l e m for t h e definition of
n e u t r a l i t y . T h u s it m a y b e rejected o n t w o excellent
grounds.
As I have chosen to a p p r o a c h t h e d y n a m i c p r o b l e m
b y asking w h a t r a t e of increase of capital w o u l d b e con-
sistent w i t h certain rates of increase in o t h e r p a r t s of t h e
system, it has seemed simplest to define a n e u t r a l s t r e a m
of inventions as one w h i c h shall r e q u i r e a r a t e of increase
« f c a p i t a l e q u a l to t h e r a t e ^pf increase of i n c o m e e n g e n -
d e r e d b y it. I P t h e s t r e a m of inventions r e q u i r e s ' c a p i t a l
26
 THE NEED FOR A D Y N A M I C ECONOMICS

to increase a t a g r e a t e r r a t e , t h e n it is l a b o u r - s a v i n g o r
c a p i t a l r e q u i r i n g ; a n d conversely. T h e r a t e of interest
is assumed t o b e c o n s t a n t , since t h a t is a s i m p l e r a s s u m p -
tion t h a n t h a t of a c h a n g i n g r a t e of interest,
4, T h e n e u t r a l i t y of a n i n v e n t i o n w o u l d b e d e t e r m i n e d
on m y definition b y reference t o w h a t h a p p e n s t o t h e
c a p i t a l coefficient, if t h e r a t e of interest is c o n s t a n t . I n
the l a n g u a g e of Statics this implies a n infinitely elastic
supply of c a p i t a l a t the existing r a t e of interest. My
definition does n o t , of course, assume t h a t t h e s u p p l y is
infinitely e l a s t i c ; b u t if it is, t h e n it will b e possible to
use it to classify all a n d s u n d r y i n v e n t i o n s as t h e y o c c u r .
T h o s e w h o follow K e y n e s in h o l d i n g t h a t , save in c o n -
ditions of Full E m p l o y m e n t , t h e s u p p l y of c a p i t a l is in fact
infinitely elastic a t a given r a t e of interest, should give m y
definition a p a r t i c u l a r l y good m a r k for its e c o n o m e t r i c
soundness.
5 . I t does n o t a p p e a r possible to say w h e t h e r M r .
Hicks's definition o r m i n e w o u l d p u t m o r e a c t u a l inven-
tions into t h e l a b o u r - s a v i n g b o x . H i s d e p e n d s p a r t l y o n
t h e outside c i r c u m s t a n c e s , m i n e o n t h e intrinsic c h a r a c t e r
of the invention only. I c a n n o t find a n y c o n s i d e r a t i o n
m a k i n g it p r o b a b l e t h a t either his or m i n e w o u l d p u t
more in.
I h o p e , I m a y say in digression, a l r e a d y to b e giving
you a d i m c o n c e p t i o n — a n d I only conceive d i m l y myself
— o f t h e kind of revolution t h a t is r e q u i r e d in e c o n o m i c s ,
I w a n t to sec those keen tools of t h o u g h t of Pigou a n d
Hicks, w h i c h h a v e b e e n so finely used to perfect static
theory, a p p l i e d to t h e r o u g h d y n a m i c s of R i c a r d o ,
c h a n g i n g it i n d e e d o u t of recognition i n t h e process, as
m o d e r n m a r g i n a l analysis h a s a l r e a d y long since c h a n g e d
the theories of price a n d cost of A \ i a m S m i t h a n d Ricardo.^
T h i s s h o u l d involve a considerable r e - w r i t i n g of economics.
27
 TOWARDS A DYNAMIC ECONOMICS

But I d o not share ihe views of those w h o hold t h a t , in

place of t h e old t h e o r y , we are to h a v e a b r a n d n e w k i n d
of economics, c h a p t e r one of w h i c h is to b e a definition
of t h e N a t i o n a l I n c o m e a n d c h a p t e r two—goodness
knows w h a t .
I t m u s t n o t b e t a k e n to b e i m p l i e d t h a t a n e u t r a l
i n v e n t i o n as defined is the most likely kind of i n v e n t i o n .
N o t h i n g of this sort is p r e s u p p o s e d in m y definition or
for t h a t m a t t e r in t h e definitions a d v a n c e d b y o t h e r s .
I m i g h t be p e r m i t t e d to observe in passing, however, t h a t
it is not m y impression t h a t i n r e c e n t years inventions
h a v e b e e n p r e d o m i n a n t l y of a c h a r a c t e r t e n d i n g to raise
the capital coefTicient as calculated a t a n d d e t e r m i n e d by
a constant r a t e of I n t e r e s t ; it is not m y impression t h a t
inventions h a v e been p r e d o m i n a n t l y labour-saving in the
sense defined.
W i t h a stationary- p o p u l a t i o n , t h e n , a n d a steady a n d
n e u t r a l technological a d v a n c e , the n e w c a p i t a l r e q u i r e d
would b e a c o n s t a n t fraction of i n c o m e e q u a l to t h e
increase of income (or o u t p u t ) i n a n y period considered
as a fraction of total income multiplied by the capital
coefficient. T h e s a m e p e r i o d must be used in calculating
t h e increase of o u t p u t a n d in c o m p u t i n g t h e c a p i t a l
coefficient.
If a is the frsction of i n c o m e required to be saved w h e n
p o p u l a t i o n is increasing at a given r a t e X a n d technology
is s t a t i o n a r y a n d b t h e fraction of i n c o m e r e q u i r e d to b e
saved w h e n p o p u l a t i o n is s t a t i o n a r y a n d technological
a d v a n c e makes possible a n increase of o u t p u t a t r a t e Y,
t h e n , w h e n t h e r e is both a p o p u l a t i o n increase of X a n d
a n increase of o u t p u t p e r h e a d of Y , the fraction of i n c o m e
r e q u i r e d to b e saved will b e a + b + ab. ab is likely to b e
^ very small q u a n t i t y a n d m a v be safely neglected.
T ^ e foregoing analysi-i i m p l i e d t h a t a const-artf, v a l u e
28
 THE NEED FOR A DYNAMIC ECONOMICS

m e a n s a c o n s t a n t p o w e r of p u r c h a s i n g goods. I h a v e
n o t h i n g n e w to say a b o u t i n d e x n u m b e r s ! T h e r e h a v e
always b e e n economists, however, from R i c a r d o to M r ,
H a w t r e y , w h o h a v e preferred a l a b o u r m e a s u r e of v a l u e .
I d o n o t s h a r e this preference. W e arc not hkcly i n
t h e foreseeable future, assuming t h a t t o t a l i t a r i a n i s m will
not t r i u m p h , to h a v e a l a b o u r m e a s u r e of v a l u e . It
implies t h a t t h e a v e r a g e of m o n e y r e w a r d s p a i d to workers
n e v e r rises, a n y increases in s o m e p a r t of t h e field being
offset b y e q u i v a l e n t decreases in o t h e r s . T h i s is a n a w k -
w a r d p r o g r a m m e ; decreases a r e n e v e r w e l c o m e ; it is
easier t o allow sectional increases to s t a n d a n d a c c e p t
a g r a d u a l rise i n the over-all a v e r a g e of m o n e y r e w a r d s .
P r o v i d e d this rise did not p r o c e e d m o r e quickly t h a n the
increase of a v e r a g e o u t p u t p e r h e a d , t h e c o n s e q u e n t
system w o u l d b e sufficiently stable. F u r t h e r m o r e t h e
pleasure given b y a n occasional increase of m o n e y i n c o m e
is p r o b a b l y s o m e w h a t g r e a t e r t h a n t h a t given by a n
e q u i v a l e n t fall in t h e prices of p u r c h a s a b l e goods a n d
services. Is it n o t a little sadistic to seek to d e p r i v e m e n
of this i n c r e m e n t of p l e a s u r e , for t h e sake o f — w h a t ? — a
m e r e a c a d e m i c preference.
Again, it seems t h a t t h e l a b o u r m e a s u r e w o u l d a c c o r d
t o o m u c h to the d e a d h a n d of the past. W h e n a c o n t r a c t
is m a d e for a future p a y m e n t i n m o n e y , it is c e r t a i n l y
i m p l i e d or h o p e d t h a t t h e future m o n e y will h a v e as good
a p o w e r of p u r c h a s i n g goods as p r e s e n t m o n e y . B u t it
is n o t , I think, i m p l i e d t h a t future m o n e y will p u r c h a s e
t h e s a m e fraction of t h e n a t i o n a l o u t p u t p e r h e a d as
present m o n e y .
O n e reason for t h e preference for t h e l a b o u r m e a s u r e
m a y be d u e to a sense of t h e i n h e r e n t difficulties in f r a m i n g
a satisfactory i n d e x n u m b e r of p n c e s to be a y a r d s t i c k for^
t e s d n g sh# goods v a l u e of m o n e y . It m u s t b e r e m e m b e r e d ,
29 •
 TOWARDS A DYNAMIC ECONOMICS

however, t h a t this p r o b l e m of a n i n d e x n u m b e r is n o t
eliminated b y the l a b o u r m e a s u r e . T h e r e a r e various
kinds of l a b o u r , a n d a l a b o u r index n u m b e r w o u l d b e
as necessary as a goods i n d e x n u m b e r . T h a t i n d e x n u m b e r
w o u l d not only h a v e to i n c l u d e the various trades a n d
grades of w o r k b u t also such l a b o u r as t h a t of the j u d g e ,
t h e surgeon a n d t h e general m a n a g e r . W o u l d this
n u m b e r really b e so very m u c h easier to c o m p u t e ?
N o n e the less this preference is so influential t h a t it is
desirable to r e m a r k o n c e a n d for all o n its b e a r i n g u p o n
t h e relations t h a t h a v e b e e n set o u t . I n the case of a n
e c o n o m y s t a t i o n a r y in n u m b e r s b u t m a k i n g n e u t r a l
technological progress w i t h a constant rate of interest, n o
n e w saving w o u l d be r e q u i r e d . T h e l a b o u r v a l u e of t h e
total of c a p i t a l assets w o u l d r e m a i n constant, a l t h o u g h
its goods v a l u e w o u l d rise at t h e same r a t e as n a t i o n a l
income.
T h i s lack of a n y r e q u i r e m e n t for savings i n the c i r c u m -
stances a s s u m e d is a r a t h e r n o t a b l e fact, w o r t h p a u s i n g
to reflect u p o n , since o u r o w n e c o n o m y is o n e in w h i c h
t h e p o p u l a t i o n will not increase in t h e m i d d l e - d i s t a n c e
future, b u t in w h i c h w e h o p e t h a t n a t i o n a l i n c o m e will
increase. If there is likely to b e a n y t e n d e n c y t o w a r d s a
r e d u n d a n c y of savings in this c o u n t r y — a n d w e m u s t
also keep o u r eyes u p o n t h e U n i t e d States — then t h e fact
t h a t a l a b o u r m e a s u r e of v a l u e w o u l d r e n d e r all saving
in t h e circumstances supposed superfluous must b e d e e m e d
t o h a v e some b e a r i n g o n t h e desirability of t h a t m e a s u r e .
I t m i g h t be a r g u e d t h a t , since w h a t savers w a n t is dis-
posable c a p i t a l or i n c o m e in future, a n d since, on a l a b o u r
s t a n d a r d , existing titles or assets w o u l d a p p r e c i a t e i n
t e r m s of goods b o t h as regards their c a p i t a l v a l u e a n d t h e
j n c o m e d u e from t h e m , jjrivate people would, so to speak,
find'their saving aulomatica'ily d o n e for t h e m , a n d w o u l d
30
 THE NEED FOR A DYNAMIC ECONOMICS

n o longer find it desirable to set aside a n y p a r t of t h e i r

i n c o m e for this p u r p o s e . W h i l e this a r g u m e n t m a y h a v e
s o m e force, it does n o t g o t h e w h o l e w a y . I t supposes
prescience as r e g a r d s the c o n t i n u e d m a i n t e n a n c e of t h e
labour standard. F u r t h e r m o r e m a n y w o u l d - b e savers
a r e n o t a l r e a d y o w n e r s of titles or assets or n o t in sufficient
q u a n t i t y to satisfy their prospective r e q u i r e m e n t s ; these
w o u l d c o n t i n u e to save in the o r d i n a r y w a y despite t h e
labour standard. Logically, it m i g h t b e a r g u e d , the
saving o n t h e p a r t of those desiring to b u i l d u p their posi-
tion a t a g r e a t e r r a t e t h a n the n a t i o n a l a v e r a g e s h o u l d
b e offset b y dis-saving b y others. A r g u i n g t h a t their
titles or assets w o u l d secure t h e m a rising goods i n c o m e
over a n d a b o v e t h e level t h a t on a goods s t a n d a r d they
w o u l d d e e m it necessary to save for, they should begin
living o n c a p i t a l , t h u s r e d u c i n g their u n w a n t e d future
accretions of i n c o m e in t e r m s of goods. B u t w o u l d t h e y ?
or w o u l d they in all cases? Is t h e r e n o t a c e r t a i n vis
inertiae in respect of savings a l r e a d y m a d e i n t h e p a s t ?
I t c a n surely h a r d l y b e d o u b t e d t h a t this l a b o u r s t a n d a r d
w o u l d c a u s e savings in t h e a g g r e g a t e to b e h i g h e r t h a n
they w o u l d be o n a goods s t a n d a r d .
T h e case of c o m p a n i e s should also b e looked at. O n
a n y system these cause savings to b e u n d e r t a k e n to a n
e x t e n t t h a t m a y often exceed w h a t their shareholders
w o u l d v o l u n t e e r from p r i v a t e motives. Yet not all c o m -
p a n y e x p a n s i o n is financed in this w a y . Debentures,
preference shares, o r d i n a r y shares a r e occasionally issued !
U n d e r t h e l a b o u r s t a n d a r d t h e o p p o r t u n i t i e s for this w o u l d
be almost entirely e l i m i n a t e d . W i t h t h e progressive fall
in prices c o m p a n i e s w o u l d h a v e to increase the v o l u m e
of their physical assets steadily w i t h o u t fresh issue. T h e
a u d i t o r s r e q u i r e t h a t t h e c a s h t ' a l u e of t h e assets b e sus-
tainedja*a level e q u a l to t h e n o m i n a l v a l u e of the fiabihties.
3»
 TOWARDS A DYNAMIC ECONOMICS

If this w e r e d o n e in the case of all c o m p a n i e s , t h e n t h e

total goods value of their assets w o u l d grow as quickly
as the total goods v a l u e of ihc wliole n a t i o n a l c a p i t a l .
T h i s w o u l d be the a u t o m a t i c effect of correct a c c o u n t a n c y
as r e q u i r e d by the a u d i t o r s . T h u s t h e r e w o u l d b e n o
scope w h a t e v e r for fresh issues of capital, except as a n
offset to the loss of assets b y o t h e r c o m p a n i e s going b a n k -
rupt. I n c i d e n t a l l y m a n y m o r e c o m p a n i e s w o u l d find
themselves faced with b a n k r u p t c y , w h i c h m i g h t , however,
only m e a n , given the m o d e r n outlook, t h a t m a n y m o r e
u n s o u n d positions w o u l d get bolstered u p at the cost of
the tax-payer.
I c a n n o t resist the t e m p t a t i o n to relate this line of
t h o u g h t to certain proposals by Professor von H a y e k
w h i c h were m u c h discussed some years a g o . H e a d v o c a t e d
a m o n e t a r y system w h i c h w o u l d p u t us in a n a r r o w e r
strait-jacket t h a n the l a b o u r s t a n d a r d itself. I m a y n o t e
in passing, however, t h a t since h e allowed the m o n e t a r y
authorities to issue a d d i t i o n a l credit to offset a n y decline
in the velocity of circulation, his system w o u l d involve
p u m p i n g in n e w m o n e y d u r i n g a depression on a m o r e
heroic scale t h a n the most a u d a c i o u s a u t h o r i t y has ever
u n d e r t a k e n in p r a c t i c e .
Professor v o n H a y e k ' s scheme would h a v e prices fall
not merely in p r o p o r t i o n to o u t p u t per h e a d , b u t to total
national output. I'hus, even if t h e r e were p o p u l a t i o n
g r o w t h , n o n e w saving w o u l d b e r e q u i r e d If inventions
w e r e n e u t r a l a n d t h e r a t e of interest c o n s t a n t . T h e gist
of the foregoing a r g u m e n t s suggests that, since a l a b o u r
s t a n d a r d , still m o r e a H a y e k s t a n d a r d , would u n d o u b t e d l y
tend to cause savings to s t a n d higher t h a n they w o u l d
otherwise be, the m o n e t a r y authorities should t a k e t h e
t e n d e n c y of savings to b e r e d u n d a n t or deficient as a
p r i m e criterion far Inclining tViem, to the extent t&at t h e y
 THE NEED FOR A DYNAMIC ECONOMICS

h a v e t h e p o w e r to influence these things (which d e p e n d

m u c h m o r e o n a u t o n o m o u s c h a n g e s in w a g e , s a l a r y a n d
fee rates), t o w a r d s a goods s t a n d a r d in t h e o n e case or
t o w a r d s a l a b o u r s t a n d a r d i n the o t h e r . T h i s leads us
to a conclusion, s o m e w h a t p a r a d o x i c a l , w h i c h is t h e exact
opposite of Professor v o n H a y e k ' s . G i v e n the d e m a n d for
n e w capital ( d e p e n d i n g m a i n l y on t h e p o t e n t i a l r a t e of
g r o w t h a n d t h e c h a r a c t e r of i n v e n t i o n s ) , t h e n the g r e a t e r
the disposition of individuals to save v o l u n t a r i l y t h e m o r e
o u g h t t h e b a n k s to increase the s u p p l y of b a n k c r e d i t .
I d o not wish to r e - e n t e r t h e old d e b a t e . I t always
a p p e a r e d to me t h a t it was a c a r d i n a l e r r o r to suppose
t h a t the v o l u m e of a d d i t i o n a l b a n k credit c o u l d .simply
be a d d e d to v o l u n t a r y saving to assess t h e total s u p p l y
of c a p i t a l available to m e e t r e q u i r e m e n t s , since t h e a d d i -
tional b a n k credit is a u t o m a t i c a l l y a n d precisely offset b y
n e w h o a r d i n g of e q u a l a m o u n t . A n d if it b e objected —
a h , b u t this a d d i t i o n a l h o a r d i n g is u n n a t u r a l a n d in s o m e
sense forced — o n e asks, h o w m u c h of it ? Surely s o m e
n e w h o a r d i n g is n a t u r a l i n a progressive society? The
H a y e k i a n s reply t h a t n o n e will be n a t u r a l o r necessary,
if only prices fall as they o u g h t t o . B u t , w e retort, w h y
o u g h t they t o ? If t h e y d o n o t , fresh h o a r d i n g will b e
n a t u r a l a n d necessary. It soon becomes evident t h a t w e
are a r g u i n g in a circle, t h a t Professor v o n H a y e k ' s p r o -
position only posed t h e p r o b l e m w i t h o u t solving it.
K e y n e s has since a d v a n c e d a solution with w h i c h you m a y
or m a y n o t be satisfied. T h e notion t h a t anjy increase of
b a n k credit s u p p l e m e n t s v o l u n t a r y saving does not a p p e a r
in Wicksell, a n d I suggest t h a t Professor v o n H a y e k ' s
a t t e m p t to i m p r o v e o n Wicksell in this m a t t e r has p u t
us o n a false scent.
I n all t h e j u n g l e of ccyitroversy t h a t followefl t h e
publicatiDn of Professor v o n H a y e k ' s fiews, I d o n o t
33
 TOWARDS A DYNAMIC ECONOMICS

recollect seeing the p o i n t m a d e t h a t a restrictive m o n e t a r y

policy of t h e kind h e a d v o c a t e d w o u l d greatly increase
t h e a u t o m a t i c saving b y c o m p a n i e s in t e r m s of goods
values. Y e t this m a y well b e the most i m p o r t a n t objection
of all.
I n w h a t follows I shall a s s u m e a goods s t a n d a r d of
value.
So far I h a v e m a d e a first a p p r o a c h to the question
of the d e m a n d for saving in a growing e c o n o m y . W e m u s t
n e x t consider w h a t m a y b e said a b o u t its p r o b a b l e s u p p l y .
I shall crave i n d u l g e n c e i n dwelling at some l e n g t h o n
this topic, n o t h o l d i n g o u t t h e h o p e of very clear-cut
results, b u t because its t r a d i t i o n a l t r e a t m e n t a p p e a r s to
m e gravely defective.

34
 LECTURE TWO

THE SUPPLY OF SAVING

S T A T I S T I C A L studies upon how the flow of savings is

related to the level of income and other economic aggre-
gates are well under way, and we may look forward to
large developments in this field. It should be a most
fruitful one for the econometrician's art. I shall not
venture into it, but shall confine myself to a brief visit to
the more old-fashioned realm of theoretical analysis.
Such an investigation may yield assistance to the econo-
metrician, by clarifying concepts and suggesting possible
connexions requiring study. W h a t is usually said in the
text-books on this subject is unsatisfactory, and the great
masters do not appear to have done their best work in
this department.
In explaining why savers expect to get and succeed in
getting a remuneration for the mere act of waiting — risk
apart — economists are apt to lay chief stress on the
phenomenon of time preference. T h e individual who
has free choice tends to prefer a given sum of money now
to an equal sum at a future date. T i m e preference in
this broad sense is complex and requires analysis.
First it is necessary to be clear what exactly it is that
has to be explained. Aristotle and his followers deemed
it unnatural that it should be possible to gain an increment
of money merely by parting with money for a period, and
concluded that it was wrong. J f indeed there were no
countervailing consideration^ to justify this accretion, the-
phenorifChon of interest would not m e r d y come up for
35
 TOWARDS A DYNAMIC ECONOMICS

m o r a l j u d g m e n t , it w o u l d violate t h e most basic law of

economics, n a m e l y t h a t o n e c a n n o t get s o m e t h i n g for
nothing. I n any community with a reasonable a m o u n t
of c o m m u n i c a t i o n a n d m u t u a l knowledge, if it a p p e a r s
t h a t s o m e t h i n g can b e b o u g h t a n d then resold at a clear
net profit with n o risk a t t a c h e d , t h e n the d e m a n d for t h a t
s o m e t h i n g will b e so s t i m u l a t e d a n d its price so b i d d e n
u p t h a t the net profit will be e l i m i n a t e d . T h i s is t h e
process of a r b i t r a g e . If gain is to be m a d e by b u y i n g silver
in N e w York a n d simultaneously selling it i n L o n d o n , so
t h a t t h e r e is profit available w i t h o u t risk, so m u c h will
b e d e m a n d e d in N e w Y o r k a n d so m u c h offered for
sale in L o n d o n t h a t t h e price spread will i m m e d i a t e l y
be r e d u c e d to w h a t is n e e d e d to cover t h e cost of
transport.
If 1^103 c a n b e o b t a i n e d w i t h c e r t a i n t y on J a n u a r y r,
1949, in r e t u r n for ^ 1 0 0 now, is this i n d e e d ^ 3 for n o t h i n g ?
T h e n w h y w o u l d not so m u c h m o n e y b e offered n o w
against t h e delivery on J a n u a r y i , 194.9, t^^^ margin
of would be eliminated?
T h e most f u n d a m e n t a l principle t h a t has to b e a d d u c e d
i n e x p l a n a t i o n of the p h e n o m e n o n is the well-known L a w
of t h e Diminishing Utility of I n c o m e . T h i s L a w m a y be
i n c l u d e d in t h e notion of t i m e preference i n its broadest
s e n s e ; b u t it is necessary to extricate it from t h e b r o a d e r
c o n c e p t because it is m o r e f u n d a m e n t a l t h a n , a n d m a y
o p e r a t e in a different m a n n e r from, tlie other element
in t i m e preference, w h i c h m a y b e called p u r e t i m e
preference.
W e all h a v e some i d e a of t h e n a t u r e of this p u r e t i m e
preference. W e d o not see t h e future so vividly as t h e
present a n d u n d e r r a t e the a d v a n t a g e of h a v i n g m o n e y
•at a^ future d a t e c o m p a r e d ,with t h a t of h a \ a n g it n o w .
Professor P i e o u ^ a s referred to o u r defective " teK:scopic
36
 T H E SUPPLY OF SAVING

faculty " . ' Also we m a y be dead at the future date a n d

not rate the welfare of our heirs as highly as o u r own.
T h e desire to use the money now is reinforced by animal
appetite. Greed m a y be thought to b e as appropriate
a n a m e for this attitude as time preference, though less
dignified. T i m e preference in this sense is a h u m a n in-
firmity, probably stronger in primitive t h a n in civilized
man.
N o such stigma can be attached to the rejection of £ 3
" for nothing " if it is based on the principle of Diminishing
Utility of I n c o m e . If a m a n has every reason to suppose
t h a t he will have a n income of £ 5 0 0 in 1948 a n d one of
£ 5 0 0 in 1 9 4 9 a n d no reason to suppose t h a t his needs will
b e greater in the latter year, he will not gain anything by
exchanging £ 1 0 0 in 1948 for £ 1 0 3 in 1949. O n the con-
trary he will almost certainly lose. I n 1948 he must cut
his consumption to £ 4 0 0 for the advantage of raising it
to £ 6 0 3 in 1 9 4 9 . It is true t h a t h e will have £ 1 0 0 3 to
spend in the two years together instead of £ 1 0 0 0 . But
regard must b e paid to the utility of the pounds. I n 1948
he foregoes the pounds n u m b e r e d from 401 to 500 a n d
in 1949 he acquires p o u n d s n u m b e r e d from 50T to 603.
Each of the former set of pounds is likely to have con-
siderably higher utility than any of the latter, a n d it is
most unlikely that the beggarly extra £ 3 will compensate
for this. Such a m a n would probably do himself injury
by seeking to get this £ 3 " for nothing If there are
sufficient members of the community in this position the
n o r m a l process of arbitrage will not eliminate the m a r g i n
of £ 3 . T h e a r g u m e n t is the same as that applied to
gambling by Marshall, in this following Bentham, as we
are reminded by Dr. S t a r k ; * but Marshall failed to m a k e
' Eamamia of Weifur^tnA edition), p. 35.
' Economic Jmanai, December 1946, p . 601.

37
 TOWARDS A DYNAMIC ECONOMICS

this cxpUcitly t h e basis of t h e t h e o r y of s a v i n g . Y e t s a v i n g

is r e a l l y a m o r e i m p o r t a n t i n s t a n c e t h a n g a m b l i n g of
t h e o p e r a t i o n of this p r i n c i p l e .
T h u s t h e r e a r e t w o q u i t e distinct r e a s o n s for s p e n d i n g
n o w r a t h e r t h a n w a i t i n g for a l a r g e r s u m l a t e r . . O n e is
t h a t t h e l a r g e r s u m l a t e r m a y v e r i t a b l y h a v e less u t i l i t y
t h a n t h e s m a l l e r s u m n o w , t h e o t h e r t h e lack o f telescopic
faculty w h e r e b y w e fail to e s t i m a t e j u s t l y t h e u t i l i t y t h a t
t h e l a r g e r s u m will h a v e . I t m u s t b e n o t i c e d t h a t e v e n
if w e w e r e perfectly e n l i g h t e n e d in o u r a t t i t u d e to t h e
f u t u r e , perfectly p r o v i d e n t a n d d i s i n t e r e s t e d , a l t o g e t h e r
lacking in b r u t e passion a n d a p p e t i t e a n d h a d a thoroughly
a d e q u a t e telescope for s u r v e y i n g future y e a r s , t h e r e m i g h t
n o n e t h e less b e a r a t e of i n t e r e s t o w i n g to t h e d i m i n i s h i n g
utility of i n c o m e . T h e r a t e of i n t e r e s t r u l i n g is b y n o
m e a n s a m e a s u r e of t h e e x t e n t t o w h i c h p e o p l e d i s c o u n t
f u t u r e satisfactions c o m p a r e d w i t h p r e s e n t . M a n y text-
b o o k s l e a v e t h e oppo.site i m p r e s s i o n o n t h e r e a d e r ' s m i n d .
I t h i n k t h a t M a r s h a l l d o e s so i n his Principles ( p . 122). I t
is t r u e t h a t h e c h a r a c t e r i s t i c a l l y a d d s all t h e n e c e s s a r y
q u a l i f i c a t i o n s t o m a k e his s t a t e m e n t f o r m a l l y c o r r e c t a n d
amplifies t h e m i n a f o o t n o t e . T h e t e x t r u n s as follows :

We c a n however get a n artificial measure of t h e rate a t

which he discounts future benefits by m a k i n g two assumptions.
These are, firstly, that h e expects to be about as rich at the
future d a t e as h e is n o w ; a n d secondly, t h a t his capacity for
deriving benefit from the things which money will b u y will
on the whole remain u n c h a n g e d , though it m a y have increased
in some directions a n d diminished Jn others. O n these
assumptions, if he is willing, b u t only just willing, to spare a
p o u n d from his expenditure now, with the certainty of having
(for the disposal of himself or his heirs) a guinea one year
.henci^, we m a y fairly say t h a t h e discounts future benefits t h a t
a r e perfectly secvire (subject only to conditions ©inhuman
38
 THE SUPPLY OF SAVING

mortality) at the r a t e of 5 per cent per a n n u m . And on these

assumptions the r a t e a t which he discounts future (certain)
benefits, will be t h e r a t e at which h e c a n discount m o n e y in
the m o n e y m a r k e t .
H o w m a n y w o u l d p e r c e i v e c l e a r l y , after r e a d i n g this,
t h a t t h e r e m a y w e l l b e a r a t e of i n t e r e s t e v e n if n o o n e
d i s c o u n t s f u t u r e satisfactions a t a l l ? I t is r e a l l y a m a s t e r -
p i e c e i n t h e a r t of c o n v e r t i n g a n a n c i e n t fallacy i n t o a
t r u t h i n a w a y t h a t c o n c e a l s t h a t t h e a n c i e n t fallacy h a s
been altered. I suspect t h a t Marshall w a n t e d to reiterate
t h a t t h e r a t e of i n t e r e s t reflected t h e t i m e d i s c o u n t , b e c a u s e
e c o n o m i s t s h a d u s u a l l y s a i d s o , o u t of his l o v i n g c a r e
to p r e s e r v e t h e c o n t i n u i t y of t h e s u b j e c t . W h a t is
r e a l l y r e q u i r e d is t o b r i n g o u t t h e fallacy i n t h a t a n c i e n t
formulation.
S o m e p u r i s t s m a y p r e f e r n o t t o b r e a k d o w n t h e broadfcr
c o n c e p t of t i m e p r e f e r e n c e i n t o its c o n s t i t u e n t e l e m e n t s
o n t h e g r o u n d t h a t e c o n o m i s t s s h o u l d confine t h e i r a t t e n -
tion t o m a r k e t facts, s u c h as t h e a c t u a l s w a p of £ 1 0 0 for
£ 1 0 3 , a n d n o t l o o k b e l o w t h e s u r f a c e for m o t i v e s . I t is
e n o u g h t o k n o w , t h e y w o u l d a r g u e , t h a t p e o p l e d o prefer
£ 1 0 0 n o w to £ 1 0 2 a y e a r h e n c e ; t h a t is a n o b j e c t i v e
ascertainable fact; once we begin peering into the reasons
w h y , which c a n n o t be m e a s u r e d or d e m o n s t r a t e d , we
shall b e lost i n a m a z e of c o n j e c t u r e a n d forfeit o u r
c h a r a c t e r of scientists d e a l i n g w i t h q u a n t i t a t i v e d a t a . I n
c e r t a i n i n s t a n c e s s u c h a m a x i m m a y b e wise ; b u t it m u s t
not be elevated into an absolute a n d universal principle
in e c o n o m i c s . I t Is t h e e c o n o m i s t ' s business to e x a m i n e
t h e r e l a t i o n b e t w e e n p r o c e d u r e a n d objectives, a n d defini-
t i o n s of t h e l a t t e r m u s t t o s o m e e x t e n t d e p e n d o n i n t r o -
s p e c t i o n . I n t r o s p e c t i v e l y t h e t w o m o t i v e s for n o t s a v i n g
c a n b e q u i t e c l e a r l y d i s t i n g u i s h ^ g e n e r a l l y , a l t h o u g h it
d o e s notjEhllow t h a t t h e i r resp*&ctive force c a n b e m e a s u r e d

39
 T O W A R D S A D Y N A M I C E C O N O M I C S

i n e a c h p a r t i c u l a r case. T h e diminishing utihty of i n c o m e

is a principle a d e q u a t e l y based o n t h e observation t h a t
identical physical objects, w h i c h have utility, d o not have
t h e s a m e d e g r e e of utility o n every occasion of use ; a n d
in p a r t i c u l a r cases it m a y be perfectly clear t h a t a m a n
does not choose to save because the cut in his present con-
s u m p t i o n w o u l d b e so painful as not to be b a l a n c e d by
t h e available accretion of i n c o m e later. O n the o t h e r
h a n d , Professor Pigou's defective telescopic faculty is also
a clear c o n c e p t ; examples of p a l p a b l e i m p r o v i d e n c e c a n
easily be piciced u p . T h e r e a r c two reasons w h y it is
i m p o r t a n t to d r a w t h e distinction.'
I said t h a t the L a w of D i m i n i s h i n g U t i l i t y was m o r e
f u n d a m e n t a l t h a n p u r e t i m e preference. It has a w i d e r
a p p h c a t i o n — f o r instance to a p l a n n e d r e g i m e in w h i c h
thb v o l u m e of saving is fixed by a benevolent g o v e r n m e n t .
After all, p u r e t i m e preference is a w e a k n e s s ; a m a n m a y
choose to sacrifice 2 u n i t s o f u t i l i t y — of utility not m o n e y —
in 20 years from n o w for the sake of i unit n o w ; b u t in
20 y e a r s ' t i m e h e will p r e s u m a b l y regret h a v i n g d o n e so.
U n f o r t u n a t e l y h e will n o t t h e n be able to reverse t h e
process. O n the a s s u m p i i o n — u n w a r r a n t e d , n o d o u b t ,
some of you m a y think — t h a t a g o v e r n m e n t is c a p a b l e of
p l a n n i n g w h a t is best for its subjects, it will p a y no a t t e n -
tion to p u r e t i m e preference, a polite expression for
r a p a c i t y a n d the conquest of reason by passion. But it
must certainly p a y a t t e n t i o n to t h e L a w of D i m i n i s h i n g
Utility of I n c o m e . P e r h a p s the U . S . S . R . did not do so
sufficiently in the first Five-Year Plan, t h o u g h from t h e
security p o i n t of view its ruthless saving t u r n e d out well.
Sir H u b e r t H e n d e r s o n , in a notable passage which does
full justice to t h e i m p o r t a n c e of the L a w of D i m i n i s h i n g
' ^ T i i e disfincCion is sharply drawji in F. P. R a m s c y ' i well-known article
i n the EtonomU JouYtud (December igafl).
40
 THE SUPPLY OF SAVING

U t i l i t y i n this c o n n e x i o n , h a s suggested t h a t t h e u n e q u a l
distribution of i n c o m e in Britain in t h e h u n g r y 'forties
m a y h a v e caused saving to p r o c e e d a t a p a c e t h a t was
t o o r a p i d from the p o i n t of view of t h e economic welfare
of t h e c o u n t r y considered over a long t e r m . ' A n d n o w
at this m o m e n t we a r e living in a r e g i m e in w h i c h t h e
v o l u m e of n a t i o n a l saving is largely controlled by t h e
g o v e r n m e n t . Is it also, p e r h a p s , p u s h i n g o n too q u i c k l y ?
If there is to b e a w a r within ten years it will h a v e p r o v e d
wise w h a t e v e r t h e present cost. O n t h e o t h e r h a n d the
c o n s e q u e n t p r o l o n g e d oppression of t h e c o n s u m e r , w h o
h a s a l r e a d y h a d so m u c h to suffer d u r i n g a d e c a d e a n d
m a y suffer p e r m a n e n t psychological injury by unnecessary
a n d a p p a r e n t l y u n e n d i n g austerity, a n d t h e d a n g e r t h a t
t h e c o u n t r y i n its i n f a t u a t i o n for c a p i t a l o u t l a y m a y fail
in c o n s e q u e n c e to b a l a n c e its e x t e r n a l a c c o u n t s in tinfe
to r e d e e m its h o n o u r , are very w e i g h t y considerations on
the o t h e r side.
Secondly, D i m i n i s h i n g U t i l i t y a n d p u r e t i m e preference
o p e r a t e in a different m a n n e r as forces restricting saving,
a n d will b e differently affected b y c h a n g e s i n t h e r a t e
of interest o r o t h e r r e l e v a n t c i r c u m s t a n c e s . I n future
I shall refer to p u r e t i m e preference simply as t i m e
preference.
T h e f u n d a m e n t a l t h e o r y of the s u p p l y of saving m a y
b e set o u t in t h e form of e q u a t i o n s . L e t C j s t a n d for c o n -
s u m p t i o n , viz. i n c o m e less saving, in y e a r o n e a n d
s t a n d for c o n s u m p t i o n in a n o t h e r year, y e a r r. L e t e .stand
for t h e average elasticity of the i n c o m e utility cur^'e o v e r
the relevant r a n g e . Let T s t a n d for the a m o u n t of utility
now w h i c h is equally preferred with o n e u n i t of utiUty
a y e a r later ; t h u s if t h e r a t e of t i m e discount p e r a n n u m
were 5 p e r c e n t , T w o u l d b e Let R be the n u m l ^ r
' Supply and Dtmand, pp. 131-132.
41
 TOWARDS A DYNAMIC ECONOMICS

of p o u n d s to w h i c h f^i a c c u m u l a t e s at the e n d of the y e a r

a t the c u r r e n t r a t e of i n t e r e s t ; thus a t 3 p e r cent R = i -03.
T h e following e q u a t i o n assumes t h a t needs are expected
to be t h e s a m e in y e a r r as i n y e a r i. A n a d j u s t m e n t for
v a r i a t i o n of need involves, however, n o difficulty of prin-
ciple, a n d c a n readily b e m a d e by multiplying C , by a
coefficient expressing t h e m a g n i t u d e of expected total
needs in y e a r T c o m p a r e d with those in y e a r i . T h e n

C, = c / 1 -e[i

A similar e q u a t i o n m a y be written to relate t h e present

year to each fulure year. If we h a d only lo consider a
finite n u m b e r of future years until some foreseen t i m e a t
w h i c h t h e globe w o u l d b e v a p o r i z e d by a n u c l e a r explosion,
s&y n years, t h e n we should h a v e [n - i) equations of t h e
a b o v e type, t o g e t h e r w i t h one further identical e q u a t i o n
expressing the fact t h a t in t h e period as a w h o l e i n c o m e
m u s t b e e q u a l lo c o n s u m p t i o n . Let Y,. s t a n d for income
in y e a r r from all sources except interest on, a n d
r e t u r n of, past savings m a d e w i t h i n t h e p e r i o d . T h e n t h e
identical e q u a t i o n is as follows:

( C , + ... + C „ } - ( Y , + . . . + Y „ )

= ( Y . - C , ) R " • ' + ..., + {Y„-a)R^

I shall r e t u r n to t h e p r o b l e m of infinity presently.
T h e s e e q u a t i o n s c a n be used in various ways. O n t h e
one h a n d one m a y assume in theory t h a t a m a n knows
his o w n m i n d a n d is a b l e to e v a l u a t e e a n d T for himself.
T h e e q u a t i o n s w o u l d tell h i m how, in t h e light of this
k n o w l e d g e , he should p l a n his e x p e n d i t u r e . I n practice,
of course, the ideas of people a b o u t their o w n satisfactions
a n d futures a r e far too V a g u e to b e given n u m e r i c a l ex-
pression. NoRc the less iHe equations m a y b e ^ t a k e n to
42
 T H E SUPPLY OF SAVING

represent a tendency. By inserting probable values for

e a n d T we can deduce w h a t effects changes in the rate
of interest or in other relevant circumstances are likely
to have on the flow of saving. I have used the equations
with some labour for this purpose with results which
I shall presently expound.
Alternatively it might be possible to use the equations
for an inverse process. By accumulating observations of
the values of Ci, Cg, C3, etc., it might be possible, R of
course being known, to deduce the values o f f a n d T . If
the equations could be solved in this m a n n e r it would give
a h a r d objective justification for discriminating, in the
way I have insisted on, between the influence of the
diminishing utility of income a n d t h a t of time preference.
It ought to be possible to get some approximate valua-
tion of e for various levels of income independently.
T h u s if it is found that a rise of piece rates causes a m a n
to work less hard, we can infer that for him over t h e
relevant range e <i. Such a finding should not surprise
us. T h e idea that, in order to impose on a m a n unaltered
sacrifice as his income alters, progressive rather t h a n pro-
portional taxation is required — I put the matter in this
way to avoid interpersonal comparison — implies that
e <i.
By experiment it should be possible to determine e
more precisely. Gould not a combination of managers
a n d shop stewards be found who were sufficiently in-
terested in basic principles to conduct such a series of
experiments? T h e y would not, of course, be easy! Let
a s t a n d a r d rate of wage be paid for part of the n o r m a l
day a n d a bonus at a different rate for the residue. T h e
individual must have complete freedom to vary the
n u m b e r of hours worked over a « d above those for which
the s t a n d a r d rate was paidi W e shoul^ begin wirti a
43
 TOWARDS A DYNAMIC ECONOMICS

c e r t a i n s t a n d a r d rate a n d a c e r t a i n r a t e of b o n u s , t o g e t h e r
a m o u n t i n g to a basic m i n i m u m wage, a n d so a r r a n g e d
t h a t the representative individual chose to work, say, a n
eight-hour day, neither more n o r less. T h e n a rise of
wages should b e i n a u g u r a t e d b y g r a d u a l stages. The
s t a n d a r d r a t e a n d the b o n u s r a t e w o u l d b o t h h a v e to b e
altered a t e a c h stage, p r o b a b l y in different proportions,
i n such wise t h a t t h e e a r n e r of his o w n free will siiU chose
to work eight h o u r s . T h i s d o u b l e v a r i a t i o n designed lo
keep t h e m a n voluntarily w o r k i n g eight h o u r s is r e q u i r e d
i n o r d e r to give a fixed yardstick with which to measure
t h e m a r g i n a l utility of i n c o m e . T h i s yardstick w o u l d
b e t h e disutility of the e i g h t h h o u r — o r four h u n d r e d
a n d eightieth m i n u t e — of a p a r t i c u l a r kind of l a b o u r .
T h e elasticity of the m a r g i n a l utility of i n c o m e would be
measured by the p r o p o r t i o n a t e rise in the total wage p a i d
p e r d a y divided by the p r o p o r t i o n a t e rise of the rate of
bonus payment.
T h e t h e o r y of saving w h i c h I h a v e a d v a n c e d implies
t h a t a m a n m a k e s a conspectus of his p r o b a b l e i n c o m e
a n d needs for all future years. T h i s is not altogether
unrealistic, if we confine his consideration to his p r o b a b l e
lifetime. O u t of the mists of u n c e r t a i n t y t h r o u g h which
a m a n views his future, some basic facts begin to e m e r g e ,
such as t h a t h e o u g h t to save for a pension or t h e s u p p o r t
of c h i l d r e n , or t h a t his prospects of e a r n i n g are s u c h a n d
such. T h e u n c e r t a i n t i e s will always b e very g r e a t . A
t h e o r y of saving will give b u t t h e roughest a p p r o x i m a -
t i o n ; i t - m a y , however, reliably b e used to show c e r t a i n
tendencies.
I n view of the theoretical difficulties i n h e r e n t in the
subject, it m a y b e well, as a n a p p r o x i m a t e a p p r o a c h ,
to divide a n individual's savings into two p a r t s : (i) those
required to satisfy his o w n iKeds d u r i n g his life «nd (ii)
44
 THE SUPPLY OF SAVING

those i n t e n d e d to b e passed o n . I n p r a c t i c e m e n d o not

m a k e this distinction a t all s h a r p l y ; n o n e t h e less it m a y
serve to analyse t h e b u n d l e of motives, some semi-con-
scious, t h a t d e t e r m i n e his b e h a v i o u r . C o r p o r a t e saving
m u s t also be considered.
T h e a m o u n t of saving t h a t a m a n does for his o w n sake
([i) above) is d e t e r m i n e d b y s u c h factors as his e x p e c t a t i o n
of increasing i n c o m e , of increasing n e e d s a n d of his
p r o b a b l e inability to e a r n i n c o m e i n t h e last p h a s e . T o
some e x t e n t the first a n d second of these m a y b a l a n c e a n d
pension provision m a y b e t h e d o m i n a t i n g m o t i v e . If
he does not seek to m a k e his pension as large as his i n c o m e
w h e n a t work, this n e e d not b e d u e to t i m e preference,
b u t to a j u s t recognition t h a t a n elderly person's needs
m a y b e less t h a n those of a m a n in his p r i m e of life. If a
m a n h a d n o t i m e preference, h e should r e d i s t r i b u t e c o n -
s u m p t i o n t h r o u g h t i m e so as to m a k e it increase (in re-
lation to his needs) at a r a t e w h i c h m a d e its m a r g i n a l
utifity fall a t a r a t e e q u a l to t h e r a t e of interest. W i t h
zero interest h e w o u l d keep its a m o u n t i n relation to his
needs, a n d t h e r e b y its m a r g i n a l u l i h t y , c o n s t a n t . If h e
has a t i m e preference h e will m a k e it rise (or fall) so t h a t

t h e m a r g i n a l utility in y e a r r is — t i m e s its m a r g i n a l

utifity in y e a r i. T h e e q u a t i o n s I h a v e set o u t express

this. T h e y m a y b e used to analyse p r o b a b l e provision
b y saving for a m a n ' s fife, his p r o b a b l e e x p e c t a t i o n of life
b e i n g r e p r e s e n t e d b y n. I n analysing provision for heirs
we must p r o b a b l y b e c o n t e n t w i t h v a g u e r considerations.
I n a society in w h i c h p o p u l a t i o n a n d t h e state of
technology a r e stationary, saving of t h e former c a t e g o r y
should be zero. M e m b e r s of e a c h g e n e r a t i o n will save
for themselves, b u t t h e o l d e r mefhbers of t h e p o p u l a t i o n
will b e simultaneously d i s - s a \ t n g a n e q u a l a m o u n t .
45
 TOWARDS A DYNAMIC ECONOMICS

I t is n o t so clear t h a t saving for heirs (ii) will also be

zero, save, p e r h a p s , after the lapse of a very long time,
w h i c h it is unrealistic even in this schematic exercise t o
consider. It would b e w r o n g to suppose t h a t in a society
otherwise stationary a n d expected to r e m a i n so, n o saving
w o u l d o c c u r o n t h e g r o u n d t h a t , since one's heirs are
e x p e c t e d to h a v e as good an income as one's o w n , there
w o u l d be n o gain of utility from transferring a n a d d i t i o n a l
p o w e r of c o n s u m p t i o n to t h e m . It m a y be expedient to
p r o v i d e s o m e t h i n g for the earlier p a r t of their lives, in
w h i c h dis-saving at t h e expense of their o w n later years
m a y b e technically difEicuk. It is not certain w h e t h e r
a p a r t i c u l a r heir will h a v e the c a p a c i t y to e a r n as m u c h
as his father. It is useful to p r o v i d e in a d v a n c e against
u n k n o w n contingencies w h i c h m a y befall h i m . So long
as t h e r e is some positive interest, there m a y b e a gain of
utility even a l t h o u g h the heir c a n in fact steadily earn
as m u c h as his father — in other w o r d s the motive m a k i n g
for saving represented in o u r e q u a t i o n s still applies in
some degree to saving for heirs, a l t h o u g h n o d o u b t with
diminished force. F u r t h e r m o r e a n u n e a r n e d i n c o m e is
a n a m e n i t y , allowing freedom of m a n o e u v r e , freedom,
if desired, to devote one's life to good, a l t h o u g h u n e c o n o m i c ,
ends. F o r all these reasons a father m a y be disposed to
sacrifice c e r t a i n p r e s e n t utilities in o r d e r to a d d to the
s u m t h a t c a n b e h a n d e d o n . I t is a mistake to suppose
t h a t , in a s t a t i o n a r y society, al! these things will a l r e a d y
h a v e b e e n t h o u g h t of, so t h a t the present g e n e r a t i o n n e e d
d o n o m o r e t h a n pass o n t h e i n h e r i t e d w e a l t h it h a s
received. T h e amenities in question m a y b e d e e m e d to
exceed, p o u n d for p o u n d , the utility of some small p a r t
of present i n c o m e b u t not t h a t of a l a r g e r p a r t . T h u s it
m i g h t t a k e very m a n y generations of a s t a t i o n a r y society
to p r o v i d e all J.he amenitiei; which m i g h t b e d e e m e d to
46
 THE SUPPLY OF SAVING

justify some saving. T h e a m o u n t of saving w o u l d p r e -

s u m a b l y t e n d to fall i n e a c h g e n e r a t i o n .
I n such a society t h e r e w o u l d b e n o d e m a n d for saving
a t all a t a c o n s t a n t r a t e of interest. T h u s it w o u l d b e
necessary to h a v e a falling r a t e of interest to give e m p l o y -
m e n t to the savings v o l u n t e e r e d .
T h e r e r e m a i n s the question of c o r p o r a t e saving. T h i s
c a n n o t b e r e g a r d e d as a t h i r d sector of saving t h a t has
to b e a d d e d to t h e t w o classes of p e r s o n a l saving In
assessing total saving. Its distinguishing feature is its
m o t i v e . U n d e r p e r s o n a l saving wc h a v e considered the
desire to r e a r r a n g e the s t r e a m of i n c o m e in a m o r e
a d v a n t a g e o u s w a y a n d to p r o v i d e against t h e contingencies
of p r i v a t e hfe. C o r p o r a t e saving, w i t h w h i c h must be
g r o u p e d some saving by p r o d u c e r s w o r k i n g o n their o w n
a c c o u n t , is m a i n l y a c t u a t e d by t h e desire of e n t r e p r e n e u r s
to p r o v i d e resources for t h e e x p a n s i o n of business w i t h o u t
forfeiting a controlling interest o r u n d u l y e n l a r g i n g fixed
c h a r g e s . But while the m o t i v e for this k i n d of saving is
different, the result is t h a t individuals, shareholders or
e n t r e p r e n e u r s , a r c p r o v i d e d w i t h a d d i t i o n a l c a p i t a l re-
sources, w h i c h m a y serve to meet their p r i v a t e needs as
a l r e a d y classified. F o r this r e a s o n c o r p o r a t e saving m a y
n o t b e a d d i t i o n a l to personal saving, b u t p a r t of it. T o
t h e e x t e n t t h a t the v a l u e of a m a n ' s business holdings
grows, h e is e x e m p t e d from t h e neces.sity of saving o^t of
his p e r s o n a l i n c o m e in o r d e r to p r o v i d e for his priv^ate
contingencies. I t docs not follow t h a t c o r p o r a t e saving
c a n b e neglected as a s e p a r a t e c o n s t i t u e n t in total saving.
F o r instance, it is conceivable t h a t c o r p o r a t e saving m i g h t
exceed the total t h a t all i n d i v i d u a l s w o u l d be disposed to
save for p r i v a t e conveiuence. W h a t is m u c h m o r e
p r o b a b l e is t h a t o w i n g to vis irartiae o r business a m b i t i o n
m a n y individuals m a y btf led o n b y , t h e i r c o r p o r a t e

47
 TOWARDS A DYNAMIC ECONOMICS

holdings or business interests to save m o r e t h a n they

w o u l d choose to, merely in o r d e r to p r o v i d e for their
p r i v a t e needs. I shall call a n excess of this sort surplus
c o r p o r a t e s a v i n g ; we must a d d it to p e r s o n a l savings as
d e t e r m i n e d by the f u n d a m e n t a l p r i v a t e motives we
h a v e e x a m i n e d in o r d e r to reach the total saving by t h e
community.
I n a s t a t i o n a r y society n e t c o r p o r a t e saving w o u l d
n o r m a l l y b e zero, a l t h o u g h p a r t i c u l a r firms m a y m a k e
positive c o r p o r a t e savings to a n e x t e n t sufficient to offset
losses i n c u r r e d b y others.
W h e r e , however, p o p u l a t i o n a n d technology a r e
s t a t i o n a r y , b u t individuals a r e c o n t i n u i n g to save in o r d e r
to increase w h a t is passed on from g e n e r a t i o n to g e n e r a -
tion, a fall in t h e r a t e of interest is r e q u i r e d . I n so far
as fills fall stimulates m o r e r o u n d a b o u t m e t h o d s of p r o -
d u c t i o n — a n d this is t h e o n l y w a y in w h i c h the fresh
savings b y individuals c a n b e utifized —- it will t e n d to
stimulate c o r p o r a t e saving a n d t h e r e b y surplus c o r p o r a t e
saving. W h e n more r o u n d a b o u t m e t h o d s of p r o d u c t i o n
b e c o m e profitable o w i n g to the fall in interest rates, firms
m a y wish to finance t h e m out of their o w n resources.
T h i s desire is likely to a d d to the total saving of t h e c o m -
m u n i t y . A n d this in t u r n will m a k e it necessarj' for t h e
r a t e of Interest to fall a t a g r e a t e r r a t e , if a steady a d v a n c e
is to b e m a i n t a i n e d . I shall h a v e presently to ask you
to e x a m i n e ver>- closely this notion of t h e r a t e of interest
falling continuously at a n a p p r o p r i a t e r a t e .
T h u s w i t h p o p u l a t i o n a n d technology stationary, there
m i g h t well, in a prosperous a n d secure society, b e a factor
of increase at work for a very long period. If all w e n t
well, m e t h o d s of p r o d u c t i o n w o u l d get steadily m o r e
roundabout.
I t m a y b e c o n v e n i e n t h e r d ' t o consider the likely effect
48
 T H E SUPPLY OF SAVING

of a falling rate of interest o n t h e s u p p l y of saving. U n -

h a p p i l y it does n o t seem possible to give a definite a n s w e r .
W e h a v e a l r e a d y seen t h a t a falUng r a t e of interest is likely
to evoke a s t r e a m of c o r p o r a t e saving t h a t w o u l d not
otherwise take p l a c e . I n t h e sector of saving for posterity,
it does n o t seem possible to m a k e a n y guess at all, Cassel
has u r g e d t h a t saving of this kind w o u l d b e likely to fall
off sharply w h e n t h e r a t e of interest fell below a c e r t a i n
critical p o i n t ; b u t his a r g u m e n t is very impressionistic,
a n d it does n o t seem t h a t m u c h c a n b e built u p o n it.
T h e r e r e m a i n s t h e saving r e q u i r e d to p r o v i d e for t h e
saver's needs d u r i n g his o w n life-time, saving destined
to be s u b s e q u e n t l y dissipated i n dis-saving. I shall call
this h u m p - s a v i n g . I s a falling r a t e of interest likely to
cause t h e size of t h e h u m p to s h r i n k ?
I h a v e considered this p r o b l e m in t h e light of tfte
e q u a t i o n s , giving e, T a n d R a wide r a n g e of values w i t h i n
the b o u n d s of p r o b a b i l i t y . I n every case it seems t h a t
saving will b e less w i t h a lower r a t e of interest. M a r s h a l l
says r a t h e r d o g m a t i c a l l y t h a t saving m a y b e expected
to respond positively to h i g h e r interest r a t e s : it is possible
t h a t h e secretly m a d e similar calculations to m i n e ! His
d o g m a t i s m is n o t usually followed in m o r e r e c e n t text-
books.
M y results a r e r a t h e r surprisingly decisive, surprisingly
because m y m o d e l is t h a t of a m a n saving d u r i n g e a r l y
a n d m i d d l e hfe i n o r d e r to b u y a life a n n u i t y o n r e t i r e m e n t
— future contingencies o t h e r t h a n a r e t i r e m e n t p e n s i o n
within the saver's life c a n converuently b e s u b s u m e d u n d e r
the pension — a n d it is precisely in this k i n d of case t h a t
it is p o p u l a r l y supposed t h a t a h i g h r a t e of interest is Hkely
to r e d u c e saving. I suspect t h a t this p o p u l a r view arises
from neglect of c o m p o u n d interest, t h e fact t h a t witl^ a
high interest yield t h e r e is mrtre a c c r u e d interest available
49
 TOWARDS A DYNAMIC ECONOMICS

to b e re-saved. I n m a n y of the cases I h a v e analysed,

a h i g h e r r a t e of interest reduces the cut in c o n s u m p -
tion which t h e individual is i n d u c e d to m a k e in his
early years, a n d enables him to sustain c o n s u m p t i o n at
a h i g h e r level in all years ; n o n e the less in all these cases
h e does m o r e saving altogether d u r i n g his life.
It m a y be t h a t those w h o claim t h a t a fall in the r a t e
of interest will increase saving a r e thinking only of its
i m m e d i a t e cftcct, a n d I c a n confirm their view in the sense
t h a t it w o u l d theoretically i n certain cases cause a larger
i m m e d i a t e c u t in c o n s u m p t i o n . Yet it is doubtful if there
is m u c h validity e v e n i n the n o t i o n t h a t the i m m e d i a t e
effect of a fall i n interest w o u l d be to increase saving.
F o r in t h e case of this d e l i b e r a t e h u m p - s a v i n g , a m a n will
t e n d to work to some r a t h e r extensive p l a n , a n d is not
liltely to readjust his ideas i m m e d i a t e l y when a c h a n g e
in t h e r a t e of interest takes place.
F u r t h e r m o r e , the p o p u l a r analysis works in terms of
a once-over r e d u c t i o n in the r a t e of interest. W h e n the
fall is c o n t i n u o u s , t h e r e is n o distinction b e t w e e n a n
i m m e d i a t e effect a n d a l a t e r effect. T h e h u m p of savings
a t a n y t i m e embodies the savings of people of all a g e s ;
it is a cross section of t h e n e a r a n d distant effects of t h e
falling r a t e . T h u s we n e e d only h a v e r e g a r d to the total
effect of a falling rate u p o n h u m p - s a v i n g , t h e distinction
b e t w e e n the n e a r a n d m o r e distant effect d i s a p p e a r i n g .
I f a lower r a t e entails a smaller h u m p on the p a r t of those
influenced b y it, a continuously falling r a t e will b e syn-
chronously a c c o m p a n i e d by a fall in the size of the total
h u m p at a r a t e t h a t is d e t e r m i n e d by t h e total effect of
t h e falling interest. N o d o u b t accelerations a n d de-
celerations o u g h t also to be considered, but I will not
a t t e m p t in this i n t r o d u c t o r y essay in d y n a m i c s to deal
w i t h t h e m . T b e r e will a l s t f b e a disposition to ask w h a t
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 THE SUPPLY OF SAVING

h a p p e n s w h e n t h e r e is a c h a n g e in t h e r a t e of fall o r in
t h e acceleration of fall, w h e n t h e r e is a kink in the c u r v e .
T h i s p r o b a b l y represents the u r g e i n the breast of t h e
e x p e r t o n e c o n o m i c statics to get b a c k to f a m i h a r g r o u n d ,
since kinks c a n p r o b a b l y best b e d e a l t with by t h e m e t h o d s
of statical analysis. T h e r e f o r e I eschew t h a t q u e s t i o n i n
this c o n t e x t .
W e a r e very m u c h in t h e d a r k as to the v a l u e of ^. I n
m y calculations I h a v e m a d e a l t e r n a t i v e assumptions,
giving it values b e t w e e n o a n d i. F o r T I h a v e a s s u m e d
values b e t w e e n i (no t i m e preference) a n d a v a l u e s o m e -
w h a t a b o v e -96. T h e l a t t e r represents a r a t h e r s t r o n g
t i m e preference, since it m e a n s t h a t a m a n w o u l d r e c k o n
o n e u n i t of present utility (not of i n c o m e ) at the b e g i n n i n g
of his w o r k i n g life as e q u a l to n o less t h a n 4 units of utility
{not of income) 40 years later.
It seems t h a t saving is m u c h m o r e responsive to c h a n g e s
in the r a t e of interest if e is high ; it also a p p e a r s t h a t it is
s o m e w h a t m o r e responsive if T is low, t h a t is if T i m e
Preference is strong.
T h e u p s h o t of this analysis is indecisive. Surplus
c o r p o r a t e savings a r e likely to rise in response to a
falling r a t e of interest while h u m p - s a v i n g s a r c likely to
f a l l ; the effect o n saving for posterity is u n k n o w n .
W h a t h a p p e n s if we i n t r o d u c e o t h e r factors of increase ?
If piopulation increases, while technology is s t a t i o n a r y ,
i t a p p e a r s t h a t t h e h u m p sector of c a p i t a l a c c u m u l a t i o n
is hkely to increase at t h e s a m e r a t e as the p o p u l a t i o n .
T h e h u m p sector is t h e s u m of all the capitals i n t e n d e d
to b e dissipated by individuals n o w l i v i n g ; i n a s t a t i o n a r y
p o p u l a t i o n this dissipation would b e exactly b a l a n c e d
by the h u m p - s a v i n g s of the y o u n g e r people. I n a steadily
g r o w i n g p o p u l a t i o n t h e n u m b e r of h u m p s is b e i n g j n -
creased, a n d therefore t h e sfze of the s u m of all h u m p s is
 TOWARDS A DYNAMIC ECONOMICS

g r o w i n g a t the s a m e r a t e as the p o p u l a t i o n itself. T h u s

h u m p - a c c u m u l a t i o n s will increase at such a r a t e t h a t if
t h e other sectors of a c c u m u l a t i o n increased at the same
l a t e , t h e d e m a n d for n e w capital w o u l d b e precisely met
a t a constant r a t e of interest.
I n this case, as in all cases, c o r p o r a t e saving m a y be
expected to v a r y with r e q u i r e m e n t s a n d consequently
to b e c o m e positive if p o p u l a t i o n is increasing by a n
a m o u n t which bears t h e same ratio to existing c o r p o r a t e
a c c u m u l a t i o n s t h a t the i n c r e m e n t of p o p u l a t i o n bears
to t h e existing p o p u l a t i o n . T h e r e m a y be some r o u g h
p r e s u m p t i o n , therefore, t h a t the sector of total saving
constituted by new surplus c o r p o r a t e saving will be
positive, a n d keep a steady relation to the n e w h u m p -
saving a n d t h e i n c r e m e n t of p o p u l a t i o n .
* W h a t of saving for posterity? A r e the a c c u m u l a t i o n s
passed on Ukely to grow as quickly as the p o p u l a t i o n ?
T h i s m i g h t prove a severe strain o n a p o p u l a t i o n whose
i n c o m e p e r h e a d was n o t g r o w i n g . I t m u s t be r e m e m -
b e r e d that t h e m o r e rapid the g r o w t h of p o p u l a t i o n , t h e
m o r e deeply the existing p o p u l a t i o n would h a v e to c u t
i n t o its s t a n d a r d of living in o r d e r to achieve this t a r g e t
for its successors. S u c h a c h i e v e m e n t need not be ruled
o u t ; i n d e e d the target m i g h t be exceeded. M u c h w o u l d
n o d o u b t d e p e n d o n t h e level of w e a l t h achieved by the
c o m m u n i t y , o n h o w n e a r to a n i m a l appetites were the
utilities t h a t h a d to be sacrificed in o r d e r to p r o v i d e
successors with these amenities.
I t seems t h a t only if each generation a d d s to the corpus
of inherited wealth e n o u g h to allow each m e m b e r of the
next generation to i n h e r i t as m u c h o n average as e a c h
m e m b e r of the p r e c e d i n g one, will the total saving of the
comjriim'ty be sufficient to provide for ail capital require-
m e n t s at a c o n s t a n t rate of interest.
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 THE SUPPLY OF SAVING

I t is at least c l e a r from t h e c o m p a r i s o n of t h e s t a t i o n a r y
p o p u l a t i o n w i t h t h e increasing o n e , t h a t a n a c c u m u l a t i o n
r e q u i r i n g a faUing r a t e of interest is m u c h m o r e hkely
i n the former case. I n t h a t case n o n e w c a p i t a l a t all is
r e q u i r e d with interest c o n s t a n t while some increase i n
a v e r a g e estates passing at d e a t h is almost c e r t a i n , so t h a t
w i t h interest u n c h a n g e d we could confidently expect a
r e d u n d a n c y of saving. I n t h e o t h e r case it is not clear
w h e t h e r such a r e d u n d a n c y is even p r o b a b l e .
Finally, we h a v e to consider increasing o u t p u t p e r
h e a d . O n c e a g a i n c o r p o r a t e saving a n d surplus c o r p o r a t e
saving are likely to r e s p o n d positively to t h e e x t r a r e q u i r e -
m e n t s d u e to technical a d v a n c e .
If wc assume e a n d T to b e c o n s t a n t as i n c o m e rises,
h u m p - s a v i n g is likely to increase in p r o p o r t i o n to i n c o m e
a n d therefore to r e q u i r e m e n t s . B u t e a n d T a r e not likfj^
to r e m a i n c o n s t a n t . As regards e I believe t h a t w e a r e
entirely in t h e d a r k . I k n o w of n o pointers w h a t e v e r .
It is sometimes assumed, I believe, t h a t e is lower for h i g h
incomes, b u t I r e g a r d this as entirely w i t h o u t f o u n d a t i o n .
T h e r e q u i r e m e n t for progressive t a x a t i o n is n o t t h a t e
should fall as i n c o m e rises, b u t only t h a t it s h o u l d b e
below one. A low v a l u e of e is inimical to saving.
O n t h e o t h e r h a n d t h e r e seems to be a p r e s u m p t i o n
t h a t time preference will fall (that T will increase). As
i n c o m e rises o u r c o n s u m p t i o n is less d o m i n a t e d b y basic
physical need a n d becomes m o r e a m e n a b l e to r a t i o n a l
p l a n n i n g . W e " look before a n d after " m o r e frequently.
A s t r o n g t i m e preference is indicative of a low degree of
civilization. T h u s it is p r o p e r to assume a rise in T w i t h
rising i n c o m e p e r h e a d , a n d this w o u l d involve the a g g r e -
g a t e of h u m p - s a v i n g increasing m o r e r a p i d l y t h a n i n c o m e .
T h i s m a y well p r o v e to b e a poifit of c e n t r a l i m p o r t a n c e
in t h e evolution of o u r econofhy.
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As against this it m i g h t be said t h a t if a representative

m a n foresaw the prospect of a rising i n c o m e in his life-
time, not merely owing to his o w n relative a d v a n c e m e n t
which h e m i g h t expect in any case, b u t owing to t h e
genera) a d v a n c e of the c o m m u n i t y , this should reduce
his need to a c c u m u l a t e in order to cover his o w n future
contingencies. W e are here, however, pitting the force
of a n expectation of increase against t h a t of a n actual
increase. A priori one would expect t h e former to be
weaker. But there is a m o r e f u n d a m e n t a l objection to
this h n e of a r g u m e n t .
It is one dimension o u t a n d well illustrates the d a n g e r s
besetting the novice in economic d y n a m i c s . Whatever
force a n expectation of t h e general a d v a n c e m e n t of the
c o m m u n i t y a n d t h e r e b y in a man's o w n circumstances
Ifiay have in m a k i n g him think it unnecessary to provide
so large a reserve to meet future contingencies. It h a s n o
effect w h a t e v e r on the r a t e of growth in the size of h u m p s .
I t is only a n increase in the a m o u n t of a d v a n c e m e n t
expected t h a t w o u l d h a v e the effect of t e n d i n g to reduce
t h e size of h u m p s - O n the assumption t h a t expectations
correspond to the facts expected, it is only a n acceleration
of g r o w t h a n d not a g r o w t h itself in average i n c o m e p e r
h e a d t h a t w o u l d (end to reduce the r a t e of h u m p a c c u m u -
lation. I n this tentative t r e a t m e n t I a m not dealing w i t h
accelerations. I n a b o o m a n acceleration of this kind
m a y p l a y some p a r t — t h e r e comes i n t o ihe h e a d s of m a n y
the i d e a " we seem to be getting rich so q u i c k l y ; w h y
b o t h e r ? ", so t h a t their n o r m a l c a n o n s of providence are
b y degrees t e m p o r a r i l y u n d e r m i n e d . S u c h a process
w o u l d increase the vicious spiral effect of b o o m . 1 d o u b t ,
however, if m u c h t h a t is i m p o r t a n t will b e missed by
neglect of longer period accelerations.
So far as hiijnp a c c u m u l a t i o n s are c o n c e r n e d , therefore,
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 THE SUPPLY OF SAVING

a rise of i n c o m e p e r h e a d is likely t o c a u s e t h e m t o g r o w
at a greater rate than income.
W h a t , finally, is t h e effect of a rising i n c o m e p e r h e a d
o n s a v i n g for p o s t e r i t y ? W e s a w t h a t if i n c o m e p e r h e a d
w e r e s t a t i o n a r y , t h e r e w o u l d b e likely t o b e a t e n d e n c y
for t h e r a t e of i n c r e a s e i n t h e size of a v e r a g e legacies t o
d e c l i n e , as m o r e a n d m o r e a m e n i t i e s c o u l d b e s e c u r e d for
children by merely passing on to children inherited capital
i n t a c t ; a m e n i t i e s of less a n d less i m p o r t a n c e w o u l d h a v e
t o b e p i t t e d a g a i n s t t h e s a m e m a r g i n a l u t i l i t y of a c o n s t a n t
i n c o m e . B u t wdth i n c o m e p e r h e a d rising this p r i n c i p l e
w o u l d n o l o n g e r o p e r a t e . I t is t r u e t h a t as t i m e w e n t o n
a n d a v e r a g e legacies i n c r e a s e d , f u r t h e r a d d i t i o n s w o u l d
p r o v i d e less i m p o r t a n t a m e n i t i e s for c h i l d r e n ; o n t h e
o t h e r h a n d , s i n c e a c t u a l i n c o m e s w e r e c o n t i n u i n g to rise,
t h e sacrifices r e q u i r e d to p r o v i d e t h o s e e x t r a a m e n i t i ^
w o u l d also b e d e c l i n i n g . AH w o u l d d e p e n d o n t h e c o m -
p a r a t i v e elasticities of t h e o w n i n c o m e c u r v e a n d t h e
a m e n i t i e s for c h i l d r e n c u r v e . N o t h i n g v e r y definite c a n
b e s a i d ; it is n o t u n r e a s o n a b l e to s u p p o s e t h a t t h e a v e r a g e
size of legacies m i g h t i n c r e a s e a t t h e s a m e r a t e as a v e r a g e
income per head.

T h e r e is a c o n s i d e r a t i o n , h o w e v e r , w h i c h suggests t h a t
a v e r a g e a m o u n t s p a s s i n g a t d e a t h m i g h t rise m o r e r a p i d l y
t h a n i n c o m e p e r h e a d . T i m e p r e f e r e n c e is r e l e v a n t h e r e
t o o . T h e s a m e force t h a t w e m a y e x p e c t to m a k e h u m p
accumulation grow m o r e quickly t h a n income per h e a d
— t h e i n c r e a s i n g d i s p o s i t i o n t o l o o k a h e a d — m a y well
aflfect p r o v i s i o n for c h i l d r e n also, a n d i n t h e s a m e w a y .
T h e r i c h e r m a n h a s m o r e m e n t a l e n e r g y t o d e v o t e to
thinking a b o u t the future.
I shall n o t a t t e m p t t o d e a l w i t h t h e i n c i d e n c e and
i n d i r e c t effects of t a x a t i o n .
I fear t h a t t h e r e s u l t of tffis r a t h e r l e n g t h y a n a l y s i s is
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 TOWARDS A DYNAMIC ECONOMICS
s o m e w h a t inconclusive. O n e negative conclusion stands
o u t . T h e r e seems to be n o b r o a d p r e s u m p t i o n t h a t the
rare of saving will b e precisely w h a t is r e q u i r e d to sustain
a steady a d v a n c e of p r o d u c t i o n with liie r a t e of interest
constant. W e m a y h a v e to c o n t e m p l a t e a continuously
rising or faUing r a t e of interest, a n d that will prove to be
a m a t t e r of g r e a t m o m e n t .
O n t h e positive side it a p p e a r s clear t h a t a s t a t i o n a r y
or decHning p o p u l a t i o n is m o r e likely to require a falling
r a t e of interest t h a n a n increasing one. T h i s a l r e a d y
a p p e a r e d in the c r u d e d y n a m i c s of A d a m S m i t h . F u r t h e r -
m o r e it seems p r o b a b l e that, in a s t a t i o n a r y p o p u l a t i o n
with i n c o m e p e r head a d v a n c i n g , t h e a c c u m u l a t i o n s
volunteered w o u l d increase m o r e r a p i d l y t h a n i n c o m e ,
or, therefore, t h a n r e q u i r e m e n t s , save in so far as those
^ e r e e n l a r g e d by c a p i t a l - r e q u i r i n g inventions. This
a p p e a r s almost certain in the sector t h a t h a s b e e n called
h u m p a c c u m u l a t i o n . I n the case of a c c u m u l a t i o n for
posterity the p r e s u m p t i o n is less s t r o n g . T h e possibility
of a flow of total saving r e q u i r i n g a falling r a t e of interest,
especially in a stationary p o p u l a t i o n , is certainly one t h a t
c a n n o t b e neglected.
I t should not b e difficult to a m a s s statistical information
in o r d e r to t h r o w light on these relations. E v a l u a t i o n s of
total income a n d income per h e a d a n d of total capital
are p r o c e e d i n g a p a c e . T h e relation between t h e g r o w t h
of total capital a n d the g r o w t h of capital passing at d e a t h
^ b e f o r e a n d after deduction of d e a t h duties — n e e d s
a t t e n t i o n , since this should b r i n g o u t the relation b e t w e e n
h u m p - s a v i n g a n d saving for posterity. O n e g r e a t pitfall
m u s t , however, be noticed. All t h a t has been said relates
to t h e propensity to s a v e ; it h a s b e e n seen t h a t c o n t i n u i n g
c^^anges in interest rates m a y b e n e e d e d to a b s o r b the
supply. I wiU not anticipant m a t t e r s n o w b y considering
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 T H E S U P P L Y OF S A V I N G
K e y n e s ' s theories of t h e unresponsiveness of t h e r a t e of
interest. Suffice it to say t h a t m y analysis h a s b e e n con-
c e r n e d w i t h m u t u a l relations in a n e c o n o m y a d v a n c i n g
a t its potentially o p t i m u m r a t e . Clearly not all economies
h a v e so a d v a n c e d . I t is n o t o n l y a question of t h e d i s t u r b -
a n c e of t h e t r a d e cycle, b u t also since 1 9 2 0 , if n o t before,
a n d m o r e m a r k e d l y since 1 9 2 9 — in fact in the p e r i o d in
w h i c h fullest statistical i n f o r m a t i o n is a v a i l a b l e — there is
t h e question of a c h r o n i c t e n d e n c y to depression. T h i s
m u s t h a v e a distorting effect o n the relations I h a v e set
o u t , a n d the statistics m u s t b e i n t e r p r e t e d w i t h this i n
mind.
T h e r e is o n e m a t t e r t h a t I h a v e n o t so far m e n t i o n e d ,
w h i c h has a r a t h e r i m p o r t a n t b e a r i n g o n t h e relations
discussed — n a m e l y t h e d e a d - w e i g h t d e b t . Capital
r e q u i r e m e n t s h a v e b e e n considered b y reference to fKe
g r o w t h of c a p i t a l called for by a g r o w t h of i n c o m e . T h e
r a t e at w h i c h c a p i t a l r e q u i r e m e n t s m a y grow in various
circumstances has b e e n c o m p a r e d w i t h t h e r a t e a t w h i c h
individuals ( a n d c o m p a n i e s ) m a y seek t o a d d to t h e i r
a c c u m u l a t i o n s . B u t from t h e p o i n t of view of savers —
t h o u g h not of t h e users of savings — a c c u m u l a t i o n s to
d a t e i n c l u d e the d e a d - w e i g h t d e b t . If t h e d e a d - w e i g h t
d e b t is small this m a y be of n o g r e a t m o m e n t . I n Britain
at p r e s e n t the n a t i o n a l d e b t is of p r e p o n d e r a t i n g i m p o r t -
a n c e a n d of a n o r d e r of m a g n i t u d e c o m p a r a b l e t o t h e
w h o l e real c a p i t a l of t h e n a t i o n . T a k e a simple case, in
which income and capital requirements are growing at
t h e r a t e of 2 p e r c e n t p e r a n n u m a n d individuals a n d
c o m p a n i e s a r e disposed to increase their c a p i t a l a c c u m u -
lations at t h e r a t e of 2 p e r c e n t p e r a n n u m also. T h i s
w o u l d seem to be a most h a r m o n i o u s state of affairs i n
w h i c h t h e r a t e of interest m i g h t r e m a i n c o n s t a n t . B u t ^
half of existing capital holdings consisted of d e a d - w e i g h t
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 TOWARDS A DYNAMIC ECONOMICS
debt tlie disposition of individuals to a d d to their capital
at the rate of 2 per cent per a n n u m would provide
industry with twice the capital it needed.
It may be argued that the artificially stimulated build
u p of dead-weight debt during a war should greatly reduce
the propensity to save thereafter. This is more likely to
be the case in Britain after World W a r I I in which
artificial savings were more widely diffused than after
Worfd W a r I when they were more coticentrated in the
hands of profiteers. It may be that, in consequence of
this surfeit of saving, for a considerable n u m b e r of years
insufficient voluntar>' saving wi]l be forthcoming to meet
even normal r e q u i r e m e n t s ; n m c will show. I n due
course thn extra war-time savings will, so to speak, be
absorbed into the system a n d the normal tendency to
accumulate will be resumed. W h e n this happens the
existence of a large dead-weight debt will tend to make
t h e m higher in relation to requirements than indicated
in the foregoing analysis in each of the cases considered.
It is n o w time to revert to the problem of a steady
advance. W e have seen that this may not be achieved
save with a steadily rising or falling rate of interest. It
is necessary to examine this concept closely.
Any civilized economy is somewhat forward looking;
it furnishes it.se]f with e q u i p m e n t ; individuals lay by
titles. It has some regard to future values. I n a n a d v a n -
cing community the broad prospect is one of an increase
in the value of factors of production in terms of their
products. But although an individual may in certain
circumstances mortgage his future income, a society
cannot collectively anticipate good times; it has to wait
for them to accrue.
. Physical equipment is a link between the present a n d
f u t u r e ; so arc efficient organizations which enjoy the
58
 T H E SUPPLY OF SAVING

" k n o w - h o w " of various forms of p r o d u c t i o n a n d selling,

a n d are expected to c o n t i n u e using it. T h e prospective
yield of the e q u i p m e n t a n d of the shares of the firms a r e
reflected i n their p r e s e n t prices. A l l o w a n c e is m a d e for
t h e u n c e r t a i n t i e s in t h e situation ; a n d the r a t e of interest
plays a p a r t . T h e r a t e of interest also governs t h e p r e s e n t
v a l u e of promises to p a y future a n n u i t i e s . T h e s e p r o m i s e d
annuities m a y b e derived from the a n t i c i p a t e d e a r n i n g s
of existing e q u i p m e n t s o r firms, o r t h e y m a y n o t . T h e
values of these various titles to revenues h a v e for l o n g
b e e n fixed in o r g a n i z e d m a r k e t s .
T h e r e is, i n the real world, n o s t e a d y a d v a n c e . In-
ventions c o m e irregularly a n d we h a v e t h e perplexities
of the t r a d e cycle. A n d t h e future is necessarily involved
in g r e a t u n c e r t a i n t y . T h e r e f o r e w c c a n n o t e x p e c t t h e
valuations of securities i n o r g a n i z e d m a r k e t s to f o U ^
a s t e a d y course of progress.
N o n e the less w e are entitled t o consider w h e t h e r '
o r g a n i z e d m a r k e t s h a v e a n y t e n d e n c y to p r o g n o s t i c a t e
in their valuations c o n t i n u e d d o w n w a r d o r u p w a r d m o v e -
m e n t s of interest. G o i n g d e e p e r , w e m a y ask w h e t h e r
the m e t h o d of b o r r o w i n g m o n e y a t fixed interest for s u b -
stantial t e r m s of years or w i t h o u t r e d e m p t i o n d a t e is
compatible with a regular downward or u p w a r d move-
m e n t of i'nterest.
Consider 2^ p e r cent stock d u e for r e d e m p t i o n a t a
precise d a t e t w e n t y years h e n c e a n d suppose this is v a l u e d
a t 9 5 J . I n p r i n c i p l e this m i g h t signify a n y of a n infinite
n u m b e r of opinions a b o u t the future course of interest.
O f these t h e simplest is t h a t interest is at p r e s e n t 2 | p e r
cent ( a p p r o x i m a t e l y ) a n d t h a t u p w a r d or d o w n w a r d
m o v e m e n t s in the i n t e r v a l a r e e q u a l l y likely. B u t it
m i g h t e q u a l l y well signify the o p i n i o n t h a t interest is n a w
at 3J per c e n t a n d \vill r^ove d o w n w a / d s steadily to
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 TOWARDS A DYNAMIC ECONOMICS
2 per cent d u r i n g the i n t e r v e n i n g 20 years. T h i s w o u l d -
m e a n t h a t t h e v a l u e of t h e stock was expected to m o v e
o n a r e g u l a r curve, rising substantially in t h e earlier years
a n d d u r i n g its course passing t h r o u g h a r a n g e of values
well a b o v e p a r . It m i g h t signify m a n y similar p a t t e r n s .
W h i c h of these things t h e present v a l u a t i o n does
signify' m a y be ascertained b y c o m p a r i n g it with t h e
v a l u a t i o n s of stocks with different r e d e m p t i o n dates.
T h e assumption t h a t t h e v a l u a t i o n represents a firm
o p i n i o n t h a t the interest r a t e will h a v e a r e g u l a r move-
m e n t leads in general to p a r a d o x i c a l results. T h u s t h e
a s s u m p t i o n of a m o v e m e n t from 3 ^ to 2 per cent over
20 years w o u l d give 2^ p e r cent stock d u e for r e d e m p t i o n
at a precise d a t e 10 years h e n c e a lower value (94 a p p r o x i -
m a t e l y ) t h a n t h a t d u e for r e d e m p t i o n in 20 years.
T h e value of stock h a v i n g n o r e d e m p t i o n d a t e becomes
i n d e t e r m i n a t e unless we p u t a t e r m to the fall in the r a t e
of interest. S u p p o s i n g it were assumed t h a t the fall in
interest w o u l d b e t e r m i n a t e d at 2 p e r cent a t the e n d of
20 years, i r r e d e e m a b l e 2J p e r cent stock should stand a t
a p p r o x i m a t e l y i i 2 i . S u c h a q u o t a t i o n alongside those
for t h e 2^ p e r cent stocks with fixed r e d e m p t i o n dates
a l r e a d y cited w o u l d b e a p a r a d o x . But if one extra-
p o l a t e d t h e a r i t h m e t i c a l fall in interest for t e n years
further, n a m e l y to i J p e r cent, 2 | per cent consols would
s t a n d at n o less a figure t h a n 150 ( a p p r o x . ) .
T h e s e results d o n o t seem to conform with m a r k e t
b e h a v i o u r as it has b e e n k n o w n at a n y t i m e . I n the face
of oscillations d u e to the t r a d e cycle such forward valua-
tions w o u l d h a r d l y be possible. Even were the t r a d e
cycle eliminated, however, it is difficult to see h o w the
m a r k e t could deal w i t h stock w i t h o u t r e d e m p t i o n d a t e
OQ this basis. Yet this is v e r y i m p o r t a n t , since o r d i n a r y
shares issued hy good coirtpanies themselves constitute
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 T H E S U P P L Y OF S A V I N G
claims o n a r e v e n u e n o final t e r m for w h i c h is set. T h u s
it w o u l d be n a t u r a l for t h e v a l u e a t w h i c h t h e m a r k e t
w o u l d accept a n issue of s u c h shares to be r e l a t e d to t h a t
of i r r e d e e m a b l e gilt-edged stock, s t a n d i n g below it b y
a m a r g i n d e e m e d sufficient to cover the e x t r a risk. A n d
t h e v a l u a t i o n of such share issues is p e r h a p s t h e most
critical w a y in w h i c h t h e r a t e of interest plays its p a r t i n
s t i m u l a t i n g or r e t a r d i n g industrial e x p a n s i o n .
I think t h a t those w h o h a v e conceived of a steadily
falling r a t e of interest w o u l d a r g u e t h e m a t t e r differently.
T h e y w o u l d h o l d — at first sight m o r e realistically —
t h a t t h e r a t e is fixed from t i m e to t i m e u n d e r the influ-
ence of supply a n d d e m a n d a t t h e m o m e n t , e a c h n e w
fall c o m i n g , so to speak, as a surprise to t h e m a r k e t ,
a n d not therefore h a v i n g b e e n d i s c o u n t e d in p r e v i o u s
valuations. *
S u p p l y consists of a g g r e g a t e d savings i n c l u d i n g c u r r e n t
savings, a n d d e m a n d of all assets i n c l u d i n g d e a d - w e i g h t
d e b t a n d assets c u r r e n t l y c o m i n g i n t o existence or p l a n n e d .
T h e s e t w o totals h a v e a c o m m o n i t e m , n a m e l y p a s t
aggregations of savings w h i c h a r e e q u a l to t h e total of
assets a n d t i d e s a l r e a d y existing, so t h a t the r a t e of interest
is m a d e to v a r y , o n this a r g u m e n t , i n response to c u r r e n t
decisions to c r e a t e n e w assets a n d c u r r e n t decisions to
save o u t of i n c o m e , i n s u c h wise as to secure e q u a h t y
b e t w e e n these t w o sets of decisions. B u t this line of
a p p r o a c h is almost as unrealistic as the o t h e r .
T h e existing stock of assets a n d titles is always large b y
c o m p a r i s o n w i t h n e w a d d i t i o n s . It is not to b e s u p p o s e d
t h a t t h e m a r k e t will r e v a l u e this great stock in response
to every c h a n c e d i s e q u i l i b r i u m b e t w e e n t h e p l a n n e d
i n c r e m e n t s of d e m a n d a n d supply. It is n o t to be s u p -
posed t h a t it takes n o r e g a r d for the future, b e i n g williag
to m a r k stock u p to 200 fm o r d e r to a b s o r b c u r r e n t
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 TOWARDS A DYNAMIC ECONOMICS
savings) w h e n it is fairly c e r t a i n t h a t t h e stock will c o m e
d o w n again to lOo in the n e a r future.
It is p a r t l y d u e to the fact t h a t this does not h a p p e n
t h a t economists h a v e b e e n driven to i n t r o d u c e such
c o n c e p t s as forced saving, i n v o l u n t a r y dis-saving, dis-
crepancies b e t w e e n e x - a n t e a n d ex-post saving or b e t w e e n
ex-ante a n d ex-post c a p i t a l outlay, a n d finally to K e y n e s i a n
theory, w h i c h I propose to consider a t the b e g i n n i n g of
the next lecture.
I t h a s b e e n in the m i n d s of economists t h a t t h e r e is,
in t h e world of ideal concepts, some b a n k i n g policy, which,
if carried o u t , w o u l d p r e v e n t forced saving or discrepancies
b e t w e e n e x - a n t e a n d ex-post capital o u t l a y ever o c c u r r i n g .
I suggest, o n t h e c o n t r a r y , t h a t economic theory h a s so far
a d v a n c e d n o valid propositions r e g a r d i n g h o w the r a t e
^ i n t e r e s t w o u l d b e h a v e in response to a n ideal b a n k i n g
policy designed to m a i n t a i n a steady a d v a n c e . Static
theory implies t h a t saving is zero a n d is i n a p p r o p r i a t e .
D y n a m i c theory strives after the c o n c e p t of a steadily
faihng r a t e of interest, b u t I d o not think t h a t m a r k e t
conditions h a v e been envisaged in w h i c h this could
b e c o m e a reality.

6a
 LECTURE THREE

F U N D A M E N T A L D Y N A M I C T H E O R E M S

A T the conclusion of t h e last lecture I discussed two

a p p r o a c h e s to t h e p r o b l e m of w h a t m i g h t govern t h e
m a r k e t r a t e of interest in a steadily a d v a n c i n g c o m -
m u n i t y . I h a s t e n to a d d t h a t b o t h these a p p r o a c h e s ,
t h o u g h at first sight a p p r o p r i a t e to t h e p r o b l e m i n h a n d
a n d c o n f o r m a b l e w i t h e c o n o m i c analysis generally, w e r e
totally unrealistic.
O n t h e o n e h a n d we considered the possibility t h a t
t h e m a r k e t h a v i n g looked f o r w a r d a n d i n its wisdbrfi
assessed t h a t f u n d a m e n t a l conditions r e q u i r e d a falling
r a t e of interest i n t h e c o m i n g period, so m a r k e d t h e values
of gilt-edged securities of various m a t u r i t i e s t h a t , w i t h
expectations u n c h a n g e d , a steady fall in t h e r a t e of yield
w o u l d e v e n t u a t e b e t w e e n the present a n d the dates of
m a t u r i t y . I t a p p e a r e d clearly t h a t this was to a t t r i b u t e
far too m u c h foresight to the m a r k e t a n d t h a t a n y assess-
m e n t of this sort implies a v a l u a t i o n of securities of various
m a t u r i t i e s w h i c h is a l t o g e t h e r in conflict w i t h t h e w h o l e
mass of o u r m a r k e t experience. I t is also very difficult
to see w h a t , o n this basis, t h e m a r k e t c o u l d d o with
securities w i t h o u t r e d e m p t i o n d a t e .
T h e o t h e r line of a p p r o a c h w e n t to t h e opposite
e x t r e m e a n d s u p p o s e d t h a t t h e m a r k e t in l o n g - d a t e d
securities w o u l d be g o v e r n e d b y t h e c u r r e n t b a l a n c e
b e t w e e n s u p p l y a n d d e m a n d for n e w c a p i t a l . ' Short-
' It is not implied that the d o c u j i c in tliis extreme form has been IJtld
by recent writers.

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 TOWARDS A DYNAMIC ECONOMICS
sighted t h o u g h the m a r k e t m a y b e it is not as short-
sighted as all this. A n a d j u s t m e n t of the security values
to t h e m o n t h l y b a l a n c e between t h e supply of a n d the
d e m a n d for new capital would surely m e a n variations
of a t least the o r d e r of i or 2 per cent in the r a t e of interest,
i.e. of 5 0 o r 100 p e r cent in the value of i r r e d e e m a b l e
securities. T h e idea t h a t the m a r k e t will, i n t h e course
of a short period, m a r k perfectly good British G o v e r n m e n t
securities, n o w at 140, n o w at 70, is q u i t e wide of the m a r k .
Such a p r o c e d u r e would be w r o n g from every point of
view. Kspecially is this so w h e n one recalls t h a t a c c o r d i n g
to this t h e o r y the alleged changes in t h e m a r k e t prices
of these securities should o c c u r even if there were n o
c h a n g e in expectations as regards the future. Changes
of expectation m a y cause big changes in Stock E x c h a n g e
values, albeit p r o b a b l y not changes big e n o u g h to secure
t h e m o n t h l y b a l a n c e i n t h e supply a n d d e m a n d for n e w
c a p i t a l ; b u t there is n o reason w h a t e v e r to suppose t h a t
such changes of expectation will occur, i n d e e d it would
b e quite fantastic to suppose t h a t they w o u l d o c c u r every
t i m e there was a need, from the p o i n t of view of the
m o n t h l y b a l a n c e , to get a big c h a n g e in prices. 1 class
this m e t h o d uf a p p r o a c h , therefore, as being q u i t e as
unrealistic as the o t h e r .
T h e a p p r o a c h by K e y n e s to the p r o b l e m of the m a r k e t
r a t e of l o n g - t e r m interest, w h a t e v e r criticisms one m a y
b r i n g against it, is m u c h m o r e realistic t h a n either of
these. T h e future is n o t left out of a c c o u n t , a l t h o u g h
K e y n e s did not think t h a t t h e Stock E x c h a n g e took a very
long v i e w ! Still t h e r e is n o question in t h e K e y n e s
analysis of the m a r k e t fixing present values at levels t h a t
a r e widely different from w h a t they j u d g e the future will
h^ve in store. O n the o t h e r h a n d n o definite c u r v e of
future prices is< d e e m e d to foreseen. O n the c o n t r a r y ,
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 FUNDAMENTAL DYNAMIC THEOREMS

it is t h e essence of t h e t h e o r y t h a t t h e m a r k e t is v e r y
l a r g e l y u n c e r t a i n as to w h a t is to h a p p e n in t h e f u t u r e .
I n D y n a m i c s w e m u s t n o t , a n y m o r e t h a n in S t a t i c s ,
think away uncertainty. E v e n if w e p o s t u l a t e t h a t t h e
f u n d a m e n t a l c o n d i t i o n s a r e c h a n g i n g s t e a d i l y , so as to
d e t e r m i n e , if all c o u l d b e assessed a c c u r a t e l y , a s t e a d y
r a t e of a d v a n c e a n d t h e r e w i t h a s t e a d y fall of i n t e r e s t ,
w e m u s t n o t p o s t u l a t e t h a t it is k n o w n t h a t t h e s e c o n d i t i o n s
will b e s u c h .
I n K e y n e s i n t e r e s t is r e d u c e d t o n o t h i n g m o r e t h a n
a risk p r e m i u m a g a i n s t fluctuations a b o u t w h i c h w e a r e
uncertain. Is t h e r a t e of i n t e r e s t u n d u l y h i g h , if it is
d e e m e d to s e r v e n o o t h e r f u n c t i o n t h a n t h a t of b e i n g a
risk p r e m i u m ? After all a c h a n g e of | p e r c e n t m a y m e a n
a c h a n g e of s o m e 2 0 p e r c e n t i n c a p i t a l v a l u e s , a n d 2^
p e r c e n t is p e r h a p s a n o t u n d u l y h i g h p r e m i u m t o c h r f g e
for b e a r i n g this risk.
C r i t i c i s m s h a v e b e e n m a d e of this t h e o r y o n t h e g r o u n d
t h a t it leaves i n t e r e s t s u s p e n d e d , so t o s p e a k , i n a v o i d ,
t h e r e b e i n g i n t e r e s t b e c a u s e t h e r e is i n t e r e s t . Professor
R o b e r t s o n ' s s u b t l e t h o u g h t s o n e c o n o m i c s h a v e for l o n g
s o l a c e d t h e h e a r t s of e c o n o m i s t s , a n d g r e a t w e i g h t is d u e
to a n y c r i t i c i s m h e m a k e s . 1 q u o t e from p a g e 2 5 of his
Essays in Monetary Theory :

T h u s the rate of interest is w h a t It is because it is expected

to become other t h a n it i s ; if it Is not expected to become
other t h a n it is there is nothing left to tell us w h y it is w h a t
it is. T h e o r g a n which secretes it has been a m p u t a t e d , a n d
yet it somehow still exists — " a grin w i t h o u t a cat " . M r .
P l u m p t r e of T o r o n t o , in a n unpublished p a p e r , has aptly com-
pared the position of the lenders of m o n e y u n d e r this theory
with that of a n insurance c o m p a n y which charges its clients
a p r e m i u m , the only risk against which it insures t h e m bciHg
the risk that its p r e m i u m wifi be raised, i f we ask w h a t
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 TOWARDS A DYNAMIC ECONOMICS
ultimately governs the judgments of wealth owners as to why
the rate of interest should be different in the future from what
it is to-day, we are surely led straight back to the fundamental
phenomena of productivity and thrift.
O r again, M r . Hicks writes ; " But to say t h a t t h e r a l e
of interest o n perfectly safe securities is d e t e r m i n e d b y
n o t h i n g else b u t u n c e r t a i n t y of future interest rates seems
to leave interest h a n g i n g by its o w n boot s t r a p s ; o n e
feels a n o b s t i n a t e conviction t h a t there must b e m u r e in
it t h a n t h a t " . M r . Hicks, however, does not base himself
u p o n p r o d u c t i v i t y a n d thrift b u t u p o n the cost i n c u r r e d
by t h e m a r g i n a l transferer of m o n e y i n t o s h o r t - d a t e d
securities, l o n g - t e r m interest being o n this view u l t i m a t e l y
g o v e r n e d by short-term interest.
T h e s e criticisms .suggest t h a t t h e K e y n e s theory of
interest is c i r c u l a r ; there is interest because t h e r a t e of
interest is expected to c h a n g e ; in fine, there is interest,
because there is expected to be interest. But w h y is there
expected to b e interest? A n d so, w h y is there i n t e r e s t ?
I d o not think t h a t this criticism Is decisive. Surely
there are s o m e p h e n o m e n a of the m i n d — a n d interest
is n o t h i n g b u t a p h e n o m e n o n of the m i n d , the resultant
of t h o u g h t s a n d opinions, hopes a n d fears, itself only a
promise, finally i n d e e d an act, b u t one solely originating
in the will of the two parties, n o t a physical p h e n o m e n o n
at all — surely there are m e n t a l p h e n o m e n a to which the
d i c t u m m a y correctly be applied t h a t there is n o t h i n g
t r u e but thinking makes it so.
A n d I a m inclined to think t h a t this a c c o u n t of interest
h a n g i n g by its o w n boot straps is an e x a g g e r a t i o n . Con-
sider a security with a certain p a r v a l u e d u e in t w e n t y years,
c a r r y i n g 2^ p e r cent. W i t h o u t interest the present value
o £ £ i o o of such stock w o u l d be £1^0. T h i s is a definite
s u m of money.' B u t the m a r k e t does n o t v a l u e t h e stock
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 FUNDAMENTAL DYNAMIC THEOREMS

a t £150, b u t a t s o m e lower figure, say, £100, to allow for

t h e fact t h a t t h e h o l d e r c a n n o t b e s u r e of getting the exact
c a l c u l a t e d s u m , w h a t e v e r it m a y be, b e t w e e n £150 a n d
3^100 a t a d a t e of his o w n choosing in t h e next t w e n t y
years. But, it will be objected t h a t if t h e r e is n o interest,
a n d k n o w n t h a t there will n o t i n a n y case be a n y interest,
will h e n o t h a v e a c e r t a i n t y of getting this a p p r o p r i a t e
s u m ? B u t this a s s u m p t i o n is too far-reaching. I n fair-
ness to K e y n e s , I d o n o t think w e a r e entitled to assume,
in r e b u t t i n g t h e theory of liquidity preference, a w o r l d
i n w h i c h it was k n o w n t h a t there n e v e r c o u l d be a n y
interest, p r e s u m a b l y a world in w h i c h t h e r e never h a d
been a n y i n t e r e s t ! A n d a r e not t h e critics going a little
far? D i d K e y n e s a n y w h e r e say t h a t liquidity preference
was the sole a n d only reason w h y there ever h a d b e e n o r
could be i n t e r e s t ? O r did h e n o t r a t h e r merely say tHaf*
h q u i d i t y preference was t h e sole d e t e r m i n a n t of t h e level
of the interest r a t e ?
I a m n o t p r e p a r e d to reject Keynes's t h e o r y , even in
t h e stripped form i n w h i c h his critics p r e s e n t it, as u n -
t e n a b l e . I t is c e r t a i n l y m u c h m o r e realistic t h a n t h e
o t h e r t w o possible theories I h a v e t o u c h e d o n . O n t h e
o t h e r h a n d I d o n o t t h i n k t h a t K e y n e s compels us to
suppose t h a t t h e m a r k e t in b r o o d i n g u p o n future prices,
a n d o n the u n c e r t a i n t i e s thereof, p a y s n o r e g a r d w h a t e v e r
to Professor R o b e r t s o n ' s p r o d u c t i v i t y a n d thrift.
A n d I w o u l d a d d this in defence of K e y n e s . S o m e
critics imply, p e r h a p s K e y n e s himself implied, t h a t h e
was substituting his t h e o r y for some well-established
o r t h o d o x theory, so t h a t , if we reject K e y n e s , t h e r e is
s o m e t h i n g to fall back o n . I d e n y t h e existence of t h e
alleged o r t h o d o x theory, a n d c l a i m t h a t t h e K e y n e s t h e o r y
o u g h t p r o p e r l y to b e r e g a r d e d as a n a t t e m p t to fill a void*'
I I d o not imply that his was the first a t t r f n p t !

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 TOWARDS A DYNAMIC ECONOMICS
If w e reject the K e y n e s theory in whole o r in p a n , we
m u s t offer s o m e t h i n g in its place [as M r . Hicks does] or
a c k n o w l e d g e t h a t w e a r e so far w i t h o u t a n y theory of
interest. It surely c a n n o t be m a i n t a i n e d t h a t dealers in
t h e m a r k e t acting for their o w n a d v a n t a g e a r e in a position
to e v a l u a t e long period trends in the m a n n e r described
in t h e last lecture a n d to m a r k stocks in such a w a y as
to i m p l y t h a t the yield o n t h e m d u e to interest a n d
a p p r e c i a t i o n (or d e p r e c i a t i o n ) will m o v e d u r i n g future
years along a c u r v e — if t h e r e is a r e d e m p t i o n d a t e t h e
c u r v e will often h a v e to rise a n d fall alternately. Nor
is it in the least degree feasible to h o l d t h a t values are
adjusted .so as to b a l a n c e the c o n t e m p o r a r y i n c r e m e n t s
of d e m a n d a n d supply regardless of t h e future.
I n the case of c o m m o d i t y m a r k e t s c o n t e m p o r a r y dis-
ecjuilibrium c a n b e m a d e good by absorption into or
release from stocks. N o w it m i g h t at first blush b e supposed
that j o b b e r s or o t h e r dealers by h o l d i n g stocks a n d shares
on speculative a c c o u n t or t a k i n g u p b e a r positions per-
form a function precisely analogous to t h a t of dealers in
c o m m o d i t y m a r k e t s . T h i s is a n illusion. T h e operations
of dealers in the two kinds of m a r k e t a r e similar in t h a t
b o t h they t e n d (or should tend) to iron out fluctuations
of prices. But t h e g r e a t difference is t h a t whereas physical
c o m m o d i t i e s c a n be carried forward t h r o u g h t i m e by
storage, it is impossible to d o this with " w a i t i n g " or
" saving " ; it c a n n o t be p u t into a bottle a n d transferred
from t i m e A to t i m e B. R e a l assets c a n , of course, b e
carried forward t h r o u g h t i m e , p e n d i n g their use ; c o m -
m o d i t y stocks a r e i n d e e d a p a r t i c u l a r e x a m p l e of this.
But this c a r r y forward is after saving has b e e n t a k e n u p
a n d e m b o d i e d in s o m e t h i n g real. It c a n n o t b e carried
forward prior to such e m b o d i m e n t .
I n the cases b o t h of p a r t i t u l a r c o m m o d i t i e s a n d saving
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 FUNDAMENTAL DYNAMIC THEOREMS
i n g e n e r a l , price oscillation w o u l d p r o b a b l y h a v e to b e
e x t r e m e l y violent to e q u a t e o u t p u t to use d a y b y d a y .
I n the former case this oscillation is r e d u c e d b y t h e
device of storing o u t p u t for future use. I n t h e case of
saving this device is not a v a i l a b l e a n d t h e modus operandi
of t h e security m a r k e t s is different. By p r e v e n t i n g these
heroic rises in interest changes w h i c h m i g h t b e necessary
from t i m e to t i m e to confine i n v e s t m e n t p l a n s to saving
available o n t h a t d a y , they allow those p l a n s to g o f o r w a r d .
T h i s progress is a c h i e v e d , not b y t h e release of stored u p
" saving " n o r as a direct result of t h e speculators' p u r -
chases, b u t indirectly by r e d u c t i o n of real stocks i n some
o t h e r p a r t of the e c o n o m y . Conversely w h e n interest
rates w o u l d b e r e q u i r e d to fall to zero or b e l o w it i n o r d e r
to get a d a y to d a y a d j u s t m e n t of t h e provision of saving
to its use, security dealers allow t h e saving to go forwSfrd
despite t h e lack of a d e q u a t e i n v e s t m e n t p l a n s , a n d this is
effected t h r o u g h t h e u n w a n t e d a c c u m u l a t i o n of c a p i t a l
stocks in s o m e o t h e r p a r t of t h e e c o n o m y .
But the m a t t e r does not rest t h e r e . T o t r a c e its
ramifications K e y n e s b r o u g h t forward his m u h i p l i e r
t h e o r y . W h a t is it t h a t p r e v e n t s t h a t large oscillation i n
t h e v a l u e of interest, w h i c h w o u l d b e n e e d e d to e q u a t e
the provision to the use of savings from d m e to time?
A c c o r d i n g to K e y n e s , variations in e m p l o y m e n t a n d in-
c o m e . W h a t is t h e o r t h o d o x t h e o r y in r e g a r d to w h a t
limits oscillations i n the r a t e of i n t e r e s t ? I s u b m i t w i t h
respect t h a t t h e r e is n o established t r a d i t i o n a l t h e o r y to
be p i t t e d against K e y n e s ' s specific t h e o r y .
T h e r e is a s o m e w h a t different fine of criticism of
K e y n e s ' s liquidity preference t h e o r y of interest w h i c h
I confess I h a v e always t h o u g h t to h a v e substance.
K e y n e s insists t h a t interest is solely t h e r e w a r d for p a r t i n g
w i t h h q u i d i t y a n d n o t in any^'sense t h e r e w a r d for waiting.
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 TOWARDS A DYNAMIC ECONOMICS
T h i s insistence has a p p e a r e d to m e to be one-sided a n d
n o t necessary for his case. It must be agreed, surely h e
w o u l d h a v e to agree, t h a t two activities are necessary
before c a p i t a l c a n be provided, n a m e l y ( t ) w a i t i n g a n d
(2} p a r t i n g with liquidity. Both activities, a n y h o w in
c e r t a i n circumstances, h a v e to be r e w a r d e d if they a r e
to take place. If a r e w a r d for w a i t i n g is necessary in
o r d e r t h a t t h e r e shall b e waiting, those w h o w a n t to enjoy
tiie benefit of it will h a v e to p a y t h a t r e w a r d , the liquidity
preference question a p a r t .
A p r o m i s i n g line of aniilysis m i g h t seem to b e t h a t
w h e n there are two activities of this sort b o t h necessary,
t h e user of the e n d p r o d u c t (viz. c a p i t a l disposal) will
h a v e to p a y the price necessary to satisfy t h e lender in
his c a p a c i t y of waiter or the price necessary to satisfy h i m
*n«-his c a p a c i t y of p a r t c r with liquidity, whichever is
higher. T h e r e seems to be a n assumption i n Keynes t h a t
the second will be higher, a n d , in circumstances in w h i c h
this is so a n d those only, it is the second t h a t will d e t e r m i n e
the rate of i n t e r e s t ; in those circumstances a n d those only
the whole of Keynes's a r g u m e n t follows as set out. K e y n e s
w o u l d n o t , I think, have a c c e p t e d this limitation. He
w o u l d rest himself o n the view t h a t income, the source
of saving, is a d e p e n d e n t variable in the whole picture
a n d t h a t t h e s u p p l y schedule of saving will so adjust
itself as to conform to t h e r a t e of interest estabhshed
in t h e m a r k e t to satisfy liquidity preference w h a t e v e r
t h a t r a t e m i g h t be.
W e m a y g r a p p l e w i t h this p r o b l e m in a n o t h e r w a y .
A c c e p t i n g t h e liquidity preference theory of the m a r k e t
rate^ there a r e t w o possibilities in r e g a r d to t h e relation
of this to the s u p p l y of saving, only o n e of which Keynes
a p p e a r s to h a v e considered. A n d to t h a t extent his
General Theory^ m a y b e deerhed to lack generality. O n e
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 FUNDAMENTAL DYNAMIC THEOREMS
case, the case h e treated, is where the liquidity preference
rate is higher t h a n that rate of interest which would m a k e
capital outlay equal to all the saving that would occur
at that rate of interest in conditions of full employment.
T h a t being so, insufficient capital outlay occurs, a n d
by consequence there is not full employment. But
what of the case in which the market r a t e of interest,
as determined by the forces defined by Keynes, estab-
lished itself at a level at which capital o u d a y exceeded
the volume of saving forthcoming at t h a t rate at full
employment? T h e n we should have an inflationary
condition — such as we have now ! T h e present is pre-
cisely a situadon in which the efforts of the Chancellor
of the Exchequer are holding the fiquidity preference r a t e
of interest far below the level at which capital outlay
would balance saving forthcoming at full employmefit.
Hence the need for controls. If Keynes did not deal with
this other case, it m a y be that at the time of w r i d n g h e
deemed it so far removed from actuality as to have n o
practical interest. Formally one m a y say t h a t he has only
tackled half liis subject.
T h e r e is a fundamental difference, however, between
the state of affairs as outlined in the Keynesian analysis
which arises when the Hquidity preference rate is too high
a n d that which — at least in the absence of Keynes to
analyse this other half of the field ! — we must deem to
arise should the fiquidity preference rate of interest be
too low. I n the former case Keynes presents us with w h a t
in the absence of fresh disturbing causes can be regarded
as a stable cquifibrium with involuntary unemployment
present. O n the other side of the line one would have,
it appears, not any kind of equilibrium, but an inflationary
condition, an unstable condition of expansion, destined
ultimately to be t e r m i n a t e d ' Capital o u d a y exceeding
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 TOWARDS A DYNAMIC ECONOMICS
saving at full e m p l o y m e n t , there w o u l d be a n inflationary
pressure with rising prices, an expansion b e y o n d the rate
t h a t could be sustained, a n d in the e n d s<ime k i n d of
b r e a k d o w n . T h u s we are confronted with a s y m m e t r y .
I n this c o n n e c t i o n I should like to r e m i n d you of the
m a i n difference b e t w e e n Keynes's Treatise an Money a n d
his General Theory. As you are well a w a r e , h e altered his
definitions of saving a n d investment b e t w e e n the two
treatises, a m a t t e r a b o u t w h i c h we need not c o m p l a i n
too m u c h ! I n the Treatise his concepts of saving a n d
investment, (ftough not identical with, are first cousins
to, t h e concepts of ex-ante saving a n d investment. In
the Treatise he envisages two a l t e r n a t i v e conditions, o n e
i n w h i c h i n v e s t m e n t is greater t h a n saving a n d the o t h e r
t h e opposite. T h e former of these is r o u g h l y analogous
to^'the case w h e r e t h e liquidity preference r a t e of interest
is below the level at which capital o u t l a y would b e e q u a l
to t h e saving as it then w a s ; capital o u t l a y is thus
s t i m u l a t e d . T h e General Theory c o n c e n t r a t e s a t t e n t i o n
o n the other case. But there is a g r e a t difference b e t w e e n
t h e two t r e a t m e n t s . I n the Treatise we get an u n s t a b l e
c o n d i t i o n o n b o t h sides of the line, viz., progressive ex-
p a n s i o n o n t h e one side a n d progressive c o n t r a c t i o n o n
the o t h e r . I n the General Theory, on the o t h e r h a n d ,
K e y n e s provides for t h e possibility of a stable e q u i l i b r i u m
o n the lower side, n a m e l y w h e r e the liquidity preference
r a t e of interest is above the level r e q u i r e d to secure
full-employment-capital-outlay. I n this, of course, t h e
General Theory breaks new g r o u n d . I t was this to which
h e a t t a c h e d great i m p o r t a n c e . It was i m p o r t a n t . It was
in o r d e r to get w h a t h e t h o u g h t w o u l d be a convenient
a p p a r a t u s for d e m o n s t r a t i n g this possibility of stable equi-
librium on t h e low side that h e a b a n d o n e d t h e ex-ante a n d
went over to tkc ex-nost conc*epts of saving a n d investment.
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 FUNDAMENTAL DYNAMIC THEOREMS
I suggest t h a t t h e Treatise m a y be r e g a r d e d as his
diagnosis of t h e t r a d e cycle, a n d t h e General Theory as his
diagnosis of c h r o n i c u n e m p l o y m e n t or u n d e r p r o d u c t i o n .
T h e Treatise does not p r o v i d e a satisfactory a c c o u n t o^
c h r o n i c u n e m p l o y m e n t , because t h e r e t h e conditions in
w h i c h the h q u i d i t y preference r a t e (to a n t i c i p a t e his l a t e r
terminology) is too high are essentially conditions of
instability, of g r o w i n g depression. A n d t h e opposite
conditions a r e essentially those of g a t h e r i n g m o m e n t u m .
T h e r e is n o notion of stability at a c e r t a i n level w h e n t h e
r a t e of interest is a b o v e its p r o p e r height, h o w e v e r t h a t
m a y b e defined. T h u s there is n o t h i n g arising from the
analysis of the Treatise to suggest t h a t in c e r t a i n c i r c u m -
stances t h e r a t e of interest m a y b e c h r o n i c a l l y too h i g h ,
t h a t we m a y h a v e a p e r m a n e n t u n e m p l o y m e n t p r o b l e m ,
over a n d a b o v e t h a t caused by t h e cycle itself. B u t ffle
circumstances at t h e t i m e w e r e s u c h as to suggest t h a t
t h e r e is in fact a p r o b l e m of c h r o n i c u n e m p l o y m e n t ,
n e e d i n g analysis. T h e General Theory was Keynes's a n s w e r .
U n t i l t h a t t h e g r e a t e r n u m b e r of economists h a d lulled
themselves w i t h the i d e a t h a t u n e m p l o y m e n t , b a d as it
m i g h t be, was a function of frictions, rigidities a n d the
t r a d e cycle. T h i s a s s u m p t i o n was first seriously c h a l l e n g e d
by t h e General Theory a n d t h a t w a s itself I m p o r t a n t . I n
the light of this it is not p e r h a p s of g r e a t m o m e n t t h a t
K e y n e s did n o t in t h e General Theory e m b a r k u p o n a n
analysis of the o t h e r possibility, w h e r e t h e r a t e as deter-
m i n e d by liquidity preference t e n d e d chronically to
over-stimulate c a p i t a l o u t l a y .
T h e r e is a m o r e i m p o r t a n t h n e of criticism o n w h i c h
I wish to dwell briefly. I n t h e General Theory the goal
of o u r e n d e a v o u r s , so to speak, is full e m p l o y m e n t .
M a n a g e m e n t of t h e r a t e of interest is to b e d i r e c t e d t<^
this goal. But there is a n o t h e r c o n c e p t , c ^ t e different
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 TOWARDS A DYNAMIC ECONOMICS
from t h o u g h not necessarily inconsistent with the i d e a
of full e m p l o y m e n t , n a m e l y a steady r a t e of progress
conformable with f u n d a m e n t a l conditions. O f course
we wish for a steady r a t e of progress with full e m p l o y m e n t ,
using t h a t expression in not too e x a g g e r a t e d a sense, all
a l o n g the line. B u t w h a t of the analysis ? Full e m p l o y -
m e n t is one t h i n g a n d a steady r a t e of progress quite
a n o t h e r . T o secure full e m p l o y m e n t in the short period
w i t h o u t r e g a r d to w h a t m a y be necessary for securing
a steady r a t e of progress is short-sighted. W e shall not
h a v e a very sound policy if we envisage t r e a t i n g the
p r o b l e m of u n e m p l o y m e n t ad hoc from m o n t h to m o n t h
w i t h o u t r e g a r d to w h a t sustained level of capital o u t l a y
is necessary for an a d v a n c e of t h e e c o n o m y in line with
w h a t f u n d a m e n t a l conditions allow. I a m n o t suggesting
tttat there is a n y t h i n g radically w r o n g with the K e y n e s i a n
remedies, b u t only t h a t they m u s t u l t i m a t e l y be based
u p o n a s o m e w h a t different analytical a p p r o a c h a n d
j u d g e d b y a different criterion.
A n interesting p o i n t m a y b e n o t e d in passing. If we
start from a condition of severe u n e m p l o y m e n t , some
p u m p - p r i m i n g — I will not b o t h e r a b o u t the precise
form, b u t for the m o m e n t we m a y think of t h a t old-
fashioned r e m e d y of public works — m a y b e necessary.
I f w e h a v e success, a n d conditions i m p r o v e , at some p o i n t
the acceleration principle must surely c o m e into play,
I will n o t say with precisely w h a t force. As w e m o v e
forward to full e m p l o y m e n t c a p i t a l o u t l a y m a y well
exceed, almost must exceed, the n o r m a l level a p p r o p r i a t e
to t h e f u n d a m e n t a l conditions of o u r steadily a d v a n c i n g
e c o n o m y . F o r in this u p w a r d p h a s e we are a d v a n c i n g
m u c h m o r e r a p i d l y t h a n at t h e n o r m a l steady r a t e ,
t h e r e f o r e if w e c a r r y o u r poUcy t h r o u g h a n d a p p r o a c h
full e m p l o y m e n t , there must b e a falling off of t h e capital
74
 FUNDAMENTAL DYNAMIC THEOREMS
o u t l a y associated w i t h t h e a b n o r m a l r a t e of a d v a n c e , a n
a b n o r m a l r a t e w h i c h m a y p r o c e e d o v e r a y e a r or two.
T h u s , still speaking in t e r m s of this old-fashioned r e m e d y
of p u b l i c works, t h e p o i n t a t w h i c h it will be a b o v e all
necessary to h a v e a large v o l u m e of p u b l i c works to t u r n
o n , p e r h a p s a l a r g e r v o l u m e t h a n in t h e original p u m p -
p r i m i n g p h a s e , is w h e n we a p p r o a c h full e m p l o y m e n t .
H a v i n g criticized K e y n e s for his lack of a d y n a m i c
p r i n c i p l e , w c m u s t r e t u r n to t h e c o n s i d e r a t i o n of t h a t
p r i n c i p l e . I n o u r earlier lecture w e r e a c h e d t h e con-
clusion t h a t f u n d a m e n t a l conditions m i g h t r e q u i r e a
steadily falling r a t e of interest. W e found g r e a t diffi-
cuUies i n envisaging h o w the c a p i t a l m a r k e t c o u l d ever
succeed i n p r o v i d i n g s u c h a s t e a d y decline.
Static t h e o r y does t w o t h i n g s . It defines t h e positions
of r a t e of o u t p u t a n d price at w h i c h e v e r y o n e will* b e
willing to c a r r y o n . E a c h person, if y o u like, is on the
most favoured indifference c u r v e w h i c h h e c a n r e a c h ,
a n d n o one sees a n y m e a n s of self-improvement in the
c i r c u m s t a n c e s p r e v a i l i n g . Secondly, it h a s s o m e t h i n g to
say as to h o w these positions are r e a c h e d . I n this u n -
certain w o r l d w c h a v e to p r o c e e d b y trial a n d e r r o r . A
p r o d u c e r tries p r o d u c i n g so m u c h . Experience and
observation m a y t h e n suggest t h a t h e c o u l d enlarge his
profit by p r o d u c i n g m o r e . If a m a n is n o t d o i n g the best
for himself t h e p r i c i n g m e c h a n i s m gives h i m g u i d a n c e ;
it b e c k o n s h i m o n or shows h i m t h e red light. It does so
a n y h o w in cases in w h i c h the preferred position is a stable
e q u i l i b r i u m . O f course w e k n o w from static theory t h a t
there m a y b e m o r e t h a n o n e position of stable e q u i l i b r i u m ,
of which o n e m a y b e b e t t e r t h a n the o t h e r , b u t will n o t
necessarily be r e a c h e d if the agent h a p p e n s to h a v e got
into t h e o t h e r ; we k n o w t h a t there m a y b e ranges ••f
i n d e t e r m i n a c y . T h e s e m a t t e r s a r e b e i n g - e v e r m o r e in-
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 TOWARDS A DYNAMIC ECONOMICS
from t h o u g h n o t necessarily inconsistent w i t h t h e i d e a
of full e m p l o y m e n t , n a m e l y a steady r a t e of progress
conformable with f u n d a m e n t a l conditions. O f course
we wish for a steady r a t e of progress with full e m p l o y m e n t ,
using t h a t expression in not too e x a g g e r a t e d a sense, all
a l o n g the tine. B u t w h a t of the analysis ? Full e m p l o y -
m e n t is one t h i n g a n d a steady r a t e of progress q u i t e
a n o t h e r . T o secure full e m p l o y m e n t in the short period
w i t h o u t r e g a r d to w h a t m a y be necessary for securing
a steady r a t e of progress is short-sighted. W e shall n o t
h a v e a very s o u n d policy if w e envisage t r e a t i n g the
p r o b l e m of u n e m p l o y m e n t ad hoc from m o n t h to m o n t h
w i t h o u t r e g a r d to w h a t sustained level of c a p i t a l o u t l a y
is necessary for a n a d v a n c e of the e c o n o m y in h n e with
w h a t f u n d a m e n t a l conditions allow. I a m not suggesting
tltAt there is a n y t h i n g radically w r o n g with the K e y n e s i a n
remedies, b u t only t h a t they m u s t u l t i m a t e l y b e based
u p o n a s o m e w h a t different analytical a p p r o a c h a n d
j u d g e d b y a different criterion.
A n interesting p o i n t m a y be n o t e d in passing. If we
start from a condition of severe u n e m p l o y m e n t , some
p u m p - p r i m i n g — I will not b o t h e r a b o u t t h e precise
form, b u t for t h e m o m e n t we m a y think of t h a t old-
fashioned r e m e d y of p u b l i c works — m a y b e necessary.
I f w e have success, a n d conditions i m p r o v e , a t some p o i n t
t h e acceleration p r i n c i p l e must surely c o m e i n t o p l a y ,
I will n o t say with precisely w h a t force. As w e m o v e
forward to full e m p l o y m e n t c a p i t a l o u d a y m a y well
exceed, almost m u s t exceed, the n o r m a l level a p p r o p r i a t e
to t h e f u n d a m e n t a l conditions of o u r steadily a d v a n c i n g
e c o n o m y . F o r in this u p w a r d phase w e a r e a d v a n c i n g
m u c h m o r e r a p i d l y t h a n at the n o r m a l steady rate,
t h e r e f o r e if w e c a r r y o u r policy t h r o u g h a n d a p p r o a c h
iull e m p l o y m t n t , t h e r e m u s t be a falling off of the c a p i t a l
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 FUNDAMENTAL DYNAMIC THEOREMS
outlay associated with the a b n o r m a l rate of advance, a n
a b n o r m a l rate which m a y proceed over a year or two.
T h u s , still speaking in terms of this old-fashioned remedy
of public works, the point at which it will be above all
necessary to have a large volume of public works to t u r n
on, perhaps a larger volume t h a n in the original p u m p -
p r i m i n g phase, is when we a p p r o a c h full employment.
H a v i n g criticized Keynes for his lack of a dynamic,
principle, we must return to the consideration of that
principle. I n o u r earlier lecture we reached the con-
clusion that fundamental conditions might require a
steadily faUing rate of interest. W e found great diffi-
culties in envisaging h o w the capital market could ever
succeed in providing such a steady decline.
Static theory does two things. It defines the positions^
of rate of o u t p u t and price at which everyone wiliTbe
willing to carry on. Each person, if you like, is on the
most favoured indifference curve which he can reach,
a n d n o one sees any means of self-improvement in the
circumstances prevailing. Secondly, it has something to
say as to how these positions arc reached. I n this un-
certain world we have to proceed by trial a n d error. A
producer tries producing so m u c h . Experience a n d
observation m a y then suggest that he could enlarge liis
profit by producing more. If a m a n is not doing the best
for himself the pricing mechanism gives him g u i d a n c e ;
it beckons him on or shows him the red Hght. It does so
anyhow in cases in which the preferred position is a stable
equilibrium. Of course we know from static theory that
there m a y b e more t h a n one position of stable equilibrium,
of which one m a y be better than the other, but will not
necessarily be reached if the agent h a p p e n s to have got
into the o t h e r ; we know t h a t there m a y be ranges • f
indeterminacy. These matters are being-ever more in-
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 TOWARDS A DYNAMIC ECONOMICS
tensivply examined. I n a very broad sense, however,
we believe that on the assumptions required for static
analysis there is a tendency for the various members of
the economy to work towards a n d stay in the best avail-
able positions. If d e m a n d exceeds supply, the price will
rise, a n d so forth.
T h e most difficult problem in the static analysis is
probably the general level of o u t p u t — Keynes's problem
in fact. Relative levels of the o u t p u t of each article are
well catered for, subject to the secondary difficulties
already mentioned. For the general level of output we
have had to rely on the balancing of the marginal utility
of income with the marginal disutility of work. It is
rightly felt to b e disturbing to the structure of this
theory if long continued " involuntary " unemployment is
possible.
T h e decision by a n entrepreneur to increase output
has a twofold effect: it alters his relative position and
it alters the general level of output. If he is but one unit
in a large economy the second-mentioned effect may be
u n i m p o r t a n t . But may it entail some tendency to set
u p a cumulative process of expansion? A harvest varia-
tion, because widespread, m a y have more important effects
in that direction than changes by an individual.
I will not pause, however, to consider possibilities
within the static conditions, but proceed directly to
dynamic assumptions. Growth is the aggregated effect
of a great n u m b e r of individual decisions. I n the fore-
going treatment I have attempted to analyse the main
elements in growth, a n d to indicate the nature of possible
Unes of advance. This corresponds to the representation
of what the positions would be in the equilibrium of a
stationary state. But what of the analysis of the stability
of that fniu'lifcriiim ? If the rate of growth entailed by
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 FUNDAMENTAL DYNAMIC THEOREMS
t h e a g g r e g a t e d i n d i v i d u a l decisions b a s e d o n trial a n d
e r r o r is different from t h e r a t e of g r o w t h r e q u i r e d b y t h e
f u n d a m e n t a l conditions, a r e t h e r e forces t e n d i n g to c o r r e c t
t h a t r a t e a n d b r i n g it i n t o line with the g r o w t h r e q u i r e d
b y t h e f u n d a m e n t a l conditions ?
I t will not be possible in w h a t follows to k e e p o u r m i n d s
a l t o g e t h e r free of t h e t r a d e cycle p r o b l e m . I a m afraid
t h a t a p r o p e r u n d e r s t a n d i n g of t h e r e l a t i o n b e t w e e n t h e
r e q u i r e m e n t s of a steady a d v a n c e a n d w h a t t h e m a r k e t
c a n p r o v i d e is very m u c h m i x e d u p w i t h t h e t r a d e cycle
p r o b l e m . B u t t h e r e a r e various aspects of t h a t p r o b l e m ,
w h i c h I propose to leave entirely o n o n e side, p a r t i c u l a r l y
those c o n n e c t e d w i t h lags. I wish to c o n c e n t r a t e a t t e n t i o n
o n o n e or two aspects t h a t seem to m e very closely related
to the general d y n a m i c p r o b l e m .
I p r o p o s e , if you will allow m e , to seek to p u s h f o r w a r d
by reverting to a m e t h o d of analysis suggested in a n
article w h i c h I wrote in the Economic Journal of M a r c h
19395 ill p a r t i c u l a r to t h e f u n d a m e n t a l e q u a t i o n t h e r e
set o u t . P e n d i n g a n y d a m a g i n g criticism of t h a t e q u a t i o n ,
I feel t h a t it is a powerful tool for sorting o u t t h e factors
involved a n d w o u l d therefore ask you to give a t t e n t i o n
to it. I shall slightly, b u t only slightly, alter t h e n o t a t i o n .
T h i s f u n d a m e n t a l e q u a t i o n h a s t w o forms. I n one
it is a t r u i s m , in the o t h e r a s t a t e m e n t of the rate of g r o w t h
w h i c h will leave t h e various parties satisfied. N e i t h e r is
directly related to t h e g r o w t h m a d e possible b y c o n t i n u i n g
c h a n g e s i n f u n d a m e n t a l conditions. First w e m a y look
at the truism. F o r this p u r p o s e I w r i t e t h e e q u a t i o n as
follows :
G C =s,

G, w h i c h stands for g r o w t h , is t h e i n c r e m e n t of t o t a i
p r o d u c t i o n in a n y u n i t p e n o a exoressed as" a fracdon of
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 TOWARDS A DYNAMIC ECONOMICS
total p r o d u c t i o n . T h u s if t h e line of steady a d v a n c e
m e a n t a n increase in o u t p u t of 2 p e r cent p e r a n n u m ,
G w o u l d b e i / 5 0 ; or if the unit period chosen w a s a
m o n t h , G w o u l d b e 1/600.
G (capital) is the increase in the v o l u m e of goods of
all kinds o u t s t a n d i n g a t the e n d over t h a t o u t s t a n d i n g
at the b e g i n n i n g of t h e period divided b y the i n c r e m e n t
of p r o d u c t i o n in t h a t same p e r i o d . T h i s seems a s o m e w h a t
c o m p l i c a t e d concept, b u t 1 h o p e t h a t you will feel, as t h e
a r g u m e n t proceeds, t h a t it is really a very simple o n e .
T h e v a l u e of G C is i n d e p e n d e n t of the u n i t period
chosen. C o n s i d e r o n e s t a n d a r d unit period a n d a n o t h e r
u n i t period n times the l e n g t h of the s t a n d a r d u n i t . T h e
n u m e r a t o r of G m e a s u r e d for t h e s e c o n d - n a m e d unit
p e r i o d is times t h a t of the s t a n d a r d u n i t period, while
tlft d e n o m i n a t o r is n times t h a t of t h e s t a n d a r d u n i t p e r i o d
(e.g. i n c o m e p e r a n n u m is twelve times i n c o m e p e r m o n t h ) ;
therefore the value of G m e a s u r e d for the s e c o n d - m e n -
tioned u n i t period is n times its value m e n t i o n e d for the
s t a n d a r d unit period. T h e n u m e r a t o r of C for the second-
m e n t i o n e d u n i t period is n times its n u m e r a t o r m e a s u r e d
for the s t a n d a r d unit period, while the d e n o m i n a t o r of
t h e former is times t h e d e n o m i n a t o r of the latter. T h u s
t h e v a l u e of C for t h e s e c o n d - m e n t i o n e d period is ijn
times t h a t of t h e latter. T h u s t h e v a l u e of G C is inde-
p e n d e n t of t h e u n i t period chosen.
s is t h e fraction of i n c o m e saved. It is not necessar)'
for t h e following a r g u m e n t to assume t h a t s is constant
as G changes. T h e long analysis In t h e last lecture did
n o t , I think, yield a m o r e convenient w a y of expressing
t h e v a l u e of saving likely to be v o l u n t e e r e d t h a n as a
fraction of i n c o m e . O n the w h o l e t h a t seemed to be the
•wiost p r o b a b l e v a l u e for the saving r e q u i r e d if an a d v a n c e
was to be steady at c o n s t a n t interest. It was recognized,
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 FUNDAMENTAL DYNAMIC THEOREMS

h o w e v e r , t h a t in c r u c i a l cases saving as a fraction of

i n c o m e m i g h t n o t be c o n s t a n t .
All t h a t is r e q u i r e d for t h e a r g u m e n t i m m e d i a t e l y to
follow is t h a t a n y c h a n g e s in s, i.e. saving expressed as a
fraction of i n c o m e , should b e small b y c o m p a r i s o n with
e x p e r i m e n t a l c h a n g e s in G. A n d this r e q u i r e m e n t is
clearly fulfilled. W i t h o u t a n y g r e a t r e v o l u d o n G m i g h t
easily c h a n g e from a to 6 p e r cent. T h i s clearly c o u l d
not cause saving to b e t r e b l e d . T h e e x t r e m e case of saving
b e i n g as low as 2 p e r cent of i n c o m e a n d all e x t r a i n c o m e ,
d u e to a rise of G, being saved m a y b e ruled o u t . If saving
is g r e a t e r t h a n 2 per cent t h e n for saving as a fraction of
i n c o m e to increase b y as m u c h as G , c o n s u m p t i o n w o u l d
h a v e to be c u t (in all p r o b a b l e c i r c u m s t a n c e s b y large
a m o u n t s ) as i n c o m e rose, a n d this, too, m a y b e r u l e d o u t .
T o m e e t t h e criticism t h a t this e q u a t i o n gives too rffuch
e m p h a s i s to t h e acceleration p r i n c i p l e , we m a y insert a
t e r m w h i c h m a y b e i n t e r p r e t e d as liberally as you wish.
Let us write t h e e q u a t i o n

GC=j-A,
w h e r e h consists of c u r r e n t a d d i t i o n s to capital (the v a l u e
t h e r e o f to b e expressed as a fraction of c u r r e n t income)
t h e worth-whileness of w h i c h is not d e e m e d to h a v e a n y
i m m e d i a t e r e l a d o n to c u r r e n t r e q u i r e m e n t s , k is in fact
t h e c a p i t a l o u t l a y of a long-range c h a r a c t e r , c a p i t a l o u t l a y
w h i c h n o one expects to see justified or not justified within
a fairly short p e r i o d . I n t h e long r u n k m u s t d i s a p p e a r ,
for in t h e long run all c a p i t a l o u t l a y is justified b y t h e use
to w h i c h it is p u t . But it m a y b e very i m p o r t a n t to
s e p a r a t e it o u t in t h e short period. I n t h e short p e r i o d
m a k e k as large as you please. U n i t s of e q u i p m e n t , e t c . ,
w h i c h a r e i n c l u d e d in k m u s t be o m i t t e d in the c o m p u t a -
tion of C. If k is very large (as in w a r ) - a n d exceeds s,
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 TOWARDS A DYNAMIC ECONOMICS
C m a y b e c o m e negative, a n d w e shall then h a v e a n
inflationary situation.
C is the a d d i t i o n t o capital, b u t need not consist
exclusively or even mostly of capital goods. It is merely
t h e accretion d u r i n g t h e period of all goods (less those
goods w h i c h arc included in k). T h i s e q u a t i o n does not
m a k e a n y explicit reference to goods in process. T h e
v a r y i n g level of these is n o d o u b t i m p o r t a n t , b u t I de-
liberately d o n o t distinguish t h e m because I believe t h a t
w e are on t h e way to certain basic t r u t h s , w h i c h are
i n d e p e n d e n t of complications t h a t have to b e i n t r o d u c e d
w h e n we seek to build u p a m o r e detailed p i c t u r e of the
w h o l e process. I e m p h a s i z e t h a t this e q u a t i o n is necessarily
t r u e . It follows from t h e definitions of t h e t e r m s . ' It is
^ d y n a m i c e q u a t i o n since it c o n t a i n s G, which refers to
t h e V a t e of increase. I also c o m m e n d to you its e x t r e m e
simplicity. I should like to t h i n k t h a t it might serve as
a target for frequent a t t a c k , like Fisher's famous truism
M V ==PT. I will only say this. D o not seek to criticize
it by reference to a l t e r n a t i v e equations or formulae w h i c h
d o not c o n t a i n a d y n a m i c t e r m such as G . T h a t w o u l d
not b e p l a y i n g the g a m e . I feel t h a t I shall h a v e achieved
something really i m p o r t a n t if in t h e discussion a n d
criticism of this formula I c a n h a b i t u a t e the critics to
t h i n k i n g in d y n a m i c t e r m s . I know of n o alternative
formulation, in the world of m o d e r n economic theory,
of a n y d y n a m i c p r i n c i p l e of c o m p a r a b l e generality. W e
m u s t start with some generality however Imperfect. W e
shall never go a h e a d if w e r e m a i n in a world of trivialities

' I t c a n easily be seen, b y the cancellation of c o m m o n terms, that it is

reducible to the truism that ex-post " investment " is equal t o ex-poat
saving.
L e t Y stand for income, I for investment and S for saving.
AY U , S

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 FUNDAMENTAL DYNAMIC THEOREMS
or fine points. I t is useless to refine a n d refine w h e n t h e r e
are no basic ideas present at all.
We n o w c o m e to t h e form of t h e e q u a t i o n w h i c h e x -
presses t h e cquifibrium of a steady a d v a n c e . I write t h i s :

G„Gr = s.
R e p e a t i n g t h e t e r m i n o l o g y of m y earlier article I call
Gu, t h e w a r r a n t e d r a t e of g r o w t h . T h i s has n o t h i n g
w h a t e v e r t o d o w i t h t h e r a t e of g r o w t h d e t e r m i n e d b y
t h e f u n d a m e n t a l conditions of p o p u l a t i o n increase, e t c . ,
w h i c h w a s discussed earUer. T h i s e q u a t i o n expresses
t h e c o n d i t i o n in w h i c h p r o d u c e r s will b e c o n t e n t w i t h
w h a t t h e y a r e doing.
H o w a r e w e to c o m p a r e the e q u i l i b r i u m of a steady
a d v a n c e w i t h a static e q u i l i b r i u m ? I n the static equi-
l i b r i u m p r o d u c e r s r e m a i n c o n t e n t w i t h their exisftnt
r a t e of o u t p u t . T h e y look u p o n their work a n d t h e y
see t h a t it is good. O n a b r o a d definition this need n o t
p r e c l u d e variations in p a r t i c u l a r c o m m o d i t i e s . W e m a y
suppose t h a t some p r o d u c e r s find t h a t t h e d e m a n d is
falling off a n d others t h a t it is increasing, in fact t h a t n o t
all individuals are c o n t e n t to rest in their present con-
d i t i o n , b u t a r c subject t o forces r e q u i r i n g t h e m to adjust
u p w a r d s or d o w n w a r d s . But if t h e f u n d a m e n t a l con-
ditions as a whole a r e s t a t i o n a r y , t h e a m o u n t of c o n t r a c -
t i o n suggested by this condition of m a r k e t s for various
speciaUties s h o u l d b e e q u a l to t h e a m o u n t of expansion
suggested b y other m a r k e t s . A n a d j u s t m e n t is m a d e ,
a n d t h e static e q u i l i b r i u m e q u a t i o n s prescribe t h e n e w
values at w h i c h t h e various kinds of o u t p u t will e v e n t u a l l y
settle d o w n after a s h o r t e r or longer p e r i o d .
T h e s a m e circumstances a p p l y to a steady a d v a n c e .
T h i s c o n c e p t need n o t p r e c l u d e t h e m o r e rapid a d v a n c e
in certain sectors, l o w e r a3vanres or e v « i declines i n
 TOWARDS A DYNAMIC ECONOMICS
others. I n this case, however, t h e r e will b e a n over-all
t e n d e n c y to a d v a n c e s o m e w h a t , n a m e l y , if the s h o r t
period conditions are right for a steady a d v a n c e , at the
r a t e G „ . T h e decision by e a c h e n t r e p r e n e u r to c o n t i n u e
p r o d u c i n g a t t h e r a t e h e h a s p r o d u c e d or to p r o d u c e
s o m e t h i n g m o r e is n o d o u b t d e t e r m i n e d b o t h b y t h e
satisfactory o r unsatisfactory c h a r a c t e r of t h e results of
his previous decisions as experienced to d a t e — a p o i n t
u p o n which the lag analysis lays p r i m a r y stress — a n d
also b y a r e a s o n a b l e prognostication of w h a t Is to c o m e
based on a survey of the p a r t i c u l a r m a r k e t s . I define
as t h a t over-all r a t e of a d v a n c e which, if executed, will
leave e n t r e p r e n e u r s in a state of m i n d in which they a r e
p r e p a r e d to c a r r y o n a similar a d v a n c e . S o m e m a y b e
dissatisfied a n d h a v e to adjust u p w a r d s or d o w n w a r d s ,
bu't the ups a n d downs should b a l a n c e out a n d , in the
aggregate, progress in t h e c u r r e n t period should be e q u a l
to progress in the last p r e c e d i n g p e r i o d .
T h e e q u a t i o n before us sets o u t to define the r a t e of
a d v a n c e w h i c h will give satisfaction a n d lead to its o w n
perpetuation.
C , is the t e r m for capital r e q u i r e m e n t s . W h e r e a s in
the truistic e q u a t i o n t h e r e was an ex-post t e r m expressing
the a m o u n t of capital goods actually p r o d u c e d per period,
0 , is an e q u i l i b r i u m t e r m expressing r e q u i r e m e n t s for
n e w capital, C, is defined analogously with G, n a m e l y
as t h e r e q u i r e m e n t for n e w capital divided b y the incre-
m e n t of o u t p u t to sustain w h i c h t h e n e w c a p i t a l is r e q u i r e d .
G, is thus the r e q u i r e d capital coefficient.
T h i s definition is based o n t h e i d e a t h a t existing o u t p u t
c a n be sustained by existing capital a n d t h a t a d d i t i o n a l
capital is only r e q u i r e d to sustain a d d i t i o n a l o u t p u t .
T h i s follows from the assumption t h a t the c a p i t a l / i n c o m e
r a t i o is c o n s t a n t , i.e. t h a t tne l e n g t h of t h e p r o d u c t i o n
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process is u n c h a n g e d a n d t h i s follows f r o m t h e t w o
assumptions on which we are at present working, namely,
( i ) t h a t i n v e n t i o n s a r e n e u t r a l a n d (2) t h a t t h e r a t e of
i n t e r e s t is c o n s t a n t . T h e e q u a t i o n m u s t b e m o d i f i e d i n
a w a y t h a t I shall p r e s e n t l y d e s c r i b e w h e n w e h a v e t o
d e a l w i t h t h e case of t h e p r o d u c t i o n processes g e t t i n g
more roundabout.
O f c o u r s e this does n o t i m p l y t h a t all i n v e n t i o n s a r e
n e u t r a l . T h e r e is n o n e e d t o m a k e s u c h a r i g i d r e q u i r e -
m e n t , w h i c h w o u l d of c o u r s e b e a l t o g e t h e r u n r e a l i s t i c .
I n t h e case of c e r t a i n g o o d s a n i n v e n t i o n m a y c o m e
f o r w a r d g r e a t l y r a i s i n g t h e a m o u n t of c a p i t a l r e q u i r e d
for t h e m o r e efficient p r o d u c t i o n of a g i v e n q u a n t u m of
g o o d s . I n o t h e r cases t h e " i n v e n t i o n " m a y t a k e t h e f o r m
of a n i m p r o v e m e n t i n m a n a g e r i a l m e t h o d s — t h e p o i n t
in which some say we are m u c h further b e h i n d * t h e
Americans t h a n in our physical capital e q u i p m e n t —
w h e r e b y a g i v e n p l a n t is m a d e t o y i e l d a h i g h e r o u t p u t
of g o o d s . W h a t w e a r e p o s t u l a t i n g in o u r d y n a m i c
a p p r o a c h to t h e s e p r o b l e m s is t h a t o n a v e r a g e all t h e
v a r i o u s i n v e n t i o n s a n d i m p r o v e m e n t s a c c r u i n g in a u n i t
period are n e u t r a l , those requiring m o r e capital per u n i t
of o u t p u t b a l a n c i n g t h e effect of t h o s e w h i c h r e q u i r e less.
O n this a s s u m p t i o n t h e e x i s t i n g c a p i t a l of t h e c o u n t r y ,
a l w a y s of c o u r s e c h a n g i n g its precise f o r m i n all t h e
different sectors, c a n s u s t a i n t h e e x i s t i n g o u t p u t . New
c a p i t a l is r e q u i r e d i n r e l a t i o n to n e w o u t p u t ( w h e t h e r
t h e n e w o u t p u t is d u e t o a n i n c r e a s e of p o p u l a t i o n o r a n
i n c r e a s e of o u t p u t p e r h e a d ) . C , is of c o u r s e a m a r g i n a l
n o t i o n ; it is t h e n e w c a p i t a l r e q u i r e d to s u s t a i n t h e o u t p u t
w h i c h will satisfy t h e d e m a n d s for c o n s u m p t i o n a r i s i n g
o u t of c o n s u m e r s ' m a r g i n a l a d d i t i o n to i n c o m e . ^ Thus

* After a recession, when thcrc^is much redundant capacity, Cr is

temporarily reduced to a low level.
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C,, the m a r g i n a l r e q u i r e m e n t for n e w capital, m a y not
b e e q u a l to t h e capital coefficient in the e c o n o m y as a
w h o l e . But as a condition for a steady a d v a n c e "we h a v e
to assume t h a t C , does not c h a n g e over t h e r a n g e of
i n c o m e increase t h a t occurs d u r i n g the postulated period
of steady a d v a n c e . Y o u m a y think t h a t all these a s s u m p -
tions involved in the definition of C, taken together are
r a t h e r large, b u t I suggest t h a t they define the simplest
possible case from w h i c h w c c a n well proceed to develop
various complications.
It m a y suggest itself to y o u r m i n d s t h a t t h e frequent
occurrence of inventions or frequent changes of taste
w o u l d lead to d e m a n d s for fresh saving even a l t h o u g h
b o t h kinds of c h a n g e were on b a l a n c e of n e u t r a l c h a r a c t e r .
Will n o t new installations be r e q u i r e d in consequence of
the*changes, a n d n e w savings, in o r d e r to finance t h e m ?
I n general this does not a p p e a r to be t h e case. Provided
t h a t the t e m p o of c h a n g e is recognized by e n t r e p e n e u r s ,
they will fix their depreciation allowances accordingly.
T h e s e will b e h i g h e r in a progressive t h a n in a s t a g n a n t
e c o n o m y . I n p a r t i c u l a r cases, however, unforeseen changes
m i g h t be so g r e a t as to t h r o w whole firms into liquidation
before they h a d h a d t i m e to write d o w n the obsolete sector
of their assets to zero, a n d it could be argued t h a t this loss
of real capital will not b e offset by t h e longevity, in o t h e r
firms, of assets w h i c h last b e y o n d expectation, since assets
c a n n o t b e w r i t t e n d o w n below zero. Strictly, losses such
as these should b e d e d u c t e d from positive savings in fixing
t h e v a l u e of s. Alternatively n e w installations of a
v a l u e e q u a l to t h e loss of incompletely written otT assets
i n the h a n d s of b a n k r u p t firms might be i n c l u d e d in h.
T h e existence of such losses does not affect the a r g u m e n t
w h i c h follows.
I n o w ask y o u to look closely at the two equations set
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o u t . T h e former, you r e m e m b e r , is a truistic e q u a t i o n
w h i c h m u s t b e satisfied w h a t e v e r a d v a n c e or recession
takes p l a c e . T h e l a t t e r expresses the fact t h a t if the
a d v a n c e is to b e m a i n t a i n e d , C, t h e q u a n t i t y of t h e a d d i -
tion to c a p i t a l a c t u a l l y a c c r u i n g , m u s t b e w h a t is n e e d e d .
T h i s capital, as I h a v e a l r e a d y p o i n t e d o u t , covers b o t h
e q u i p m e n t a n d stock-in-trade. I a m n o t a t p r e s e n t b a s i n g
myself u p o n the distinction b e t w e e n d u r a b l e a n d n o n -
d u r a b l e goods o r u p o n t h a t b e t w e e n p r o d u c e r a n d con-
s u m e r goods. C consists in p a r t of c o n s u m e r goods,
i n c l u d i n g n o n - d u r a b l e c o n s u m e r goods. In a n a d v a n c i n g
c o m m u n i t y goods in t h e pipe-line, shops, warehouses,
transit, a n d p r o d u c e r s ' stores, h a v e to increase in p r o p o r -
tion to t u r n o v e r . All these goods a r e p a r t of c a p i t a l . T h e
rise or fall of goods in t h e pipe-line a b o v e o r below t h e
r e q u i r e d level m a y be just as b i g a factor as the m a r g i n s
of u n w a n t e d e q u i p m e n t or s h o r t a g e of e q u i p m e n t in
depressing or s t i m u l a t i n g the system.
T a k i n g these two e q u a t i o n s together, w e c a n see a
relation of t h e u t m o s t simplicity, a n d I ask you to j o i n
with m e in t h i n k i n g it e x t r a o r d i n a r i l y impressive. T h e
g r e a t e r G, the lower C , T h a t can h a r d l y be questioned.
C o n s e q u e n t l y if G h a s a v a l u e a b o v e G^, C will h a v e a
v a l u e below G,. I see n o w a y of escape from t h a t . If C
h a s a v a l u e below C „ this m e a n s t h a t o n b a l a n c e p r o -
d u c e r s a n d t r a d e r s find the goods in t h e pipe-line o r the
e q u i p m e n t insufficient to sustain existing t u r n o v e r . Let
m e r e p e a t : if the v a l u e G is a b o v e t h a t of Gu,, the v a l u e
of C m u s t b e below t h a t of C^; there will b e insufficient
goods i n the pipe-fine a n d / o r insuflicient e q u i p m e n t , a n d
o r d e r s will b e increased. If t h e v a l u e G is a b o v e t h e
v a l u e Gy^, t h a t is if t h e actual g r o w t h is a b o v e the line of
g r o w t h consistent w i t h a steady a d v a n c e , o r d e r s will b e
increased. A n d , of course, conversely. Tiiis strikes m e
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as a n e x t r a o r d i n a r i l y simple a n d n o t a b l e d e m o n s t r a t i o n
of the instability of a n a d v a n c i n g system. A r o u n d t h e
line of a d v a n c e , w h i c h , if a d h e r e d to, w o u l d a l o n e give
satisfaction, centrifugal forces a r e at work, c a u s i n g t h e
system to d e p a r t further a n d j - u r t h e r from t h e r e q u i r e d
line of a d v a n c e .
G is a q u a n t i t y d e t e r m i n e d from t i m e to t i m e by trial
a n d error, by t h e collective trials a n d errors of vast
n u m b e r s of people. It w o u l d b e g r e a t luck if their col-
lective appraisals caused t h e m to hit precisely u p o n t h e
v a l u e G „ . But if they d o not d o so their experience will
tend to drive t h e m farther a n d farther from it. T h i s
kind of instability has n o t h i n g to d o w i t h the effect of
lags, a n d strikes m e as m o r e f u n d a m e n t a l . T h e only w a y
in w h i c h this conclusion c o u l d be upset w o u l d be by the
suggestion t h a t variations in G w o u l d cause equally large
variations in t h e v a l u e ois. B u t this is clearly u n a c c e p t a b l e
for reasons a l r e a d y stated. I t is n o t t h i n k a b l e , for instance,
t h a t saving as a fraction of i n c o m e c o u l d b e multiplied
by 4 i n c o n s e q u e n c e of a c h a n g e in the increase of i n c o m e
from I p e r cent to 4 per cent. T h e only case in w h i c h any-
t h i n g of this sort could possibly h a p p e n would b e if the value
of i was almost as g r e a t as t h a t of s, t h a t is in which almost
all savings were a b s o r b e d in capital o u t l a y w h i c h h a d n o
relation to t h e r e q u i r e m e n t s of c u r r e n t d e m a n d .
So far t h e n we h a v e two propositions, (i) T h e r e is
a line of a d v a n c e w h i c h , if a d h e r e d to, w o u l d leave p r o -
d u c e r s c o n t e n t with w h a t they h a d d o n e . A small p o i n t
t h a t will readily o c c u r to you is t h a t p e r h a p s should
be d e e m e d to h a v e a v a l u e slightly lower t h a n the r e q u i r e d
a m o u n t of capital, lower, that is, b y the a m o u n t necessary
to keep p r o d u c e r s m o v i n g forward on the line of a d v a n c e ,
i f Cr were precisely e q u a l to r e q u i r e m e n t s they m i g h t
lapse i n t o a s t a t i o n a r y condUion.
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(ii) If t h e a g g r e g a t e d result of trial a n d e r r o r by
n u m e r o u s p r o d u c e r s gives a v a l u e for G w h i c h is different
from Gu,, t h e r e will n o t b e a n y t e n d e n c y to a d a p t p r o -
d u c t i o n t o w a r d s G„, b u t , o n t h e c o n t r a r y , a t e n d e n c y to
a d a p t p r o d u c t i o n still farther a w a y from it, w h e t h e r o n
the higher or lower side.
N e x t it is desirable to relate these t w o e q u a t i o n s to
t h a t steady r a t e of a d v a n c e d e t e r m i n e d b y f u n d a m e n t a l
conditions, w h i c h h a s b e e n so m u c h discussed a l r e a d y .
W e m a y set this o u t in t h e form of a n e q u a t i o n as follows;

G „ G , - o r ^ s.
G„ {„ for n a t u r a l ) is t h e r a t e of a d v a n c e w h i c h t h e
increase of p o p u l a t i o n a n d technological i m p r o v e m e n t s
allow. I t has n o direct relation to G^.
G„ represents the line of o u t p u t at e a c h p o i n t o n witich
p r o d u c e r s of all kinds will be satisfied t h a t they a r e m a k i n g
a correct b a l a n c e b e t w e e n work a n d l e i s u r e ; it excludes
the possibility of " i n v o l u n t a r y " u n e m p l o y m e n t . is
the e n t r e p r e n e u r i a l e q u i l i b r i u m ; it is the line of a d v a n c e ,
which, if achieved, will sadsfy profit takers t h a t t h e y h a v e
d o n e t h e right t h i n g ; in K e y n e s i a n fashion It c o n t e m -
plates t h e possibility of g r o w i n g " i n v o l u n t a r y " u n e m -
p l o y m e n t . T h u s the plot thickens. W e h a v e n o t o n l y
to consider divergences of G a n d G^, b u t also those of
G„, from G„.
I n the first place it is to b e observed t h a t G„ sets a limit
to t h e m a x i m u m a v e r a g e v a l u e of G over a l o n g period.
After a recession G m a y a t t a i n a h i g h e r v a l u e t h a n G„
for a c o n s i d e r a b l e period. But it is n o t possible to m a i n -
tain g r o w t h at a g r e a t e r r a t e for a n indefinite period t h a n
t h e increase of p o p u l a t i o n a n d technological i m p r o v e -
m e n t s (both being expressed in G„) allows.
Secondly, t h e r e l a d o n of G„ to G. is cle«rly of crucial
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i m p o r t a n c e in d e t e r m i n i n g w h e t h e r t h e e c o n o m y over
a t e r m of years is likely to b e p r e p o n d e r a t i n g l y Hvely o r
depressed, A p a r a d o x is involved. W h e n e v e r G exceeds
G,^, there will b e a t e n d e n c y for a b o o m to develop ; a n d
conversely. N o w if G„ exceeds G^ t h e r e is n o reason w h y
G should not exceed G „ for most of the t i m e . Conse-
quently t h e r e is n o reason w h y the e c o n o m y should n o t
enjoy a r e c u r r e n t t e n d e n c y to develop b o o m conditions.
But if G„, exceeds G„, t h e n G must lie below G,^ for most
of the time, since the a v e r a g e v a l u e of G over a period
c a n n o t exceed t h a t of G„. Therefore in such c i r c u m -
stances we must expect the e c o n o m y to b e prevailingly
depressed. T h i s is p a r a d o x i c a l , since, at first blush, one
would suppose it to b e a good t h i n g t h a t the line of e n t r e -
p r e n e u r i a l c o n t e n t m e n t should be o n e i m p l y i n g an
a t t e m p t to push forward always a t a g r e a t e r r a t e t h a n
f u n d a m e n t a l conditions allow. W o u l d not this m a k e
for a constantly b u o y a n t e c o n o m y , a t e n d e n c y always
towards full e m p l o y m e n t ? Analysis reveals the opposite
to b e the case. I t is the d e p a r t u r e s from G„, not t h e value
of G„. itself w h i c h h a v e p a r a m o u n t influence in p r o d u c i n g
b o o m a n d s l u m p . If t h e v a l u e of G^^ is too g r e a t (greater
t h a n t h a t of G„) there will b e a prevailing t e n d e n c y for
d e p a r t u r e s to b e in a d o w n w a r d direction. F r o m t h a t
t h e r e is n o escape. I believe t h a t this p a r a d o x is very
n e a r the h e a r t of the contrast b e t w e e n K e y n e s i a n econ-
omics a n d classical economics. Saving is a v i r t u e a n d
beneficial so long as is below G„. While it is disastrous
to have G^ a b o v e G^, it is not g o o d to have it too far
below, for in t h a t case, a l t h o u g h w e m a y h a v e p l e n t y of
booms a n d a frequent t e n d e n c y to a p p r o a c h full employ-
m e n t , the high e m p l o y m e n t will b e of a n inflationary a n d
\ h c r e b y u n h e a h h y cliaracter. I n these circumstances
saving is a virtue since, by^'raising G„„ it enables us to
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have good employment without inflation. But if G^, is
above G„ saving is a force making for depression.
I t is far from m y purpose to give a finished theory of
the trade cycle. Lags, psychological, m o n e t a r y a n d other
factors, no d o u b t play their p a r t . I should suggest that
n o theory c a n be complete which neglects the fundamental
causes of instability expressed in the equations which have
been set out.
T h e following points are, however, tentatively ad-
vanced.
1. I n a revival, in which unemployed resources are
brought back to work, G stands above G,. W h e n full
employment is reached it must be reduced to G„. If G^
stands below G^, then a slump is inevitable at that point,
since G has to fall below G^ a n d will, for the time being,
be driven progressively downwards. *
2. Gy, itself fluctuates in the trade cycle. Even if
saving as a fraction of income is fairly steady in t h e long
r u n , it is not likely to be so in the short r u n . T h e r e is some
tendency for saving in the short period to be a residual
between earnings a n d n o r m a l habits of consumption.
Companies are likely to save a large fraction of short
period increases of net receipts. T h u s even if G„, is
normally below G, it m a y rise above it in the later stages
of a n advance, a n d , if it does so, a vicious spiral of-depres-
sion is inevitable when full employment is reached. If
G„ has not been raised above G„ during the course of the
advance a n d there is continued pressure to expand when
full employment is reached, then the consequent inflation
of prices a n d profit wifl sooner or later raise above G„
a n d thus precipitate the vicious spiral of depression.
3. Before full emplojonent is reached G m a y have
to be reduced owing to the '^creasing difficulty of t r a n s - '
ferring labour a n d other resources to their inquired uses
 TOWARDS A DYNAMIC ECONOMICS
as e m p l o y m e n t gets b e t t e r . If Gu, is substantially a b o v e
G„, the G c u r v e m a y interseet the G,„ c u r v e some t i m e
before full e m p l o y m e n t is r e a c h e d , thus m a k i n g a vicious
spiral of depression inevitable at this point.
4. If Gu, is very substantially above G„, G m a y n e v e r
rise very far a b o v e G^ d u r i n g the revival o w m g to mobility
difficulties, a n d in this case m a i n t e n a n c e of t h e revival
m a y be p r e c a r i o u s , a n d a vicious spiral of depression m a y
b e p r e c i p i t a t e d long before full e m p l o y m e n t is r e a c h e d .
W h i l e t h e e q u a t i o n s clearly show t h e instability of a n
a d v a n c i n g e c o n o m y , they d o n o t in themselves p r o v i d e
very good tools for analysing the course of the s l u m p .
I t is p r o b a b l y necessary for t h a t p u r p o s e to d r a w a dis-
tinction b e t w e e n d u r a b l e a n d n o n - d u r a b l e c a p i t a l . It
should be noticed t h a t C is positive if t h e q u a n t i t y of
cajiital is m o v i n g in t h e same direction as the level
of i n c o m e . I n a s l u m p w h a t m a t t e r s is t h a t circulating
capital should be r e d u c e d . T h e existence of surplus fixed
e q u i p m e n t in those trades whose o u t p u t is shrinking —
the o u t p u t of some m a y c o n t i n u e to e x p a n d u n d e r longer
period influences in a s l u m p — is not in itself a force
m a k i n g for a further d o w n w a r d adjustment, since orders
c a n n o t b e r e d u c e d below zero. O n the o t h e r h a n d a p i p e
line filled fuller t h a n a p p r o p r i a t e to a falling t u r n o v e r
will cause a further c o n t r a c t i o n of orders.
C o n s e q u e n t l y in a s l u m p the v a l u e of C^ will b e lower
t h a n usual, being confined to t h e r e q u i r e m e n t s for circulat-
i n g c a p i t a l . T h u s t h e negative v a l u e to w h i c h s - k has
to fall in o r d e r to check a certain r a t e of recession is n o t
nearly so great as the positive value to w h i c h it has to rise
in o r d e r to check t h e same r a t e of u p w a r d m o v e m e n t .
It is well k n o w n t h a t in trade-cycle study gross capital
"outlay a n d gross saving a r e more serviceable concepts
t h a n n e t outfey a n d saving. D u r i n g a decline gross o u t l a y
go
 FUNDAMENTAL DYNAMIC THEOREMS
o n d u r a b l e p l a n t over p a r t of t h e field m a y b e nil. A
sort of e q u i l i b r i u m of decline w o u l d t h u s be r e a c h e d i n
w h i c h t h e n e g a t i v e v a l u e of s (gross) m i n u s k m i n u s s u c h
c a p i t a l [considered as a fraction of i n c o m e ) as was r e q u i r e d
for t h a t p a r t of i n d u s t r y w h i c h w e r e still e x p a n d i n g
despite t h e s l u m p , was e q u a l to t h e r a t e of decline m u l t i -
plied b y a m u c h r e d u c e d c a p i t a l coefficient consisting of
the a m o u n t of c i r c u l a t i n g c a p i t a l t h a t could b e dispensed
w i t h in c o n s e q u e n c e of t h e decline.
Gross c a p i t a l r e q u i r e m e n t s , h o w e v e r , d o n o t , like n e t
r e q u i r e m e n t s , d e p e n d p r i m a r i l y o n the r a t e of increase
of o u t p u t , b u t to some e x t e n t also o n t h e total level ot
o u t p u t . I n t h e early p a r t of the s l u m p these m a y b e
r e d u c e d to nil {in t h e c o n t r a c t i n g sectors), because t h e
old m a c h i n e s or o t h e r fixed e q u i p m e n t s need not be,
r e p l a c e d at the e n d of their w o r k i n g life o w i n g to rediiced
o u t p u t . But sooner or l a t e r the r e q u i r e m e n t s for r e p l a c e -
m e n t s m u s t b e c o m e positive, if a n y o u t p u t a t all is to b e
m a i n t a i n e d . T h e c o n s e q u e n t r e d u c t i o n in C , {a rise i n
t h e n u m e r i c a l v a l u e of its n u m e r a t o r reduces its a l g e b r a i c
value) m a y r e d u c e it below C . T h e a c t u a l r e d u c t i o n of
c a p i t a l stock becomes g r e a t e r t h a n w h a t is convenient.
T h i s will arrest t h e d o w n w a r d m o v e m e n t a n d t u r n it i n t o
an upward one.
T h i s a c c o u n t of the c o m p l e t e cycle m a k e s n o claim to
b e fully satisfactory. It requires s u p p l e m e n t i n g by t h e
findings of o t h e r m e t h o d s of a p p r o a c h to cycle s t u d y .
T h u s t h e r e a r e two distinct sets of p r o b l e m s b o t h for
analysis a n d policy, n a m e l y : ( i ) the divergence of G „
fi-om G „ ; anti (2) the t e n d e n c y of G to r u n a w a y from
G „ . T h e former is t h e p r o b l e m of chronic u n e m p l o y m e n t ,
t h e l a t t e r t h e t r a d e cycle p r o b l e m .
First as r e g a r d s analysis. A c c o r d i n g to classical
d o c t r i n e , if t h e r e is g e n e r a l u n e m p l o y m e n f o w i n g to a n y
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cause, wages will tend to fall; if wages are n o n e the less
m a i n t a i n e d in these circumstances, c o n t i n u a n c e of u n -
e m p l o y m e n t is thereby r e n d e r e d inevitable. T h i s is
t a n t a m o u n t to saying t h a t a r e d u c t i o n of wages w o u l d
b e a cure Ibr the u n e m p l o y m e n t .
Y o u are all familiar with Keynes's views a b o u t the effect
of wage r e d u c t i o n . I m a y r e m i n d you in passing t h a t
his theory a n d the practical recipes t h a t flow from it relate
to a closed system, that being the p r o b l e m on w h i c h h e
was c o n c e n t r a t i n g his m i n d . N o w t h a t the p r o b l e m of
o u r foreign t r a d e has b e c o m e such a p r e d o m i n a n t o n e ,
we h a v e to t e m p e r K e y n e s i a n policy by reference to it.
Keynes's diagnosis m a y h a v e i n t r o d u c e d some m e a s u r e
of levity a b o u t the h a r m that m i g h t b e d o n e b y m o n e y
wage iTirreases not w a r r a n t e d b y the situation.
O f course u n d e r the Bretton W o o d s regime unjustified
increases in m o n e y wages m a y be offset by reductions in
the foreign e x c h a n g e rates. N o n e t h e less they will not
b e helpful. T h e working of the I n t e r n a t i o n a l M o n e t a r y
F u n d will in a n y case bristle with p r o b l e m s , a n d it is most
undesirable that Britain, one of its m a i n pillars, should
a d d to its p r o b l e m s by frequent requests t h a t the v a l u e
of sterling b e r e d u c e d . N o r , I think, is the progressive
d e t e r i o r a t i o n of t h e goods v a l u e of a c u r r e n c y desirable
o n other g r o u n d s . W e d o n o t w a n t savings to go d o w n
t h e d r a i n , especially at this t i m e w h e n they h a v e b e c o m e
m o r e widely diffused a n d w h e n w e h o p e that t h e savings
of all citizens will g r o w progressively.
T h e w a g e - r e d u c t i o n r e m e d y should b e considered
u n d e r t h e two heads set out. First as regards the excess
of Gu, over G„. I t must b e r e m e m b e r e d t h a t in this
investigation of trends, a once-over r e d u c t i o n h a s n o
m e a n i n g . Docs t h e situation r e q u i r e a ycar-by-year
reduction? f h i s w o u l d h a v e n o direct effect on G„.
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W o u l d it t e n d to depress G „ ? T h e r e is n o r e a s o n to
suppose t h a t it w o u l d . Unless o u t p u t p e r h e a d is a c t u a l l y
faUing t h r o u g h t i m e , it does not seem n a t u r a l to suppose
t h a t a steady r e d u c t i o n of m o n e y wages is r e q u i r e d . O n
t h e c o n t r a r y it seems t h a t a steady r e d u c t i o n of m o n e y
wages w o u l d inflame t h e difficulties. A n u p w a r d t e n d e n c y
in t h e goods v a l u e of m o n e y c e r t a i n l y increases c o r p o r a t e
saving for t h e reasons stated in t h e first lecture, a n d p r o b -
a b l y increases surplus c o r p o r a t e saving. A steady r e d u c -
tion in m o n e y wages w o u l d entail a n u p w a r d m o v e m e n t
in t h e goods v a l u e of m o n e y . T h e effect of t h e r e d u c t i o n
w o u l d therefore be to raise a n d so t a k e it stiU further
a w a y from G„. T h u s t h e c h r o n i c t e n d e n c y to depression
w o u l d b e intensified. W e c o n c l u d e t h a t in a n e c o n o m y
t e n d i n g p r e d o m i n a n t l y to depression a steady r e d u c t i o n
of m o n e y w a g e s w o u l d b e injurious.
H o w d o e s this alleged r e m e d y s t a n d in relation to t h e
t r a d e cycle p r o b l e m of a r u n - a w a y of G from G„,? T h e r e
a r e t w o questions : {i) W o u l d a once-over w a g e r e d u c t i o n
give a filfip t o o u t p u t ? (2) W o u l d o u t p u t b e sustained
a t a h i g h e r level i n c o n s e q u e n c e of t h e fillip?
T h e a n s w e r to t h e second q u e s t i o n d e p e n d s o n t h e
n a t u r e a n d causes of the recession. I f before t h e set-
b a c k a n a d v a n c e h a d b e e n p r o c e e d i n g at a r a t e n o t too
m u c h in excess of G„ a n d w i t h p e r h a p s s o m e slack of
resources still to b e t a k e n u p , a n d t h e set-back was d u e
to some p a r t i c u l a r adverse event w h i c h h a d sent the
system into a d o w n w a r d spin, t h e n a fillip — d u e to a
w a g e r e d u c t i o n or a n y o t h e r cause — m i g h t b e useful.
It m i g h t serve to restore t h e system to w h e r e it was before
a n d t h u s e n a b l e it to proceed on a h e a l t h y line of a d v a n c e .
E v e n if t h e fillip h a d in itself n o t e n d e n c y to raise the
m a r g i n a l efficiency of c a p i t a l n o r r e d u c e t h e p r o p e n s i t y
to save, it m i g h t be of benefit to e m p l o y m t n t , since o n

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this hypothesis the m a r g i n a l efficiency of capital before
the set-back was sufficient to m a i n t a i n e m p l o y m e n t , t h e
present low m a r g i n a l efficiency being merely d u e to the
decline in activity c o n s e q u e n t o n the set-back.
B u t if before the set-back G a n d G^, were b o t h con-
siderably in excess of G„ a n d the system a p p r o a c h i n g full
e m p l o y m e n t , a m e r e fillip will b e in vain, Tf the system
is j e r k e d u p to a higher level of e m p l o y m e n t , it will merely
relapse a g a i n . If the trouble is a n excessive G„„ the wage
r e d u c t i o n c a n d o n o good even if it does give a fillip. I
a m of the o p i n i o n t h a t an analysis of the effects of a wage
r e d u c t i o n w h i c h does n o t use the g r o w t h factor as a tool
c a n t h r o w n o light o n s u c h a situation.
W o u l d a w a g e r e d u c t i o n h a v e a n y t e n d e n c y to give
a fillip {in a closed system) ? It is i m p o r t a n t to stress t h a t
t h e fillip, if a n y , w h i c h it might give w o u l d b e d u e entirely
to the increased c o n s u m p t i o n by rentiers. I n a closed
e c o n o m y in w h i c h i n c o m e could b e exhaustively classified
as wages {including salaries a n d fees of all kinds) a n d
profits, a reduction of wages w o u l d entail a fully p r o p o r -
tional r e d u c t i o n of prices a n d profits.' T h i s w o u l d b e
so unless the profit-taking class a c c o m p a n i e d their wage
r e d u c t i o n s b y a n increase of personal c o n s u m p t i o n . I n
p r a c t i c e , h a v i n g t e n d e r consciences, they would b e m o r e
likely to d o t h e opposite. Since t h e e c o n o m y w o u l d
receive a n e q u a l fiUip by a n increase of profit-takers'
c o n s u m p t i o n , w i t h o u t a n y w a g e r e d u c t i o n , t h e fillip in
question should n o t b e a t t r i b u t e d to the wage r e d u c t i o n .
T h e rentiers, o n t h e o t h e r h a n d , will receive a higher
goods i n c o m e in consequence of the fall of m o n e y wages
a n d prices a n d it would b e n a t u r a l for t h e m to increase
their c o n s u m p t i o n ; to the extent t h a t they d o so t h e

F o r a proof of this proposition,, see Economic Journal, March, 1934-

p a g e 23.

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 FUNDAMENTAL DYNAMIC THEOREMS

g o o d s i n c o m e o f p r o f i t t a k e r s will a l s o b e e n l a r g e d . Thus
t h e fillip g i v e n b y w a g e r e d u c t i o n c o n s i s t s i n e s s e n c e o f
t h e provision of m o r e p u r c h a s i n g p o w e r to t h e rentiers.
I n s o far as t h e y a r e a n i m p o r t a n t e l e m e n t , t h i s m a y b e
o f s u b s t a n t i a l i m p o r t a n c e . T h e e f f e c t i v e n e s s o f t h e fillip
d e p e n d s o n t h e c a u s e s o f t h e r e c e s s i o n , as a l r e a d y e x p l a i n e d . '
W h e t h e r i t is d e s i r a b l e t o list s u c h a r e m e d y a s a
s t a n d i n g o r d e r t o b e a p p l i e d f r o m t i m e t o t i m e , e v e n if
i t w e r e p r a c t i c a l t o d o s o , is d o u b t f u l . While I have
already urged that we should not wish to destroy the
p u r c h a s i n g p o w e r of past savers b y m o n e t a r y inflation,
i t is a n o t h e r m a t t e r t o r a i s e t h a t p u r c h a s i n g p o w e r
artificially from t i m e to t i m e . A n e n l a r g e m e n t of t h e
p u r c h a s i n g p o w e r of rentiers a t t h e e x p e n s e of o t h e r
s h a r e r s i n t h e n a t i o n a l d i v i d e n d is n o t w a r r a n t e d i n e q u i t y
a n d tends to reduce the incentive to the m o r e active
elements in the c o m m u n i t y , w h e t h e r the enlarged p a y -
m e n t s in t e r m s of goods h a v e to be c h a r g e d o n t o t h e
r e c e i p t s o f i n d u s t r y o r p r e d o m i n a n t l y , as w h e n t h e n a t i o n a l
d e b t is v e r y l a r g e , o n t o t h e t a x p a y e r s .
W e m u s t n o w t u r n to t h e question of interest rates.
T h a t a r e d u c t i o n of these w o u l d t e n d to p r o d u c e t h e
d e s i r e d effect is a g r e e d , a l t h o u g h t h e r e m a y b e d o u b t
whether the weapon would be potent enough to cause
r e v i v a l i n a l l c i r c u m s t a n c e s . W h e r e t h e r e is d i s a g r e e m e n t
is w h e t h e r i n c i r c u m s t a n c e s o f f a l l i n g e m p l o y m e n t t h e r e
is a n y n a t u r a l t e n d e n c y for t h e r a t e s o f i n t e r e s t t o m o v e
d o w n , for i n s t a n c e u n d e r t h e p r e s s u r e o f a n e x c e s s o f
l o a n a b l e funds, t o t h e level r e q u i r e d t o restore e m p l o y -
ment.
' It b also possible, of course, that the wage reduction might give a
fillip by inducing entrepreneurs to increase capital outlay, whether there
was any observed increase in consumption or not. It seems more probable
that they would wait for some tar^ible profit to accrue before embarking
on this course.
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I t must be remembered that there arc two problems,
the divergence of Gu, from G, a n d the runaway of G from
G^,. If G^ implies a steeper gradient than G„ what will be
the position of the rate of interest •* Certainly a progressive
fall in the rale of interest is the appropriate remedy,
vouchsafed by classical a n d Keynesian economics alike.
H i t h e r t o we have been working on the assumption
t h a t inventions have been neutral. T o meet the case of
their not being so, we may introduce another term into
the equilibrium equation. Let d (for deepening) stand
for the value of new capital installations during the unit
period, expressed for convenience as a fraction of income,
involved in the lengthening of the production process.
If inventions are " capital saving d is negative. T h u s ,

G„C, ^s -d.

I t m a y seem artificial to separate d from C,. But it is

logically possible ; and it is right in principle. We want
to keep C, segregated as that capital requirement which
essentially belongs to the growth of output as such, from
the requirement for increased capital per unit of output.
d m a y have a positive value because of the n a t u r e of
the inventions occurring. It m a y also have a positive
value because the rate of interest is falUng. O u r a i m
should be to get such a progressive reduction in the rate
of interest that
G,C,-j-<^-G.C,.

If if is positive, C , will increase through time, and m a y

eventually become so great as lo enable us to dispense
with d. At that point interest need fall n o further. A
positive value for (/incidentally serves to raise G„. A falling
rtite of interest may also — a n d this is of course i m p o r t a n t
if it so turns out — reduce j".
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 FUNDAMENTAL DYNAMIC THEOREMS
T h e question w e n o w h a v e to ask is w h e t h e r t h e r e will
b e a n y n a t u r a l t e n d e n c y for t h e r a t e of interest to c o m e
d o w n sufficiently. T h i s is the c r u x of t h e m a t t e r , t h e c r u x ,
p e r h a p s , of t h a t m o d e r n e c o n o m i c situation to w h i c h we
shall revert, w h e n the p o s t - w a r shortages cease. T h i s is
w h e r e the lack of a d e q u a t e d y n a m i c theory is p a r t i c u l a r l y
u n f o r t u n a t e . T h a t t h e o r y tells us t h a t a falling r a t e of
interest is necessary if the e c o n o m y is to a d v a n c e a t its
p o t e n t i a l r a t e a n d r e a s o n a b l y full e m p l o y m e n t is to b e
m a i n t a i n e d . B u t w h e r e a s static t h e o r y n o t only defines
a position of e q u i l i b r i u m b u t indicates h o w , t h r o u g h the
laws of s u p p l y a n d d e m a n d , the e c o n o m y tends to m o v e
i n t o t h a t position, d y n a m i c t h e o r y h a s n o t so far s h o w n
h o w o r w h e t h e r t h e m a r k e t , as subject to t h e forces t h a t
n o r m a l l y o p e r a t e u p o n it, will t e n d to m a r k t h e r a t e of
interest d o w n at a n a p p r o p r i a t e p a c e . *
Keynes's t h e o r y , w i t h all its imperfections u p o n it, does
definitely p o i n t to a negative a n s w e r . E v e n if the m a r k e t
c o u l d form a fairly c l e a r view as to t h e future t r e n d —
w h i c h it c a n n o t , since inventions w h i c h m a y b e c a p i t a l
r e q u i r i n g , a r e in essence u n p r e d i c t a b l e — n o n e t h e less
(he lack of c e r t a i n t y w o u l d m a k e it d e m a n d a risk p r e m i u m
( m e a s u r i n g liquidity preference) for l o n g - t e r m loans.
T h u s t h e p r e s e n t r a t e w o u l d b e s o m e w h a t a b o v e the level
a p p r o p r i a t e to t h e p r e s e n t situation a n d to t h e c h a n g i n g
level most likely to b e r e q u i r e d in f u t u r e ; a n d , as e a c h
future period will in d u e course b e c o m e a p r e s e n t o n e ,
this liquidity factor w h i c h affects the p r e s e n t r a t e will
also affect future rates to a n u n k n o w n e x t e n t a n d so
p r e v e n t the right levels of future rates b e i n g m a d e t h e
basis of a n a r g u m e n t n o w . A n d so w e get b a c k a g a i n
to a r a t e of interest w h i c h is h a n g i n g b y its o w n boot-
straps. H o w escape from this?
T h e l o n g - t e r m p r o b l e m is also c o m p l i c a t e d b y the
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 TOWARDS A DYNAMIC ECONOMICS
s h o r t - t e r m p r o b l e m . G e t t i n g G „ i n t o e q u a h t y with G„
over t h e long period w o u l d n o t by itself present a r u n - a w a y
of G d o w n w a r d s from G„ from t i m e to t i m e . C h a n g e s
in the m a r k e t r a t e d u e to n a t u r a l forces clearly will n o t
p r e v e n t t h i s ; a n d I shall a r g u e in the next lecture t h a t
n o Bank R a t e policy, h o w e v e r heroic, w o u l d be likely
to p r e v e n t it. (It does n o t follow t h a t we need despair
of a n effective contra-cyclical policy.) D u r i n g the periods
in w h i c h G is low a n d u n e m p l o y m e n t high, clearly less
saving will a c c r u e t h a n w o u l d otherwise. T h e loss of
savings, w h i c h in t h e a g g r e g a t e will be large, must affect
t h e l o n g - r u n course of the interest r a t e . T h u s it w o u l d
b e relevant for a n all-wise m a r k e t to ask h o w great a n d
h o w p r o l o n g e d the d o w n w a r d r u n - a w a y s of G in future
a r e likely to b e . But it will not get a n answer.
'Critics of K e y n e s , disliking the divorce w h i c h his
theory seems to entail b e t w e e n the forces affecting t h e
r a t e of interest a n d the supply a n d d e m a n d for savings,
h a v e u r g e d t h a t wc must consider the stream of l o a n a b l e
funds c o m i n g i n t o t h e m a r k e t a n d their t e n d e n c y to
depress t h e r a t e of interest as activity falls off. T h e y h a v e
to call time-lags to their aid. Strictly in K e y n e s i a n theory
t h e effect of the multiplier o n activity is i n s t a n t a n e o u s .
But there is n o d o u b t a n i n t e r v a l in w h i c h t h e r e is a
discrepancy b e t w e e n ex-ante a n d ex-post investment. If
those involved in u n i n t e n d e d investment — a c c u m u l a t i o n
of stocks —• d o n o t c o m e into the capital m a r k e t for t h e
loan of funds — they m a y h a v e h a d a cash b a l a n c e at t h e
expense of which they c a n hold the u n w a n t e d stocks —
t h e r e m a y b e a n excess of t h e supply of funds over the
d e m a n d . O r again i n c o m e m a y c o n t i n u e to be dis-
t r i b u t e d after o u t p u t h a s fallen — p r e s u m a b l y also at the
'expense of t h e cash of firms — a n d individuals m a y s u p p l y
funds to the rtiarket accordingly, or m a y r e c k o n w h a t they
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 FUNDAMENTAL DYNAMIC THEOREMS
will save o n the basis of their i n c o m e in the last p r e c e d i n g
p e r i o d instead of the present. I a m most r e l u c t a n t to
e n t e r this field of t h o u g h t . L e t it b e t h a t a t t h e onset of
recession there is a g r e a t e r p r e s e n t a t i o n of funds in t h e
c a p i t a l m a r k e t t h a n the strict d o c t r i n e of t h e multiplier
w o u l d suggest a n d a c o n s e q u e n t d o w n w a r d m o v e m e n t in
t h e r a t e of interest.
I t is n o t usually sufficient to p r e v e n t t h e o n w a r d m o v e -
m e n t of t h e recession. So w h a t does it m a t t e r ? I n d u e
course t h e m u l t i p l i e r will h a v e its full effect in r e d u c i n g
i n c o m e a n d savings. A t t h e e n d of a depression a g g r e -
g a t e d savings will b e less t h a n they w o u l d otherwise h a v e
been. T h e r a t e of interest as g o v e r n e d b y t h e s u p p l y of
a n d d e m a n d for savings will b e h i g h e r t h a n if a steady
a d v a n c e h a d b e e n m a i n t a i n e d . N a t u r a l forces will n o t h a v e
served to secure t h a t fall in t h e r a t e of interest necessary
to a b s o r b all savings a c c r u i n g t h r o u g h t i m e w i t h the c o m -
m u n i t y a d v a n c i n g steadily at r e a s o n a b l y full e m p l o y m e n t .
I a m b o u n d to c o n c l u d e negatively. I t does n o t a p p e a r
to b e shown t h a t t h e system will of its o w n secure a
sufficient fall in the r a t e of interest. T h e r e is general
a g r e e m e n t t h a t this is the t r u e r e m e d y for u n e m p l o y m e n t .
U n e m p l o y m e n t h a s persisted for years a n d not b e e n
r e m e d i e d . T h e r e is therefore a prima facie case for a
p l a n n e d r e d u c t i o n i n t h e r a t e of interest.
K e y n e s proposed a n assault o n it by t h e m e t h o d s n o w
being used b y t h e C h a n c e l l o r of t h e E x c h e q u e r , n a m e l y
by increasing the a m o u n t of liquidity a v a i l a b l e . This
has not p r o v e d a l t o g e t h e r unsuccessful. I t is a n unfor-
t u n a t e irony t h a t we should h a v e h a d a s p u r t in t h e policy,
n o d o u b t justified by the N a t i o n a l D e b t position a n d
l o n g - r u n considerations, j u s t at a t i m e w h e n t h e short-
period situation considered in itself w o u l d r e q u i r e ari
exceedingly high r a t e of interest.
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 TOWARDS A DYNAMIC ECONOMICS

O f course t h e r e m a y be limits to the success of this

policy, limits w h i c h m a y a p p e a r even before, from a
long-range p o i n t of view, Gu,C, is r e d u c e d to t h e r e q u i r e d
level. U l t i m a t e l y the m a r k e t m a y refuse to believe t h a t
t h e r a t e of interest o u g h t to b e a n y lower, a n d m a y a b s o r b
a n u n l i m i t e d a m o u n t of liquidity r a t h e r t h a n m a r k
security prices u p further. I shall h a v e to r e t u r n to this.
It m a y also b e t h a t this assault m e t h o d will not achieve
a steady r a t e of fall b u t only a series of b u m p s . . T h a t ,
however, is n o t fatal, because t h e r e will In a n y case also
b e a t r a d e cycle p r o b l e m r e q u i r i n g s e p a r a t e t r e a t m e n t .
This is d u e to t h e fact t h a t , q u i t e a p a r t from a n y failure
to get t h e r a t e of interest d o w n at the r e q u i r e d steady rate,
t h e r e are b o u n d to be exogenous shocks t e n d i n g to m a k e
G diverge from G„ a n d setting t h e t r a d e cycle processes
goiiig. T h e r e will, for instance, b e times in w h i c h inven-
tions a r e not n e u t r a l . A n d t h e r e will be o t h e r shocks.
F o r this reason, q u i t e a p a r t from o u r long-range policy
of a c t i n g u p o n the r a t e of interest, w e shall h a v e to h a v e
a s e p a r a t e contra-cyclical policy. But of this m o r e
hereafter.
 LECTURE FOUR

[a) T H E FOREIGN BALANCE

I T is n o w necessary to o p e n t h e doors a n d consider o u r

e c o n o m y as h a v i n g t r a d i n g relations w i t h a w i d e r e c o n o m y .
W i t h t h e d e v e l o p m e n t of K e y n e s i a n d o c t r i n e a n d
especially w h e n this r e a c h e d the c u l m i n a t i o n of t h e
General Theory, it b e c a m e p l a i n t h a t some reconsideration
of balance-of-trade d o c t r i n e w o u l d b e necessary. I t h i n k
it is fair to say t h a t t h e classical t h e o r y of t h e b a l a n c e of
t r a d e did i m p l y full e m p l o y m e n t . I n d e p a r t m e n t a l dis-
cussions of this subject, as t i m e w e n t on, m u c h w a s said
a b o u t the possibility of u n e m p l o y m e n t b e i n g caused b y
a m o n e t a r y restriction, necessitated by t h e foreign t r a d i n g
position. T h e r e was s o m e t h i n g of the s a m e sort of cleavage
b e t w e e n basic principle a n d w h a t o n e was allowed to say
d e p a r t m e n t a l l y as t h e r e was, before Wicksell, b e t w e e n
the basic d o c t r i n e of interest as the r e w a r d for saving a n d
w h a t o n e was allowed to say d e p a r t m e n t a l l y a b o u t
fluctuations in the m a r k e t r a t e of interest. W h e n it fell
to m e to p r o d u c e a revised edition (which a p p e a r e d i n
1939) of m y h a n d b o o k o n International Economics, I resolved
to e n d e a v o u r to g r a p p l e manfully w i t h this p r o b l e m ;
I think I succeeded in p r o d u c i n g s o m e t h i n g w h i c h g a v e
a systematic a c c o u n t of the relation b e t w e e n the K e y n e s i a n
t h e o r y of u n e m p l o y m e n t a n d balance-of-trade theory.
I showed t h e results to K e y n e s , as being a n a t t e m p t to
fill a n i m p o r t a n t g a p w h i c h h e h a d left, b u t h e did n o t '
give it his i m p r i m a t u r . H e felt t h a t he w o u i d n e e d s o m e
lOI
 TOWARDS A DYNAMIC ECONOMICS
t i m e to consider it. O n the o t h e r h a n d h e raised n o
f u n d a m e n t a l objections to it.
His t r e a t m e n t of the b a l a n c e of t r a d e in the Treatise
on Money was manifestly makeshift. H e was clearly con-
c e n t r a t i n g his m i n d u p o n the p r o b l e m s of a closed system,
b u t felt impelled to say s o m e t h i n g on t h e foreign t r a d e
question. Consequently h e was content to t r e a t a posidve
b a l a n c e as a form of " I n v e s t m e n t a n d this form of
investment was reckoned in along with investment at
h o m e to constitute t h a t total investment w h i c h h e used
in his celebrated e q u a t i o n . T h e General Theory did not
take t h e e x t e r n a l p r o b l e m m u c h further, a l t h o u g h the
d e v e l o p m e n t of his theory r e g a r d i n g t h e i n t e r n a l e c o n o m y
certainly required a similar d e v e l o p m e n t on the external
side.
' M y t r e a t m e n t of t h e b a l a n c e of t r a d e question went
on different lines. It seemed clear to me t h a t the v o l u m e
of achieved exports b o r e precisely the s a m e relation to
the propensity to i m p o r t t h a t the v o l u m e of capital outlay
at h o m e b o r e to t h e propensity to save. T h e right solu-
tion of t h e p r o b l e m therefore seemed to be to conflate
the propensity to save a n d t h e propensity to i m p o r t a n d
to take t h e multiplier as the reciprocal of a fraction e q u a l
to the s u m of t h e fraction of m a r g i n a l income saved a n d
the fraction of m a r g i n a l i n c o m e s p e n t o n i m p o r t s . T h u s
the multipKer was related to the propensity to spend
i n c o m e o n h o m e - p r o d u c e d goods. T h i s being so, it is
the v o l u m e of exports a n d not t h e b a l a n c e of t r a d e t h a t
has to b e taken as the base of the multiplier. T h i s brings
the theory i n t o line with K e y n e s , p a r t i c u l a r l y with the
General Theory as distinct from t h e Treatise on Money. In
the latter, you r e m e m b e r , it is the excess of investment
over saving t h a t is i m p o r t a n t , w h e r e a s in t h e General
Theory it is t h e absolute v o l u m e of investment. By like
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 THE F O R E I G N B A L A N C E

reasoning it should b e t h e absolute v o l u m e of exports,

n o t t h e b a l a n c e of t r a d e , t h a t is i m p o r t a n t . If we deal
i n b a l a n c e s t h e n it is a n o m a l o u s to take c x - a n t e values
for h o m e saving a n d investment a n d ex-post values for
t h e foreign b a l a n c e (I d o not k n o w h o w o n e c a n take
e x - a n t e values for t h e l a t t e r ) ; b u t if one takes ex-post
values for b o t h t h e r e is n e v e r a n y b a l a n c e at all, since t h e
excess of ex-post i n v e s t m e n t over saving is always e q u a l
to t h e excess of i m p o r t s over exports. I n m y system the
increase in t h e v o l u m e of exports w o u l d be rightly found
to h a v e a s t i m u l a t i n g effect o n e m p l o y m e n t , even a l t h o u g h ,
t h r o u g h c o n s e q u e n t i a l reactions in h o m e i n v e s t m e n t , n o
a d d i t i o n to the b a l a n c e of t r a d e e n s u e d .
I n m y system t h e b a l a n c e of t r a d e d e p e n d s o n w h e t h e r
the ratio of the v o l u m e of exports to the v o l u m e of h o m e
investment is g r e a t e r or less t h a n the ratio of the propensity
to I m p o r t (viz. i m p o r t s represented as a fraction of i n c o m e )
to the p r o p e n s i t y to save. I suggested t h a t there was n o
a priori reason w h y these ratios should b e e q u a l or w h y
therefore foreign t r a d e should s t a n d in n e u t r a l b a l a n c e .
T h e c o n t i n u a n c e of a n e g a t i v e b a l a n c e w o u l d of course
d e p e n d o n the possibihty of getting c o n t i n u e d a c c o m -
m o d a t i o n from a b r o a d to finance it. If such a c c o m m o d a -
tion w e r e not forthcoming, a crisis w o u l d o c c u r , i n c l u d i n g
i n the old-fashioned world a b a n k - r a t e crisis — w e d o
n o t yet k n o w w h a t form the crisis w o u l d take in t h e n e w
controlled w o r l d — a n d i n v e s t m e n t w o u l d c o m e t u m b l i n g
d o w n . T h i s w o u l d b r i n g a n e n d to the excess of the r a t i o ,
p r o p e n s i t y to i m p o r t to propensity to save, over t h e r a t i o ,
v o l u m e of exports to v o l u m e of h o m e Investment. On
the o t h e r h a n d there seems to b e n o t h i n g to check the
c o n t i n u a n c e of a positive b a l a n c e , save in so far as the
progressive a c c u m u l a t i o n of liquid assets a c c o m p a n i e d b y -
falling interest rates m a y s<Efrve to i n c r e a s e , t h e v o l u m e
103 H
 TOWARDS A DYNAMIC ECONOMICS
of h o m e i n v e s t m e n t . W h e t h e r o n e w o u l d get a sufficient
stimulus in t h a t direction w o u l d n o d o u b t d e p e n d o n t h e
elasticity of the m a r g i n a l productivity of c a p i t a l . T h u s
t h e r e docs seem to be a n a s y m m e t r y h e r e b e t w e e n the
n a t u r e of t h e forces acting u p o n d e b i t a n d credit countries
respectively, a n d some justification for the g e n e r a l feehng
t h a t t h e credit countries, in so far as t h e y d i d not m a k e
a p p r o p r i a t e plans to invest their b a l a n c e a b r o a d in real
c a p i t a l projects, were exerting a sort of stranglehold.
F o r this reason I place a h i g h value u p o n t h e scarce
c u r r e n c y clause in the Bretton W o o d s A g r e e m e n t , despite
t h e a d m i t t e d a w k w a r d n e s s t h a t m i g h t o c c u r in t h e
a p p l i c a t i o n of it. I t is a n a t t e m p t e d r e m e d y for a real
evil of q u i t e c e n t r a l i m p o r t a n c e in t h e world e c o n o m y .
Its v a l u e lies n o t so m u c h in the proposed measures to b e
t a k e n if a c u r r e n c y were declared scarce, as in t h r o w i n g
t h e onus of responsibility w h e r e it should lie, in b r i n g i n g
to b e a r u p o n c r e d i t countries a force in the form of a
t h r e a t , of s t r e n g t h c o m p a r a b l e to those forces, w h i c h a r e
also in the first instance kinds of threats, t h a t a u t o m a t i c a l l y
c o m e to b e a r u p o n the d e b i t countries.
N o w i n m y h a n d b o o k I said explicitly t h a t all this
analysis was static a n d w o u l d r e q u i r e reconsideration
if a d y n a m i c economics w e r e ever d e v e l o p e d . How,
you m a y ask, did 1 d e e m t h a t it m a d e sense at all to a r g u e
in t e r m s of the static analysis w h e n the concepts in ques-
tion, saving a n d i n v e s t m e n t , were so p a l p a b l y d y n a m i c
c o n c e p t s ? I think one m a y p l e a d t h a t these a r g u m e n t s
w e r e n o t a l t o g e t h e r nonsensical, j u s t as o n e m a y p l e a d
t h a t the General Theory, despite its lack of a d y n a m i c
p r o p e r t y , is not nonsensical. Nonsense is t u r n e d i n t o
sense, a l t h o u g h n o t i n t o a fully correct analysis, by t h e
basic a s s u m p t i o n which, t h o u g h unjustified, o n e m a y
use to go o n w i t h , t h a t fhe m a r g i n a l p r o d u c t i v i t y of
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 T H E F O R E I G N BALANCE
c a p i t a l {which governs t h e v o l u m e of investment) is a n
e x t e r n a l d a t u m , a gift of G o d , so to speak, a f u n d a m e n t a l
c o n d i t i o n , like tastes a n d productivity, w h i c h d e t e r m i n e s
t h e values of the d e p e n d e n t variables. T h e system of
t h o u g h t is d y n a m i z e d as soon as w e r e g a r d t h e schedule
of t h e m a r g i n a l p r o d u c t i v i t y of c a p i t a l n o t as s o m e t h i n g
w h i c h is t a k e n as given b u t as a function of t h e r a t e of
g r o w t h of t h e e c o n o m y .
I t is w i t h some regret t h a t I h a v e to r e p o r t t h a t w h e n
w e t a k e foreign t r a d e i n t o a c c o u n t the f u n d a m e n t a l
e q u a t i o n h a s to be w r i t t e n in t h e form

GC =S'b,

w h e r e b is the b a l a n c e of t r a d e expressed as a fraction of

i n c o m e . I say t h a t it is w i t h regret t h a t I r e p o r t t ^ s ,
b e c a u s e o n e n a t u r a l l y hates to give expression to a n y
form of w o r d s w h i c h m a y b e used as a m m u n i t i o n b y t h e
hateful mercantilists. T h e y are only t o o r e a d y to seize
u p o n a n y m a t e r i a l a n d distort it to serve their o w n
purposes. I n the long r u n , however, the right c a u s e
cannot but be helped by a more complete understanding.
Since this form of expression is distasteful to m e , you m a y
i m a g i n e t h a t I e x a m i n e d it w i t h t h e most critical a c e r b i t y .
I h a v e confidence in its correctness, a n d the fact t h a t there
was, so to speak, n o escape from it e n h a n c e s m y con-
fidence i n this d y n a m i c e q u a t i o n as a tool of t h o u g h t .
I c a m e to t h e m a t t e r w i t h o u t prejudice {or p e r h a p s w i t h
t h e prejudice o n t h e o t h e r side) a n d the e q u a t i o n p r o v i d e d
m e with a n a n s w e r t h a t I could not gainsay.
W e m a y further write

G^C,-s-b.

F o r a c o u n t r y in w h i c h is t e n d i n g to exceed G„ a n a
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 TOWARDS A DYNAMIC ECONOMICS
there is by consequence a chronic tendency to depression,
a positive value of b m a y be beneficial. This clearly
tends to reduce the value of and might bring it into
a better relation to G,. This proposition is perhaps
obvious after all. A country where saving is high in
relation to her potentialities of further growth will be
helped by opportunity for investment abroad. T h a t is
from the country's own point of view. In international
policy we shall have to look at the matter from the point
of view of other countries also. It is to be noted that the
absence of growth, or of sufficient growth, is as important
as the level of income a n d saving in determining whether
it is good to have a positive balance.
I a m afraid, therefore, that I cannot join with those
who urge that a large volume of exports are of no par-
tictilar value for the United States and particularly that
a large unbalanced volume of exports is of no par-
ticular value. It m a y be just these unbalanced exports
that are of particular value. T h e r e has been a tendency
by some to argue that the Americans are foolish to look
lo pushing exports as a means of getting employment, on
the ground that the greatest possible value that one can
imagine for her exports would still b e small in relation to
her national income and her unemployment potential and
therefore would not be an important factor helping her
to full employment. This is altogether to neglect the
' multiplier effect of such exports. And I think it is clear
t h a t the multiplier effect is stronger the longer the view
that one takes.
Next it is necessary to set out formulae for the growth
of exports. Let ,G stand for the rate of growth of ex-
ports and E for the value of exports ; let ^G stand for the
•rate of growth of output for the h o m e market a n d H for
the value of that output, het ^G^ stand for the warranted
in6
 T H E F O R E I G N BALANCE
r a t e of growth of o u t p u t for the h o m e market. Then
,GE . , G H
C = G C -J,
E+H
,GE . , G ^ H
• C , = G,,C,=j.
E+H

If the rate of growth of exports exceeds the rate of

growth of production for the h o m e market, then the rate
of growth of exports will exceed the total rate of growth.
If the rate of growth of exports exceeds the w a r r a n t e d rate
of growth for the home market, then the rate of growth
of exports will exceed the total warranted growth, a n d
the warranted r a t e of growth of production for the h o m e
market will be less than the total w a r r a n t e d rate of growth.
I n these conditions, with the propensity to import i^on-
stant, b will grow through time. This will tend to reduce
the warranted total rate of growth, a n d thus, If initially
the warranted total rate of growth is above the natural
rate of growth, will tend to bring the former into Une
with the latter. If in these circumstances the rate of
growth of exports continued to be in excess of the war-
ranted rate of total growth, we should h a v e a tendency
towards inflationary condidons. T h e n (but I fear t h e n
only) could we begin to expostulate with the Americans
t h a t their export drive was doing t h e m n o good.
It m a y be interesdng to note in passing that if our
problem is the t r a d e cycle one, the r u n a w a y of actual
growth downwards from the warranted rate, an increase
in the volume of exports in and by itself will have a
restorative tendency, whether the balance of trade is
thereby improved or not. I n cases where the increase
of exports stimulates h o m e investment, the n e t effect m a y
be a less favourable balance of t r a d e , b u t this would not
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 TOWARDS A DYNAMIC ECONOMICS
a t all reduce the restoradve effect of the increase of
e x p o r t s — j u s t the contrary.
But when wc look at the long-period problem, ihe
failure of the natural rate to be as high as the warranted
rate, then it is an improvement of the balance of trade
that is needed as a corrective. T h u s in the context of
cychcal trade depression the doctrine of my International
Economics, that it is the volume not the balance of exports
that matters, is correct, a n d the doctrine of the Treatise
is misleading. But in the context of the long-period
problem the doctrine of the Treatise comes into its own.
T h i s may be another example of Keynes having a correct
h u n c h before he h a d m a d e the analysis necessary to
justify it. I t ca.nnot be claimed that there is any such
analysis in the Treatise.
W h a t is likely to determine the rate of growth of
exports? T h r e e governing principles may be mentioned.
Of these much the most important is the rate of growth
of the foreign economy as a whole. If this exceeds the
rate of growth of the domestic economy, then, other things
being equal, the balance of trade will increase. This is
the most easy a n d natural way for it to increase. T h e
home country has merely to retain its proportionate share;
of foreign markets. U n d e r this head the American
balance might be expected to decline, which is incon-
venient for her. I n the battle of accusations between
the United States a n d the rest of the world, the former
is arraigned for her tendency to severe slump, which has
unfavourable reactions throughout the world. She might
reply that it is precisely because the rest of the world is
so relatively stagnant that she tends to have recurrent
s l u m p s ! Ail one-sided accusations are no d o u b t very
foolish.
Secondly," we must have^ regard to our old friend,
io8
 THE FOREIGN BALANCE
never out of d a t e a n d never to be despised, the law of
comparative costs. If the rate of growth of o u t p u t per
head in the products in which a country has comparative
advantage exceeds the rate of growth of her national
income, then the rate of growth of her exports will tend
to exceed her total rate of growth a n d the balance of t r a d e
will lend to increase. This was no d o u b t the governing
factor in the course of British trade in the time following
the industrial revolution. It is not e n o u g h for a country
to be more progressive t h a n others for her balance of
trade to grow ; on the contrary, the fact that she is more
progressive will in itself tend to make her balance of trade
sink; she must be more progressive in the lines in which
she already has the lead, than she is in other lines.
Finally there is the relation between the rate of growth
in the rewards to factors of production other t h a n profit,
in terms of tradable goods, to the rate of growth of o u t p u t
per head. If the ratio between these rates is one, then
this d e t e r m i n a n t is neutral, a n d the rate of growth of the
balance of trade will be governed by the other two forces
only. If the ratio is less than one, then the balance of
t r a d e will tend to grow, subject to the condition that its
growth as so determined does not pull the w a r r a n t e d
r a t e of growth of the economy below its natural rate.
Understanding of this m a y be facilitated by reference
to static analysis. If contractual (non-profit) rewards
to factors are fixed too high, a country will suffer from
unemployment. T h e n u m b e r of lines in which her costs
are such as to allow her to offer them at competitive prices
abroad is restricted, a n d the n u m b e r of lines in which
she has to surrender the home market or p a r t of it to
foreigners increased. T h e law of comparative costs still
operates ; but the r a n g e of ^oods that c a n be offered w i t h
mercantile a d v a n t a g e is restricted, the range of goods
109
 TOWARDS A DYNAMIC ECONOMICS
that c a n be bought abroad with mercantile advantage
being correspondingly increased, while owing to low
employment (and income) the volume of the latter is
restricted, precisely so as to offset their greater range,
a n d there is equilibrium at a low level of trade a n d
employment. According to the old ideas this would not
be a position of equilibrium, since gold would flow out
or the foreign exchange rates be depressed forcing gold
rewards to factors d o w n . W e now discard this notion.
Keynes's theory that equilibrium with unemployment
m a y be stable in certain circumstances of investment
opportunity a n d saving was extended in my International
Economics to apply by similar reasoning to unemployment
due to too high a rate of rewards in relation to the foreign
trade position.
'if rewards were lower, there would be more employ-
m e n t ; if sufficiently low, " f u l l e m p l o y m e n t " ; if they
were lower still (as, some say, in J a p a n ) there would not
be still more employment, but profit inflation ; a reduc-
tion of wages in all occupations below the " full employ-
ment " level would not have any further tendency to
stimulate e x p e r t s ; profits being inflated, exports would
be restricted to the range shown by the law of comparative
costs, it being possible to make still higher profits in the
rest of the field by selling in the home market.
These static principles have their analogues in dyn-
amics. If rewards to factors generally do not rise as
rapidly as o u t p u t per m a n , the range of goods that can
be sold abroad with mercantile advantage will grow for
this reason ; exports will tend to grow more rapidly t h a n
national income a n d therefore the balance of trade will
tend to grow. But, as in the static analysis, there is a
limiting condition. If the balance grows, it can be seen
from the equation that the w a r r a n t e d rate of growth of
 THE FOREIGN BALANCE
the economy is pulled d o w n ; if this is pulled below the
natural rate there will be a chronic tendency to inflationary
conditions, a n d these, by a similar principle to that of
the static analysis, will restrict the growth of exports a n d
prevent a further increase in the balance of trade. T h u s
the rate of growth of a country's productive potential
has a decisive effect in restricting the growth in her
balance of trade.
T h o s e w h o fear a rising deluge of A m e r i c a n goods in
the world markets should discipline their thoughts by
reference to these principles. If the United States con-
tinues to be more progressive t h a n the average of countries,
that it itself will be a force tending to reduce her balance ;
her imports will grow more quickly t h a n her export
outlets. T h e other two forces will only cause a rising
balance to the extent that they c a n more than offset'this
primary force. T o w h a t extent is the increase of efficiency
in the United States in producing the types of goods which
she exports likely to exceed her increase of efficiency
generally? And to what extent is the average increase
in real rewards to factors (other t h a n profit takers) likely
to fall short of the average increase of output per head ?
It is true that an American administration with a full
employment plan might endeavour to overcome the
natural obstacles to achieving a sufficient export surplus
by differential subsidies for exports. T h a t business
subsidizes exports by a n appropriate distribution of over-
heads is of course well recognized. But to make the rate
of growth of exports greater t h a n that determined by
natural forces it would probably b e necessary for these
subsidies to be progressively increased through time.
If we regard an u n d u e pressure by the Americans to
export as a danger, then we should d o well to enter into
agreements limiting the sc(?pe of official export subsidies.
 TOWARDS A DYNAMIC ECONOMICS
This is in fact another reason for pressing on with the
kind of international code of good behaviour envisaged
in Article 7 of the M u t u a l Aid Agreement and recent
discussions. W e thereby n o d o u b t deprive ourselves of
the weapon of export subsidies. This m a y seem a weapon
to which we shall be absolutely driven by the present
exigencies. W e must not allow ourselves to develop a
panicky attitude about the present situation. I suggest
in that connexion that either our balance will, despite
the immediate signs to the contrary, come right, or that,
if it does not d o so, a far more radical treatment of our
economic problem than the mere provision of export
subsidies will be indicated as necessary. Subsidies to
exports might d o positive h a r m in further postponing the
need for such a radical overhaul.
If we take a longer period, it is surely clear that from
the full employment point of view — a n d that point of
view is likely to have a p a r a m o u n t influence on policy —
our need for a high rate of growth of exports is likely to
be much less than the American. Consequently their
tendency to have mounting subsidies for exports, if these
are allowed, is hkely to be stronger than anything we
should seek, save in competition with theirs. From our
point of view it would certainly be better to outlaw com-
petition in the granting of export subsidies.
H o w , it may be asked, d o British exporting prospects
stand in the light of this analysis? Unfortunately this
problem, so much the most important for us, has no
connexion with the analysis of t r e n d s ; for the British
problem is that of a large oncc-ovcr change in the level
of her exports. But we must beware of ambiguity in this
term " once-over ". We require a large once-over change
in the annual level of our exports, a n d this, of course,
cannot be met by a mere onfce-over d e m a n d for a set of
112
 T H E F O R E I G N BALANCE
goods by o t h e r c o u n t r i e s to m e e t re-stocking needs. I t
w o u l d take m e too far from m y subject to scrutinize the
prospects of h e r a c h i e v i n g this once-over c h a n g e vrithout
a serious once-over d e t e r i o r a t i o n in h e r s t a n d a r d of
living.' I will only m e n t i o n t h a t a large m o v e m e n t
t o w a r d s g r e a t e r freedom of t r a d e w o u l d b e of p a r a m o u n t
value.
I n t h e long r u n it w o u l d p r o b a b l y b e a p p r o p r i a t e for
B r i t a i n to h a v e s o m e positive b a l a n c e . H e r s t a t i o n a r y
p o p u l a t i o n w i t h i n a world of rising p o p u l a t i o n will b e
a force t e n d i n g t o offset w h a t w e h o p e will b e a s u p e r i o r
progressiveness i n o u t p u t per h e a d a n d to facilitate a n
increase in h e r b a l a n c e . T h e prospective increase of
w o r l d efficiency, if this takes effect in c o n s e q u e n c e of
i n t e r n a t i o n a l p l a n s , will w o r k in t w o opposite ways for
B r i t a i n ; t h e g r o w t h of m a r k e t s will t e n d to raise l i e r
e x p o r t s , b u t t h e g r o w t h of efficiency in m a n u f a c t u r i n g
i n d u s t r y m a y t e n d to r e d u c e the scope of t h e g a i n w h i c h
accrues to h e r u n d e r t h e l a w of c o m p a r a t i v e costs.
W e m a y n o w t a k e t h e w o r l d scene. W e h a v e to ask
t h e question w h e t h e r for the world as a whole the w a r -
r a n t e d r a t e of g r o w t h is g r e a t e r or less t h a n t h e n a t u r a l
r a t e . I t w o u l d be r a s h to d o g m a t i z e . T h e i n t e r - w a r
d o l d r u m s suggested t h a t t h e w a r r a n t e d r a t e was u n d u l y
h i g h . I n m a n y p a r t s , of course, saving w a s painfully
a b s e n t , b u t so also was i m p r o v e m e n t in p r o d u c t i o n .
T h e r e m a y b e a n excess of saving in one p a r t a n d a lack of
g r o w t h in a n o t h e r simply o w i n g to the a b s e n c e of c a p i t a l
i n t h e latter. T h u s we w o u l d n o t get t h e j3icture of d e -
pression in the over-saving p a r t s a n d a t e n d e n c y to
inflation i n t h e r e m a i n d e r , b u t m e r e l y s t a g n a t i o n in t h e
remainder. A revival of t h e " i n t e r n a t i o n a l m o v e m e n t

• T h i s haa been a d m i r a b l y d o n ^ in a n article b y M r , G. D. A. Mac-

D o u g a l l in the Economic Journal, March 1947.

"3
 TOWARDS A DYNAMIC ECONOMICS

of c a p i t a l m a y assist t h e n a t u r a l r a t e of g r o w t h . I t is
assumed t h a t t h e i n t e r n a t i o n a l m o v e m e n t of capital will
b e a c c o m p a n i e d by a n i n t e r n a t i o n a l m o v e m e n t o f " k n o w
how
It m a y b e well to e n u m e r a t e t h e difficulties, w h i c h
a r e well k n o w n , t h a t confront a large-scale i n t e r n a t i o n a l
m o v e m e n t . I n the first p l a c e , a n d this is p r o b a b l y t h e
most i m p o r t a n t p o i n t of all, there a r e vast regions to w h i c h
t h e old classical analy,sis still applies, the regions in w h i c h
p o p u l a t i o n is pressing u p o n the m e a n s of subsistence.
Fertilize these with n e w c a p i t a l a n d the p o p u l a t i o n merely
e x p a n d s . If these regions w e r e a t present relatively u n d e r -
p o p u l a t e d , one m i g h t take one's c h a n c e , h o p i n g t h a t ,
as in t h e case of the m o r e a d v a n c e d regions, o n e m i g h t
succeed i n getting p r o d u c t i o n t e m p o r a r i l y to outstrip
poi>uIation increase, getting t h e r e b y a better s t a n d a r d
of living a n d , as a consequence, an effect u p o n the b i r t h -
rates. But w h a t does the t i m e lag i n v o l v e ? If it w e r e
a n y t h i n g like t h a t w h i c h a p p l i e d in W e s t e r n E u r o p e in
the last c e n t u r y , the i n t e r v e n i n g increase of p o p u l a t i o n
w o u l d be fatally large, h a v i n g r e g a r d to t h e a l r e a d y over-
p o p u l a t e d state of these b a c k w a r d regions. Does it n o t
almost seem t h a t w c will h a v e to tackle t h e b i r t h - r a t e
question as a prior condition of a n y really large c a p i t a l
o u t l a y in those regions ?
Secondly, t h e r e is t h e political question of the desir-
ability of g r o w i n g financial d e p e n d e n c e of c e r t a i n p a r t s
of the w o r l d o n o n e o r two rich countries. T h e I n t e r -
n a t i o n a l Bank m a y h e l p h e r e , b u t only if it is i n t e r n a t i o n a l
in fact as well as in n a m e — a n d is t h a t possible ? I t would
certainly b e very i m p o r t a n t for this c o u n t r y q u i t e boldly
t o seek to p l a y a leading role in the Bank — despite h e r
lack of a n y i m m e d i a t e prospect of m a k i n g large c o n t r i b u -
tions t o its resources — if onl^ this c o u n t r y was in a m o o d
114
 CONTRA-CYCLICAL POLICY
to t a k e h e r i n t e r n a t i o n a l e c o n o m i c responsibilities seri-
ously. H o w c a n she b e , it m i g h t be a r g u e d , w i t h h e r
o w n house in such d i s o r d e r ? T h a t is a pity. Ail the
s a m e t h e r e a r e t w o sides to t h e question. I t is possible
t h a t if she addressed herself w i t h m o r e earnestness t o
these l o n g - r a n g e i n t e r n a t i o n a l p r o b l e m s , she w o u l d b e
forced to t h i n k of h e r o w n p r o b l e m s in a w a y t h a t m i g h t
suggest b e t t e r solutions of t h e m .
T h i r d l y , allied to this political q u e s t i o n , is t h e risk
of default. T h i s itself, as it seems to m e , d e p e n d s o n t h e
e x t e n t to w h i c h a n i n t e r n a t i o n a l w e l d i n g t o g e t h e r b y
t h e e n l a r g e m e n t of t r a d e a n d t h e successful o p e r a t i o n of
j o i n t i n t e r n a t i o n a l Institutions p r o c e e d s , or h o w far w e
a r e to lapse ever further into t h e a u t a r k i c p o i n t of view.
Finally there is the p r o b l e m of service a n d r e d e m p t i o n .
H e r e it m u s t b e a d m i t t e d t h a t t h e U n i t e d States will Hhve
in the long r u n to solve her o w n p r o b l e m otherwise t h a n
by a c o n t i n u e d expansion of h e r b a l a n c e of t r a d e . T h i s
brings us b a c k to the m a i n question. W h a t , for a c o u n t r y
or for the w o r l d as a w h o l e , is t h e p r o p e r solution if t h e r e
is a persistent t e n d e n c y for t h e w a r r a n t e d r a t e of g r o w t h
to s t a n d a b o v e the n a t u r a l r a t e ?
Before giving o u r final consideration to this p r o b l e m
w e must revert to t h a t of t h e s h o r t e r period, p a r t i c u l a r l y
the t r a d e cycle.

{b) C O N T R A - C Y C L I C A L POLICY
O u r considerations h a v e given good g r o u n d s , a n d
there a r c o t h e r s , for r e g a r d i n g the t r a d e cycle as likely
to c o n t i n u e .
I . First a n d foremost is t h e instability of a n y possible
steady line of a d v a n c e as revealed b y the f u n d a m e n t a l
e q u a t i o n s . T o t a l o u t p u t being t h ^ resultanS of n u m e r o u s
''5
 TOWARDS A DYNAMIC ECONOMICS
decisions, m a n y of them based on uncertain d a t a , we
can hardly expect it to conform to the level required by
the steady line of advance. But we have seen that any
divergences on cither side of this line take output into a
field in which it is drawn farther and farther from the
line. It would not be right to present this as a complete
theory of the trade cycle; it merely displays a framework
within which a detailed theory of the cycle should be
worked out.
2. Even if fundamental conditions were broadly subject
only to steadily continuing change, divergences from the
steady fine, a n d thereby extended movements away from
it, would be Ukely owing to minor miscalculadons. But
fundamental conditions are not likely to be steady. For
instance, inventions m a y be expected to follow the way-
wai'd course of genius. From time to time we m a y get
a crop of labour-saving inventions outweighing the effect
of those of a capital-saving character. If these came,
for instance, at a time when the system h a d been pro-
gressing steadily on its warranted line, they would pull
down the value of G^,. G would be hardly likely to a d a p t
itself at once. There is an analogy here with Wicksell's
concept of the divergence of the actual from the natural
rate of interest being d u e more often to a change in the
former t h a n to any misguided attempt by the bankers
to change the latter, the banks being deemed by him to
m a i n t a i n existing procedures under the influence of vis
inertiae. According to the formulation I have given,
additional capital outlay d u e to the labour-saving char-
acter of the inventions would be included in d on the
right-hand side of the equation. By some adjustment
of definitions they could alternatively be included in Cr,
thus enlarging it. I n either case the effect on Gu, is the
same, namely to reduce it, a n d put it below the actual
ii6
 CONTRA.CYCLICAL POLICY

r a t e . A n d so w c s h o u l d g o off i n t o a vicious spiral of

expansion.
3. I t has b e e n suggested t h a t i n p u r s u i t of t h e objective
of a steadily falling r a t e of interest over the long p e r i o d ,
i n practice w e m a y h a v e to p r o c e e d by b u m p s , a n d these
a r e likely to h a v e the same effect as o t h e r exogenous shocks
i n twisting t h e e c o n o m y a w a y from its steady line of
advance.
4. A l t h o u g h I h a v e nui ucalt w i t h t h e m , I h a v e little
d o u b t t h a t o u r lag experts a r e right in t h i n k i n g t h a t
v a r i o u s lags, i n s e p a r a b l e from a system i n w h i c h decisions
h a v e to b e based o n imperfect d a t a a n d to some e x t e n t
therefore o n trial a n d error, a r e likely t o set u p a cycle.
5. T h e r e is n o n e e d to t r e a t as vieux jeux m a n y of the
theories a d v a n c e d to d e m o n s t r a t e t h e likelihood of a
m o v e m e n t , once s t a r t e d , d e v e l o p i n g a n cumuld^ive
c h a r a c t e r . 1 refer to theories in t h e field of m o n e y a n d
of psychology. T h e s e still have their p a r t to play.
W h a t a r e t h e r e m e d i e s ? I t h i n k t h a t we a r e n o w in
a position to record a n d ask for e n d o r s e m e n t for a n e g a t i v e
p o i n t of c a r d i n a l i m p o r t a n c e . I t seems clear t h a t varia-
tions in t h e r a t e of interest will n o t p l a y a n i m p o r t a n t
p a r t in o u r contra-cyclical a r m o u r y . This certainly
follows from the a r g u m e n t of these lectures a n d is, I think,
implicit in m u c h recent writing. A n d in p r a c t i c e this
w e a p o n has n o w b e e n d i s c a r d e d for fifteen years. Practical
m e n m i g h t say t h a t economists were a little t a r d y in their
discoveries.
So m u c h discussion, however, of contra-cyclical policy
has for generations c o n c e n t r a t e d u p o n interest r a t e policy,
t h a t this conclusion, if I a m right in d e e m i n g t h a t it is a
final conclusion, constitutes a 'major revolution in this
field, a n d is, therefore, w o r t h dwelling u p o n . D i s c a r d i n g
the interest-rate c u r e or r e l e g a t i n g it to -a position of
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 TOWARDS A DYNAMIC ECONOMICS

secondary i m p o r t a n c e m e a n s , 1 suppose, discarding the

m o n e t a r y c u r e in t h e form in which it has b e e n tradition-
ally a d v a n c e d . I t is possible t h a t there m a y still be r o o m
for some o t h e r kind of m o n e t a r y c u r e , of which 1 shall
h a v e s o m e t h i n g to say. It is also possible t h a t s h o r t - t e r m
interest-rate p o h c y m a y yet serve some useful s u b o r d i n a t e
role, e.g. in checking speculation, if only o u r l o n g - t e r m
interest-rate policy allows us to take such liberties w i t h
the s h o r t - t e r m r a t e . It m a y not d o so.
T h e g r e a t e x p o n e n t of the s h o r t - t e r m rate has b e e n
for so long M r . H a w t r e y . H i s p e n is persuasive, his views
are constructive a n d w o u l d be most welcome, if only we
c o u l d believe t h e m , ' l h a t the s h o r t - t e r m r a t e has been
most potent i n British b a n k i n g history is obvious e n o u g h .
T h e field i n w h i c h its a i d was most u r g e n t l y n e e d e d a n d
i n w h i c h its quick effects were u n d o u b t e d a n d decisive
was t h a t of the s h o r t - t e r m foreign b a l a n c e of p a y m e n t s .
A b o u t its efficacy in t h a t respect t h e r e is n o dispute. It
h a s also b e e n used to b r e a k the b o o m at the top. B u t
t h a t is a very different m a t t e r from c u r b i n g a b o o m o r
r e d u c i n g a recession in the earlier stages of either. It
m a y also h a v e h a d effects t h r o u g h its influence o n t h e
l o n g - t e r m r a t e or o n psychology. T h a t again is a different
m a t t e r . T h e proposition n o w u n d e r consideration, t h e
characteristically H a w t r e y proposition, is t h a t a v a r i a t i o n
i n t h e s h o r t - t e r m r a t e tends lo h a v e a direct effect o n the
v o l u m e of activity by m a k i n g it m o r e or less profitable
to hold a d d i t i o n a l stocks (whether of r a w materials or
semi-finished goods). T h e chorus of m e r c h a n t s a n d
t r a d e r s a n d p r o d u c e r s h a v e testified in t h e negative. N o t
a single H a w t r e y i t e is to be found in t h e world of p r a c t i c a l
m e n . T h e theorist only lias lo dot the i's a n d cross the t's.
H e m a y p o i n t o u t t h a t w h e r e goods are of t h e h o m o -
geneous c h a r a c t e r a n d c a n be' dealt with in a n o r g a n i z e d
ii8
 C O N T R A - C Y C L I C A L POLICY
e x c h a n g e , or n e a r it, risks of price fluctuation w i t h i n a
s h o r t p e r i o d a r e very large c o m p a r e d w i t h possible v a r i a -
tions in t h e s h o r t - t e r m r a t e of interest for a short period,
e.g. o n e q u a r t e r of t h e variations i n t h e s h o r t - t e r m r a t e
p e r a n n u m . T h e speculator, or t h e p r o d u c e r o r t r a d e r
w h o ventures to h o l d stocks a d d i t i o n a l to his most c o n -
venient r e q u i r e m e n t s , is boldly p i t t i n g his view a g a i n s t
t h e m a r k e t v i e w ; w h e r e t h e risk is so g r e a t , if h e acts in
this way, h e is likely to be r a t h e r strongly of his o p i n i o n
a n d to foresee, a c c o r d i n g to his n o t i o n , a sizable profit.
W h e n b r a c i n g himself u p to this decision w i t h all its
implications, h e is not likely to weigh the plus or m i n u s
h a l f p e r cent of interest. W h e r e t h e goods arc less stan-
d a r d i z e d a n d m o r e finished, obsolescence a t once becomes
a d a n g e r . A g a i n t h e risk of h o l d i n g r e d u n d a n t stock is
c o n s i d e r a b l e . Nor, o n the o t h e r h a n d , c a n h e let his stocks
fall below his c o n v e n i e n t r e q u i r e m e n t s . I n ordinary
times, unlike ours, a t r a d e r or p r o d u c e r w h o c a n n o t m e e t
his c u s t o m e r ' s o r d e r in a line i n w h i c h h e specializes, for
lack of stock-in-hand, must look r a t h e r a fool a n d suffer
loss of good will. H e will h a r d l y r u n t h e risk of this for
t h e sake of t h e plus or m i n u s half p e r cent.
A n d the l o n g - t e r m r a t e ? H e r e there a r e two points
of w h i c h I reserve t h e m o r e i m p o r t a n t for the second
place. D o u b t s h a v e been expressed a b o u t the elasticity
of the d e m a n d for c a p i t a l . W e have t h e elegant article
o n this subject by M r . Shackle in t h e M a r c h issue of t h e
Economic Journal, 1946. I wiU n o t r e p e a t his a r g u m e n t s .
It is possible t h a t this is o n e of those cases w h e r e d e m a n d
( a n d p e r h a p s s u p p l y also) responds r a t h e r slowly to a
c h a n g e in price, a n d t h a t if w e look a t t h e increase in
t h e d e m a n d for l o n g - t e r m c a p i t a l d u r i n g a d e c a d e
following a c e r t a i n r e d u c t i o n i n the l o n g - t e r m r a t e of
interest, w e m i g h t find consWerably m o r e responsiveness
U 9
 TOWARDS A DYNAMIC ECONOMICS
t h a n w c d e t e c t b y considering only w h a t m a y h a p p e n
in the following few m o n t h s . I shall h a v e to r e t u r n to
this point when I come finally r o u n d to the l o n g - t e r m
p r o b l e m . But this does n o t help us with o u r t r a d e cycle
p r o b l e m . W h a t w e there w a n t is responsiveness prefer-
a b l y within a few m o n t h s , b u t , a t the very worst, within
a y e a r o r t w o . L o n g e r r a n g e responsiveness does not
h e l p us. O n e d a r e n o t d o g m a t i z e , b u t I a m inclined to
a t t a c h weight to the views of those w h o urge us not to
expect a very great increase of capital outlay in the period
i m m e d i a t e l y following a c h a n g e i n the long-term r a t e
of interest.
T h e m o r e i m p o r t a n t p o i n t in c o n n e c t i o n w i t h the
l o n g - t e r m r a t e is t h a t it will in n o wise be possible for us
to m a k e this r a t e m o v e u p a n d d o w n b y substantial
a m o u n t s within t h e a m b i t of t h e cycle. If this were a
d e c l a r e d policy it w o u l d at once defeat itself. W h o w o u l d
m a r k some G o v e r n m e n t Stock u p to 150 w h e n it was the
k n o w n intention of t h e m o n e t a r y authorities to force it
d o w n to 100 within a trade-cycle p e r i o d ? W e m i g h t
expect such a policy to effect changes a m o u n t i n g lo a
fraction of i p e r cent, a n d these a r e the sorts of changes
t h a t h a v e in fact occurred in the past. But, manifestly,
we c a n n o t expect to show quick responsiveness in plans for
long r a n g e c a p i t a l o u t l a y to such m i n u t e changes. L a r g e r
c h a n g e s a r e o u t of the question. T h e one spectacular
c h a n g e in the l o n g - t e r m r a t e , o t h e r t h a n in w a r , was t h a t
eflfected b y C h a m b e r l a i n in 1 9 3 2 , b u t this was based
o n a g e n e r a l o p i n i o n t h a t after three years of profitless
i n d u s t r y the time was ripe for a r e t u r n — a p e r m a n e n t
r e t u r n , m a r k you — to o u r historic 3 per cent. What
is left of the interest ratft as a contra-cyclical w e a p o n ?
W h a t t h e n of other r e m e d i e s ? I d o not think t h a t
p u b l i c works should also be* r e g a r d e d as altogether o u t -
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moded, especially if we can widen this concept to include
all forms of capital outlay that m a y b e subject to influence,
direct or indirect, by the central authority. T h e r e are
certainly most difficult problems of timing. M u c h has
still to be done in the way of the spread of enlightenment
a n d of change in administrative procedure before the
local authorities will pull their full weight in co-operating
on such a contra-cychcal policy. N o d o u b t the same
applies to the semi-public concerns a n d other i m p o r t a n t
spending bodies that m a y eventually be subject to in-
fluence. O u r problems are such at the m o m e n t that,
despite the W h i t e P a p e r of the Coalition Government,
we are hardly beginning yet to see a n y such influence
exerted.
T h e r e is a large field here for international co-opera-
tion, not only through the actual operations of the IrJter-
national Bank, but also by getting international machinery
for m u t u a l consultation with the purpose of synchronizing
those variations in o u d a y which the various nations are
able to finance through their own resources. T h e r e is n o
reason to suppose that the United States would not b e
interested in proposals for synchronizing some of her
domestic projects in conformity with a properly agreed
world contra-cyclical policy endorsed by the best experts.
I n countries which have housing subsidies, these surely
could a n d should be used to iron out the building cycle,
which has been of such large amplitude. At present
I fear t h a t we here are moving in the exactly opposite
direction, a n d by toying with house demolition plans of
fabulous dimensions are making a slump in the building
industry wor^e t h a n any known in that or any other
industry quite inevitable at thft end of a decade. W e
should remember t h a t with the i m p e n d i n g stadonary
population a very great shrilikage in our building industry
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will b e r e q u i r e d , a n d w e should s p r e a d o u r house demoli-
tion plans over a r e a s o n a b l y long t e r m of years, so as to
get t h e b u i l d i n g i n d u s t r y to m o v e m o r e o r less steadily
d o w n to t h a t lower level which is inevitable in the long
run.
T h e n we h a v e t h e t e n - y e a r B u d g e t . T h e g r e a t e r the
difhcultics, a n d they m a y well b e considerable, of adjust-
ing the t i m i n g of large c a p i t a l o u d a y to fit in with the
r e q u i r e m e n t s of a contra-cyclical policy t h e m o r e we m a y
h a v e to rely o n variations in the Budget. Deficit s p e n d i n g
is a t a p t h a t c a n b e t u r n e d o n quickly, a n d t h e most
w e l c o m e w a y of t u r n i n g it o n is to r e d u c e t a x a t i o n . W e
certainly d o not w a n t public works w h i c h a r e merely
t h o u g h t u p as a m e a n s for s p e n d i n g m o n e y . It will, alas,
be m a n y a long y e a r before w c c a n afford such a l u x u r y
in Ciiis c o u n t r y , a n d in a n y case it is a silly l u x u r y . M u c h
better to r e d u c e taxes a n d allow t h e citizens to spend
this h a p p y windfall. A n d , if they d o n o t s p e n d it, t h e
taxes c a n b e r e d u c e d still f u r t h e r ! V a r i a t i o n s in t h e
B u d g e t deficit a p p e a r e d to h a v e a p o t e n t s h o r t - t e r m
influence in the U n i t e d States in the 'thirties. T h i s form
of contra-cyclical p o h c y c o u l d also b e c o m e t h e subject
of i n t e r n a t i o n a l co-operation, Budget deficits a n d sur-
pluses being synchronized —- a t least by the m o r e re-
sponsible g o v e r n m e n t s ! — i n a c c o r d a n c e with the finding
of experts o n t h e a p p r o p r i a t e i n t e r n a t i o n a l b o d y .
I t h a s for some t i m e a p p e a r e d to m e t h a t we r e q u i r e
a third contra-cyclical w e a p o n , n a m e l y a p l a n for g o v e r n -
m e n t financed buffer stocks. T h e other inflationary taps
m a y not t e n d to c r e a t e d e m a n d in those sectors of t h e
e c o n o m y w h i c h a r e most exposed to the blast of depression.
Yet, if we a r e indeed d e a l i n g with a m e r e d d a l e b b a n d
not a p e r m a n e n t recession of the waters, it is not desirable
t h a t t h e personnel should be Sihiftcd a w a y from their site
 CONTRA-CYCLICAL POLICY
or t r a d e w h e n they will b e w a n t e d back t h e r e in ful!
n u m b e r s after t w o o r three years. I t should be possible
to m a k e a c a t a l o g u e of w h a t are some times called b r e a d -
a n d - b u t t e r lines in the various industries, to w h i c h re-
d u n d a n t personnel in a depression could b e t u r n e d over.
F i r m s d o this of course to some e x t e n t o n their o w n
a c c o u n t , p r o d u c i n g for stock, b u t they c a n n o t c a r r y t h e
process far e n o u g h . I t s h o u l d b e possible to find a sufficient
n u m b e r a n d variety of goods belonging to the different
centres of i n d u s t r y t h a t could b e held in stock w i t h o u t
d a n g e r of obsolescence d u r i n g t h e s l u m p p e r i o d . T o h e l p
the British e c o n o m y t h e list m u s t i n c l u d e , a n d i n d e e d
m u s t m a i n l y consist of, processed articles. Particular
r e g a r d should b e h a d to items w h i c h m a y give a l t e r n a t i v e
e m p l o y m e n t to those affected by a recession in o u r e x p o r t
m a r k e t s . O f course it will b e necessary to b e very obje(;;ive
in the execution of this policy lest positions liable to secular
obsolescence are p r o t e c t e d on t h e false p r e t e x t of b e i n g
merely t h e victims of a transitional trade-cycle p h a s e .
Plans for i n t e r n a t i o n a l buffer stocks h a v e been u n d e r
discussion for some years. T h e s e , of course, n e e d , in t h e
first i n s t a n c e , to be confined to p r i m a r y p r o d u c t s . T h e y
h a v e b e e n o n the a g e n d a of t h e F o o d a n d A g r i c u l t u r e
O r g a n i z a t i o n a n d of t h e I n t e r n a t i o n a l T r a d e O r g a n i z a -
tion. The former b o d y a p p e a r s to h a v e a b a n d o n e d t h e
i d e a of a full i n t e r n a t i o n a l p l a n , a n d to h a v e proposed
t h a t a u t h o r i t y should b e delegated to t h e n a t i o n a l govern-
m e n t s to act separately. I h o p e t h a t this m a y b e recon-
sidered. P e r h a p s t h e I n t e r n a t i o n a l T r a d e O r g a n i z a t i o n
will c o m e to t h e rescue of t h e m o r e comprehensive a n d
hopeful idea.
I n the discussions in the F o o d a n d A g r i c u l t u r e O r g a n -
ization a t t e n t i o n a p p e a r s to h a v e b e e n focused o n the
p l a n n e a r t h e h e a r t of t h * t c h a m p i o n of the distressed.
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 TOWARDS A DYNAMIC ECONOMICS
Sir J o h n Boyd Orr, for distributing surpluses to the needy.
I have already given expression lo m y somewhat Mal-
thusian qualms about that particular expedient as a
continuing policy. But whatever good might come of it,
I j u d g e that it would be small by comparison with the
great universal benefits that would flow from a really
effective piece of contra-cyclical machinery dealing with
p r i m a r y products. It seems to me that the buffer stock
plan is the most potent weapon for dealing with world
slump on an international scale that has yet been dis-
cussed. A n d are we not right to think very strenuously
about that world s l u m p ? It has become the fashion in
this country to talk always about the American slump.
T h a t is rather rude, a n d unscientific, a n d not conducive
to the right kind of thinking on this subject. It is probably
trud-that the United States is likely to be the first great
nation to encounter a post-war slump. T h a t is not the
same as saying that it is always most likely to be the
original source of future world slumps. T h a t m a y be
true, or it m a y not be. It may b e true that the United
States was the source of the world slump of 1 9 2 9 - 3 2 . O r
it m a y not be. Another view is that the true source of
that was a world-wide maladjustment in the position of
p r i m a r y products, which preceded the American slump
by an a m p l e margin of d m e , a n d that America was merely
the first victim of forces emanating from this world-wide
maladjustment. It m a y also be true that if we could
define effective international measures for checking the
course of a world-wide slump at an early phase we might
incidentally check the American slump. T h e exact inter-
relations between a possible American slump a n d a world
s l u m p are most worthy o~ study, but it is begging very
m a n y questions to assume a causal role for America in
every case, apd also to aasuftie that the right remedy
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necessarily lies inside America. I think that p a r t of
international co-operation should consist in reaching
a n d promulgating the best views about what the several
nations should d o on their own account in the face of a
slump, whether world-wide or their own, a n d t h a t such
information should be conveyed to the Americans, a n d
that they would b e interested in it a n d quite possibly
carry that interest into action. But alongside of t h a t
we have also to consider what m a y be regarded as world-
wide action in relation to a world-wide slump. And this
brings me back to the buffer stocks scheme. T h e issues
at stake in this question of handling a world slump are
portentous for the survival of freedom a n d the main-
tenance of peace. T h e lives of millions, both of those
distressed now a n d also of the young a n d hopeful now —
a n d we should not forget them — m a y depend o n , its
success. And I therefore say quite frankly that I p u t the
potential benefit of the contra-cyclical operation of buffer
stocks very m u c h higher t h a n Sir J o h n Boyd O r r ' s scheme.
T h e r e are certain principles which ought to be laid
down for the conduct of international buffer stocks.
T h e first principle, of course, is that prices should be held
steady or fairly steady as depression deepens. This
involves in some sense of the word guaranteed prices.
T h e r e b y the incomes of a large sector of the world economy
would be sustained, and their purchasing power sustained.
If this were done, I bcUcve that the vicious spiral of
depression could be, a n d indeed must, by consequence,
be broken. I d o not see how llie process of a general fall
in prices and employment could proceed far in a vicious
spiral if so m a n y important prices and such a large sector
of incomes were being sustained*
Secondly, a n d equally important—for without this
the scheme would speedily' crumble — prices must be
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adjusted in the long r u n to a n economic level, t h a t is to
a level at w h i c h supply a n d d e m a n d b a l a n c e w i t h o u t
restriction of o u t p u t . T h i s m a y m e a n in m a n y cases t h a t
prices will h a v e to fall over a t e r m of years, a n d t h a t m a n y
high cost producers will h a v e to he squeezed out. T h i s
m a y b e in some senses a painful process, b u t it will be
essential if the world is to m a k e economic progress. A n d
t h e p a i n of it will be greatly mitigated by t h e gradualness
of the decline. T h e high-cost p r o d u c e r s will h a v e d u e
notice, some years of notice, t h a t the world m a r k e t is
m o v i n g ineluctably against t h e m , a n d t h a t unless they
c a n radically alter their costs they m u s t m o v e to a n o t h e r
o c c u p a t i o n . T h e g o v e r n m e n t s of countries like Bolivia,
too d e p e n d e n t on a single c o m m o d i t y , will h a v e d u e
notice, a n d should take suitable measures within the
phijosophy of international co-operation to diversify their
production.
I suggest t h a t in o r d e r to reconcile the first a n d second
of these basic principles there should be, so to speak, a n
o v e r r i d i n g s t a n d i n g o r d e r t h a t a buffer stock shall never
in one year alter its b u y i n g price by m o r e t h a n 3 per cent.
I t m a y seem o d d to m e n t i o n a p a r t i c u l a r figure in a
f u n d a m e n t a l p r i n c i p l e ; it m a y b e t h a t this figure is not
q u i t e right; p e r h a p s it should b e 2J or 2 p e r cent. B u t
t h e right figure c a n n o t be very far from m y figure if we
a r e to c o m b i n e the principle of sustaining income d u r i n g
t h e .slump with the principle of working towards the
e c o n o m i c price in t h e long r u n .
T o i m p l e m e n t its task of keeping t h e price steady, yet
w i t h o u t allowing restriction schemes, w h i c h should b e
t a b o o save in very special circumstances, each stock must
b e p r e p a r e d to b u y w i t h o u t limit of q u a n t i t y . I n this
it should b e in exactly the s a m e position as a c e n t r a l b a n k
o p e r a t i n g a ^old s t a n d a r d .
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 CONTRA-CYCLICAL POLICY
I t should establish bu^nng a n d selling prices — also
like the b a n k — b u t in this case p r o b a b l y some 20 p e r
cent a p a r t , to allow for t h e free w o r k i n g of c o m m o d i t y
m a r k e t s , a n d to p r o v i d e a n y h o w t h e possibility of covering
its storage costs. It m u s t b e faced, however, t h a t some
p a r t of these costs m i g h t h a v e to b e c a r r i e d by interested
parties — b y p r o d u c e r a n d c o n s u m e r n a t i o n s p r e s u m a b l y
in p r o p o r t i o n to their interest — as a p a y m e n t for t h e
g r e a t benefits likely to flow from t h e scheme.
U n H m i t e d b u y i n g at a price is essendal to effective
contra-cyclical a c h i e v e m e n t . A g r i c u l t u r a l experts a r e
a p t to t a k e a l a r m , foreseeing a deluge of p r o d u c t i o n a n d
m o u n t i n g surpluses b e i n g offered for p u r c h a s e . But t h e
c o m p l e m e n t of u n l i m i t e d b u y i n g should b e a n i n e l u c t a b l e
l o n g - r u n d o w n w a r d price m o v e m e n t , slow b u t steady,
should a stock show a t e n d e n c y to grow in good a n d ^ b a d
years alike. A n d it is a b s u r d to suppose t h a t this w o u l d
not u l t i m a t e l y e l i m i n a t e r e d u n d a n t p r o d u c t i o n .
Agriculturists t e n d to prefer limited b u y i n g as m o r e
p r a c t i c a b l e . If this is to b e consistent with price m a i n -
t e n a n c e t h r o u g h a recession it m u s t entail r e s t r i c t i o n ;
in years of t r a d e recession the restriction w o u l d h a v e to
b e intensified or t h e price r e d u c e d . S u c h a p o h c y , t h o u g h
relieving p r o d u c e r s of p a r t of their t r o u b l e s in a s l u m p ,
is not genuinely contra-cyclical.
Likewise agriculturists d o n o t relish the prospect of
a long-period d o w n w a r d t r e n d . T h i s is not a t all the
philosophy, for i n s t a n c e , of t h e A m e r i c a n " p a r i t y "
principle. H e n c e a soft spot for t h e Boyd O r r s c h e m e ,
which seems to open a d o o r to indefinite price m a i n t e n -
ance. A b r o a d e r h u m a n i t y sees v i r t u e in c h e a p e r food
for all, not for restricted classes of n e e d y persons o n l y ;
the g r e a t majority of people in the world are not so c o m -
fortable t h a t they w o u l d n o t b e relieved of m u c h p a i n
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 TOWARDS A DYNAMIC ECONOMICS
b y h a v i n g food available a t l o w e r prices. Agriculturists
d o not like to recognize t h e plain t r u t h t h a t wide sectors
of the p o p u l a t i o n m u s t b e shooed a w a y from food p r o -
d u c t i o n , if t h e world is to progress. T h i s follows from
t h e limited c a p a c i t y of t h e h u m a n s t o m a c h a n d t h e l a w
t h a t m a n spends a smaller fraction of his i n c o m e o n
p r i m a r y p r o d u c t s as he advances. Agriculturists w o u l d
prefer to spread t h e r e q u i r e d p r o d u c t i o n from a given
a g r i c u l t u r a l p o p u l a t i o n , t a k e n as m o r e or less fixed ; b u t
this would be a b a r to progress.
I t does not help their case to cite t h e vast a n d wide-
s p r e a d u n d e r - n o u r i s h m e n t t h a t n o w exists. F o r t h a t
increase of c o n s u m p t i o n w h i c h we hope those sectors will
achieve m u s t be b a l a n c e d , unless they are to be t h e objects
of p e r m a n e n t c h a r i t y , b y a c o r r e s p o n d i n g increase in their
p r o d u c t i o n — of something.
W h i l e it m a y be pointed out to the agriculturists t h a t
a r e d u c t i o n in t h e oscillation of prices, w i t h t h e increased
short- a n d m e d i u m - t e r m security which t h a t offers, w o u l d
b e of very g r e a t benefit to a g r i c u l t u r a l producers, yet t h e
buffer-stock policy must not b e shaped to favour a n y
sectional interests, b u t to be of general benefit. Plans
for buffer stocks of t h e kind most often discussed are still
r a t h e r far r e m o v e d from contra-cyclical policy. A revolu-
tion of t h o u g h t is r e q u i r e d . C o n q u e s t of t h e t r a d e cycle
will n o t b e achieved w i t h o u t it.
I n m y final lecture I shall r e t u r n to t h e long-range
problem.

128
 LECTURE FIVE

IS I N T E R E S T OBSOLETE?

A N D SO finally w e c o m e to t h e l o n g - r a n g e p r o b l e m . H e r e
we h a v e to a d v a n c e cautiously, tentatively. If one con-
t e m p l a t e s , as one should, far-reaching possibilities, this
phould not i m p l y a d o g m a t i c affirmation t h a t one c a n
see h e r e a n d n o w a n y p a r t i c u l a r solution to b e necessary.
But it is v a l u a b l e to accUmatize one's m i n d to t h e a t m o -
s p h e r e of bold p l a n s . I t h i n k t h a t we h a v e been p r o c e e d i n g
b y t h e m e t h o d of p a t c h w o r k too long, a n d t h a t the in-
conveniences of a t t e m p t i n g to solve one's p r o b l e m s
w i t h o u t r e g a r d to p r i n c i p l e a r e e v e n n o w i n t h e process
of b e c o m i n g a p p a r e n t .
Will conditions in Britain be such, w h e n t h e transition
is over, as to r e q u i r e a steadily falling r a t e of i n t e r e s t ?
Will t h e y b e such in t h e U n i t e d S t a t e s ? W h a t is necessary
t h e r e t o - d a y m a y b e necessary h e r e t o - m o r r o w . May
one think t h a t over t h e r e t e m p e r is n o t a l t o g e t h e r averse
from a far-reaching e x p e r i m e n t , p r o v i d e d always t h a t
it is c o n f o r m a b l e to the f u n d a m e n t a l philosophy of
political a n d economic f r e e d o m ?
O u r reasoning h a s shown t h a t a faihng r a t e of interest
is m u c h m o r e likely to b e r e q u i r e d w h e n the p o p u l a t i o n
is s t a t i o n a r y . T h e sinister possibility of a d c c h n i n g
p o p u l a t i o n c a n n o t b e left o u t of a c c o u n t , even of one
declining r a t h e r r a p i d l y . If, as m a y well b e t h e case,
saving is a function not only o f ' t h e size of i n c o m e b u t of
t h e v o l u m e of a c c u m u l a t e d o u t s t a n d i n g titles to future
i n c o m e , t h e n t h e existencw of a large d e a d - w e i g h t d e b t
129
 TOWARDS A DYNAMIC ECONOMICS
is a force making for a redundancy of saving. I n my
fundamental equation (Lecture 3) saving was represented
as a constant fraction of i n c o m e ; this was only an ad hoc
e x p e d i e n t ; it may well also be a function of the volume
of private capital. This would not affect the general
argument which I developed from the fundamental
equation.
If we could optimistically contemplate a growth of
Output p e r head as high as 1 ^ per cent a year, which
appears to be somewhat above experience, capital require-
ments {G„C,) might be a b o u t 6 per cent of income.
Even this m a y be too high, since it assumes the marginal
capital rneificicnt to be of the same order of magnitude
as the present over-all capital coefficient, but marginal
accretions to income in our present phase may well be
spejit on valuables of a primarily service character, on
cinemas and dog-racing if you will, for which the marginal
capital coefficient is lower than the over-all coefficient.
This would reduce requirements below 6 per cent of income.
Tfiis points strongly to the necessity for a faUing rate of
interest. I always have in mind that in the great era of
expHnsion in Britain the population increase alone probably
entailed a requirement for saving of some 6 per cent of
income a n d that another sijrable fraction went a w a y in
overseas investment. With these sources of d e m a n d for
capital cut off, the former irretrievably in Britain for a
n u m b e r of decades, there is a .'Jtrong a prion presumption
that saving will tend to redundancy. This provides a
cogent reason for not regarding the speculations that are
to follow as merely academic. I n this long-range survey
we must set our minds free from thoughts about the
immediate pressures arising from great schemes of
modernizing British industry and rehousing. With
population stationary a greav reduction tending to an
130
 IS I N T E R E S T O B S O L E T E ?
e l i m i n a t i o n of t h e r e q u i r e m e n t of n e w c a p i t a l for b u i l d i n g
of all sorts is i n e v i t a b l e . A n d if w e really go in for A m e r i -
c a n i z i n g British i n d u s t r y , this, once it is d o n e , is likely
to be adverse to t h e elongation of t h e p r o d u c t i o n process.
It is t h e old British n o t the A m e r i c a n t e c h n i q u e t h a t
requires long-lived m a c h i n e r y ; o n t h e A m e r i c a n p l a n
m a c h i n e r y is t e n d i n g ever t o w a r d s b e c o m i n g t h e direct
cost of c u r r e n t o u t p u t r a t h e r t h a n a c h a r g e t h a t has to
b e a m o r t i z e d over a n u m b e r of years.
W h a t is Hkely to b e t h e v a l u e of t h e increase of capital
r e q u i r e d p e r u n i t of o u t p u t d, if t h e interest r a t e is c o n -
s t a n t ? I see n o reason to believe t h a t it is likely to b e
p o s i t i v e ; I c a n n o t d o g m a t i z e , b u t merely t h r o w this o u t
as a c h a l l e n g e to the statisticians. O f course if d were
s u b s t a n d a l l y positive this m i g h t help.
T h e r e h a s b e e n m u c h discussion recently of rediatri-
b u t i o n of i n c o m e as a m e t h o d of r e d u c i n g the p r o p e n s i t y
to save. O n this economists clearly c a n n o t , a n d o u g h t
n o t , to h a v e t h e last w o r d . T h i s is a m a t t e r most c e n t r a l
for t h e c o n s i d e r a t i o n of political scientists, if only t h e r e
was a n y political science. I believe t h a t t h e r e a r e d e e p
laws r e l a t i n g t h e distribution of p o w e r ( m o n e y is p o w e r )
to the stability of a political o r g a n i s m . Economists a r e
entitled to rush in w i t h expostulations a b o u t incentive.
T h e y m a y cite Russia w h e r e , despite the creed of socialism,
a very u n e q u a l distribution a p p e a r s to be d e e m e d neces-
sary, t h o u g h n o t necessarily correctly so, for t h e m a i n -
t e n a n c e of incentive.
T h e r e is a n o t h e r p o i n t a b o u t w h i c h we m u s t b e
cautious. It is quite possible t h a t the A m e r i c a n s c a n g o
further t o w a r d s d a m p i n g saving b y m e a n s of redistribution
t h a n we n o w c a n . As t h e nurtiber of rich people w i t h
m o n e y to h a n d declines t h e r e m a y b e a strong stimulus
to c o r p o r a t e saving. A n d ^ s w a g e - e a r n e r s rise to a level
i3>
 TOWARDS A DYNAMIC ECONOMICS
a t w h i c h p r u d e n c e is possible, we m a y expect massive
saving on t h a t side. I leave this question o p e n .
W e n o w come to a crucial m a t t e r , long deferred.
W h a t a b o u t the elasticity of the d e m a n d for c a p i t a l ?
W h a t a b o u t t h e prospect of getting a substantial elonga-
tion, a good positive v a l u e for c/, t h r o u g h a falling r a t e
of interest? Scepticism on this p o i n t is growing. I h a v e
a l r e a d y referred to t h e d e m o n s t r a t i o n provided b y M r .
Shackle in his article in t h e Economic Journal in M a r c h
1946. I hasten to a d d t h a t there m a y be a very big
difference b e t w e e n t h e effect of a fall in interest in a
fairly short period, such as the trade-cycle period, a n d
in a m u c h longer period. T h e former p o i n t is i m p o r t a n t
as r e g a r d s t h e possibility of ironing out the cycle b y m e a n s
of changes in t h e l o n g - t e r m r a t e of interest. W h i l e t h e
fall'in this r a t e m a y not p r o d u c e a n y stixjng i m m e d i a t e
effect b y m a k i n g e n t r e p r e n e u r s reconsider their p r o d u c t i v e
m e t h o d s or b y m a k i n g d u r a b l e goods m o r e a t t r a c t i v e to
t h e consumer, it is not inconsistent with this to hold t h a t
in d u e time, t h a t is after there has b e e n t i m e for the lower
r a t e to sink in a n d b e c o m e p a r t of the furniture of the
m i n d of e n t r e p r e n e u r s a n d others, the various adjustments
c o n s e q u e n t u p o n it m a y a d d u p to a sizable a m o u n t .
T h i s m a y seem, by the way, to b e i n t r o d u c i n g , c o n t r a r y
to m y self-denying o r d i n a n c e , a time-lag. It w o u l d be
so if we were n o w considering the t r a d e cycle. But w h e r e
y o u get a steady m o v e m e n t , a lag h a s n o m e a n i n g . If
t h e r a t e of interest falls steadily over a n a m p l e period,
it does not m a t t e r w h e t h e r the decisions to m a k e p r o -
d u c t i o n more r o u n d a b o u t at t i m e , f^, a r e caused by t h e
fall in interest at or l^, b o t h being assumed to be t h e
s a m e in a m o u n t . Therefore I w o u l d not rule out the
possibility t h a t the absorption of saving b y elongation in
response to a.falling r a t e m a y ' o e substantial. But I m u s t
13^
 IS I N T E R E S T O B S O L E T E ?
b e g leave to h a v e serious d o u b t s . Cassel referred to an
inexhaustible d e m a n d for capital if there w e r e n o price
for i t ; there is n o such inexhaustible d e m a n d . W e always
h a v e to consider a m o r t i s a t i o n . Is there really a vast mass
of installation, confidently expected to p a y its o w n
a m o r t i s a t i o n , if only the r a t e of interest was p e r cent
r a t h e r t h a n 2 J ? I crave leave to d o u b t it. 1 d o u b t if a
zero r a t e of interest w o u l d p r o d u c e a revolution in o u r
p r o d u c t i v e m e t h o d s . E v e n in the fruitful field of housing,
w h e r e t h e r a t e of interest m a y h a v e a substantial effect
u p o n t h e e c o n o m i c r e n t — b u t w h a t does t h e e c o n o m i c
r e n t m a t t e r in these days ? — it is i m p o r t a n t to r e m e m b e r
t h a t t h e r e n t itself is only a small p a r t of the costs which
people h a v e in m i n d in deciding w h e t h e r to h a v e a larger
or a smaller house. T h e r e a r e the costs of servicing it,
h e a t i n g it, furnishing it, m a i n t a i n i n g it. W h y , it c/ten
h a p p e n s t h a t people will p a y a higher r e n t for a smaller
house of the same q u a l i t y .
It is sometimes hinted t h a t at zero interest t h e r e m i g h t
b e a vast n u m b e r of p e r m a n e n t installations, which, since
they h a v e n o a m o r t i s a t i o n , w o u l d t h e n b e c o m e htcrally
costless, or, strictly, w o u l d t h e n only cost their m a i n t e n -
a n c e . T h e r e a r e , I suggest, n o such p e r m a n e n t installa-
tions. W h a t is there t h a t does not d e p e n d on o u r w a y
of life, o u r technology, o u r m o d e of civilization ? W h o
c a n say w h a t t h e face of E n g l a n d will be like in a h u n d r e d
years, or w h a t p a r t i c u l a r piece of installation will h a v e
a positive v a l u e a t t h a t t i m e ? T h e p o p u l a t i o n , for one
t h i n g , m a y be almost extinct. W h a t changes in o u r
m e t h o d s m a y not b e caused b y n u c l e a r e n e r g y ? W h a t
of the t o w n s ? M a y not the g r e a t mass of people wish
to revert to c o u n t r y life, if this iS r e n d e r e d possible by o u r
technical revolutions? O r m a y they possibly b e d r i v e n
u n d e r g r o u n d b y m o r e sinister forces, in t h e w a y described
133
 TOWARDS A DYNAMIC ECONOMICS
m a n y years a g o b y M r . E. M . F o r s t e r ? O r m a y they
Uve with H . G. Wells s u s p e n d e d in m i d - a i r ? I suggest
t h a t some a m o r t i z a t i o n must be c h a r g e d against a n y
man-made equipment.
O f course a very low r a t e of interest, a p p r o a c h i n g
zero, m i g h t h a v e a strong effect on saving. T h i s i.s a most
i n t r i g u i n g question. W e simply d o not k n o w the answer.
A c c o r d i n g to my analysis " h u m p saving " should be d o w n ,
b u t not necessarily saving for heirs, a n d c o r p o r a t e saving
should be u p . S a v i n g m i g h t still be m o r e t h a n G„C,.
T h e r e is n o simple m e a n s of e x t r a p o l a t i n g for a c o n -
tinued fall in the r a t e of interest, a n d we shall be driven
to t h e e x p e d i e n t of trial a n d e r r o r . H o w is the trial to
be j u d g e d as w e proceed with i t ?
I t is i m p o r t a n t not to forget t h a t w e shall c o n t i n u e
to hp beset with t h e t r a d e cycle p r o b l e m . I n some respects
this will c o m p l i c a t e m a t t e r s , b u t in some respects it m a y ,
parado.xically e n o u g h , be of assistance. I n principle all
remedies addressed to d e a l i n g with the t r a d e cycle as such
should be self-liquidating. W h a t is spent in the b a d
years should be r e g a i n e d in the good years. Buffer stocks,
for instance, m u s t be held in b a l a n c e in the long r u n .
W e c a n n o t let these g r o w w i t h o u t l i m i t ; we c a n n o t let
v a l u a b l e articles r u n to waste. O n e m u s t r e m e m b e r t h a t
if buffer stocks are to be o n a scale a d e q u a t e to have a
p o t e n t effect on the t r a d e cycle, they will have to b e large.
T h e a m o u n t of coffee b u r n t was by comparison trifling
w i t h w h a t these o u g h t to b e . Therefore there must b e
n o question of getting i n t o a position in which the goods
held c a n n o t b e finally consumed. Similarly with t h e
G o v e r n m e n t deficit. T h e i d e a of a ten-year Budget
implies t h a t w h a t is ovcr«spent in b a d years is offset by
surpluses in good years. S o m e writers h a v e tried to
b e h t t l c the b u r d e n of a m o u n t i n g interest c h a r g e , b u t
34
 IS I N T E R E S T OBSOLETE?
this is very d a n g e r o u s if w e h a v e lo c o n t e m p l a t e a falling
p o p u l a t i o n ; a n d surely we c a n n o t acquiesce in such a n
u n s o u n d principle as s a d d l i n g the posterity of tax-payers
w i t h interest p a y m e n t s for o u r c u r r e n t c o n s u m p t i o n .
H e a v e n forfend t h a t w e should be d r i v e n from p r i n c i p l e
to find sufficient p u b l i c works to absorb the G o v e r n m e n t
deficit I T h a t w o u l d b e a monstrous waste of resources
w h i c h w e a r e not hkely to be a b l e to afford in the foresee-
able future.
I h a v e always b e h e v e d t h a t if t h e trade-cycle remedies
a r e to b e effective, w e h a v e to be p r e p a r e d to c a r r y t h e m
d VoutTance. A limited p u r c h a s e of g r a i n , a loan to buttress
u p some u n s o u n d position, a Tennessee V a l l e y project —
I d o n o t believe t h a t t h e a m o u n t s of these ad hoc expedients
a d d e d t o g e t h e r will ever solve t h e p r o b l e m . T h e y d o not
p r o v i d e a basis of confidence. T h e r e is always < h e
question, w h a t h a p p e n s w h e n they r u n o u t ? As I see it,
t h e trade-cycle r e m e d y should b e so devised l h a t the flow
of p u m p - p r i m i n g p u r c h a s i n g p o w e r is in principle limit-
less. I think in this connexion of the gold s t a n d a r d , o n e
of t h e few e x p e r i m e n t s in e c o n o m i c p l a n n i n g t h a t o v e r
m a n y generations was, if y o u will n o t allow m e to say
beneficial, a t least successful in achieving w h a t it sought.
T h e essence of t h e gold s t a n d a r d was t h a t in principle
a n d in p r a c t i c e the a u t h o r i t y was p r e p a r e d to receive gold
a n d to release gold w i t h o u t a n y limit of q u a n t i t y . T h e r e
was n o question of saying we will give a certain n u m b e r
of a p p l i c a n t s gold or we will vote a c e r t a i n a m o u n t of
gold to ease o u r t r a d e troubles. I t was of t h e essence t h a t
gold should b e provided absolutely w i t h o u t limit to m e e t
all r e q u i r e m e n t s to t h e extent of lOO p e r cent. T h i s in
o u r case was reinforced b y the tvillingness of t h e c e n t r a l
b a n k to lend on good security a t its chosen rg.te of discount,
also absolutely w i t h o u t limit of q u a n t i t y .
135 K
 TOWARDS A DYNAMIC ECONOMICS
Bagehot h a s always h a d a g r e a t influence o n m y
t h i n k i n g in this r e g a r d . I t was the " w i t h o u t limit of
q u a n t i t y " t h a t was the key to success in a n y operation
of this k i n d . A n d I believe that, owing to t h e essential
n a t u r e of expectation a n d u n c e r t a i n t y , this will always
be the key to the success of a n y trade-cycle recipe. Is
there a d a n g e r t h a t t h e resolution to c a r r y a s u p p o r t i n g
p r o g r a m m e d I'oulrance m a y be s a p p e d by t h e self-balancing
i d e a ? I n the case of buffer stocks the authorities should
be able to sustain their o w n resolution b y t h e reflection
t h a t , h o w e v e r m u c h they h a v e to b u y to s u p p o r t the
e c o n o m y in a s l u m p , in the e n d their freedom to m a r k
prices d o w n in the long period will e n a b l e t h e m to p u t
a stop to u n l i m i t e d a c c u m u l a t i o n , I fear t h a t it is im-
p r a c t i c a b l e to devise a s c h e m e b y which the bufl^er stocks
wiil b e self-liquidating in the sense t h a t they will m a k e
n o loss a t all. S o m e external finance m a y be n e e d e d to
cover p a r t of t h e cost of storage. B u t the d u t y should
be laid u p o n t h e m of securing t h a t in the long r u n their
stocks are cleared.
B u t w h a t of b u d g e t deficits ? H o w far will a C h a n c e l l o r
b e willing to g o if he is really u n d e r most solemn obligation
to m a k e these good b y surpluses within a t e n - y e a r p e r i o d ?
This, I believe, is the p o i n t of c o n t a c t b e t w e e n c o n t r a -
cyclical policy a n d l o n g - t e r m policy. A n d m y suggestion
is a bold one — b u t I w a r n e d you t h a t we should let o u r
m i n d s r a n g e over bold ideas — t h a t d e b t i n c u r r e d for
t h e sole p u r p o s e of sustaining p u r c h a s i n g p o w e r in a
s l u m p should c a r r y n o interest. Is not this right in prin-
ciple ? W h y should m o n e y issued, not to c r e a t e p r o d u c t i v e
assets, b u t to m a i n t a i n persons in e m p l o y m e n t p r o d u c i n g
goods n e e d e d by, frecly"bought by a n d c o n s u m e d b y the
g e n e r a l p u b l i c (in consequence of their relief from taxa-
t i o n ) , carr>' interest? T h e i ^ is not all t h a t difference
.„6
 IS I N T E R E S T O B S O L E T E ?

b e t w e e n t h e interest n o w p a y a b l e o n t h e floating d e b t \^
a n d n o t h i n g ; b u t t h e r e is a vast gulf of principle.
O n c e w e get a w a y from interest, the m a x i m of a T e n - ,
y e a r B u d g e t c a n be relaxed. This relaxation must,
however, only b e allowed if events, as they develop over
a t e n - y e a r period, p r o v e t h a t t h e d e e p e n i n g caused b y
t h e falHng r a t e of interest is not sufficient to absorb saving.
r suggest t h a t b y using this t e c h n i q u e w e o v e r c o m e t h e
necessity for a n y c e n t r a l a u t h o r i t y to form a n opinion,
w h i c h in a n y case it c a n n o t validly d o , on t h e r a t e of fall
in the r a t e of interest w h i c h is justified b y f u n d a m e n t a l
conditions. If t h e q u a n t i t y of n e w interest-free m o n e y
a c c u m u l a t e s o v e r the years, the m a r k e t r a t e of l o n g - t e r m
interest wiU find its o w n n a t u r a l w a y d o w n w a r d s . T h i s
will n o t be a p l a n n i n g decision but the r e s u l t a n t of n a t u r a l
forces. A p l a n n i n g decision is, however, involved, naifiely
a b o u t h o w m u c h deficit to h a v e . W e must e x a m i n e this.
As t h e r a t e of interest falls a d e e p e n i n g wifl occur.
W e d o not k n o w h o w m u c h d e e p e n i n g or h o w saving will
b e effected. W e d o not k n o w if we shall not h a v e to h a v e
a zero r a t e of interest, or w h e t h e r even t h a t will p r o d u c e
e n o u g h effect on d e e p e n i n g a n d saving to secure steady
progress. It m a y well be t h a t b a l a n c e c a n b e achieved
at, say, i J p e r cent. It m a y be at a h i g h e r r a t e or it m a y
b e a t a lower r a t e . It w o u l d b e foolish to try to rush at
o n c e to a n e q u i l i b r i u m position w h e n w e d o not k n o w
w h a t t h a t is. T h e e x p e d i e n t of issuing a b a l a n c i n g a m o u n t
of interest-free d e b t e n a b l e s us to feel o u r w a y f o r w a r d .
If a n d in so far as the d e e p e n i n g t h a t occurs as t h e r a t e
falls is insufficient, t h a t will b e m a d e good from t i m e to
t i m e a n d to t h e r e q u i r e d figure b y t h e m o p p i n g u p of
saving in interest-free g o v e r n m e n t p a p e r . F u n d a m e n t a l l y
this m e a n s t h a t w h a t some people save ir^ excess, others,
t h e tax-payers, will consum*e„
137
 TOWARDS A DYNAMIC ECONOMICS
W h a t is to be the criterion of the deficit ? W e are
committed to the principle of " full employment " . I
a m sure you will agree that it is necessary to have a very
guarded definition of this. T a k e n too literally it might
lead to either regimentation or inflation. T h e r e are
certain circumstances which, I think, should lead us to
enlarge our notion of the m i n i m u m allowable unemploy-
m e n t percentage. Increased benefits u n d e r social security
m a y bring many scrimshankers on to the Register who
have hitherto preferred a life of independent poverty.
M a n y members of the submerged tenth have tended to
evade the interference involved in reporting to L a b o u r
Exchanges, but they m a y now find themselves compelled
to come in. T h e y do not want to work, or only wish to
d o so occasionally, and it would be an act of barbarism
to legiment them. Furthermore, the universalization of
T r a d e U n i o n rates may make it more difficult to give the
kind of casual low-grade a n d low-paid employment which
is all that members of this class of people are willing to
accept or capable of executing.

W e should base ourselves, then, on the proposition

that sufficient purchasing power should be issued from
time to time to maintain full employment. T h e amount
required to be issued m a y be expected to vary. Despite
alt our other devices we m a y not succeed in preventing
some oscillation in the volume of industrial capital o u t l a y ;
a n d exports m a y oscillate. I have always held that the
decision regarding the size of the deficit should not rest
with the Chiincellor of the Exchequer, who should not
b e subject to the temptation to have a n unbalanced
Budget, nor with the Cabinet, which is always under a
similar temptation, b u f with an independent expert
Authority. Stnctly the Budget would not be unbalanced ;
but the yield of taxation woilld be subvented from time
138
 IS INTEREST OBSOLETE?
to time by payments into the Exchequer from the
Authority, which might be called a Stabilization F u n d .
At present there is a tendency to concentrate responsi-
bihty for a vast mass of basic decisions affecting economic
life upon the government. This will surely be reversed
in times to come, socialism or n o socialism, because it will
become evident that it is inconsistent with democratic
control. If the n u m b e r of diverse decisions which the
government has to make becomes too great, it becomes
technically impossible for public opinion to bring any sort
of influence to bear. I n this matter of the Stabihzation
F u n d , Parliament can exert its authority in framing the
terms of reference u n d e r which it must o p e r a t e ; the
terms could be revised from time to time. T h e y would
resemble in this the old Bank Charter Acts, save that the
Authority would not, of course, be a profit-making b«dy.
W h a t it h a d to d o would be clearly set out in t h e ' t e r m s
of reference, a n d it would carry on u n d e r them,- until
pubUc opinion required some changes in the terms, which
could b e properly debated.
T h e receipts from the F u n d would normally go to
the relief of taxation. This need not rule out plans for
stabilization by varying the volume of P u b h c Works.
T h e d e p a r t m e n t of government responsible for securing
the proper timing of public works would operate in close
consultation with the F u n d . In the matter of correct
timing their poHcies would be similar; b u t there would
also be a great difference between them, namely in their
attitude to the total volume of disbursements. Broadly,
public works should always be limited in total q u a n d t y
by regard for economy, only genuinely useful works being
undertaken. It is most undesirable that there should be
a n y tendency to view projects with a kinjlly eye simply
on the ground that they *tyild tend to " give employ-
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 TOWARDS A DYNAMIC ECONOMICS
m e n t " . T h e S t a b i h z a t i o n F u n d w o u l d b e u n d e r n o such
inhibition. It w o u l d h a v e n o q u a l m s as the total of
monies issued, save only t h a t they should b e of the right
a m o u n t to m a i n t a i n " full e m p l o y m e n t " , however t h a t
be defined. Inflation must b e avoided.
A l t h o u g h the F u n d w o u l d normally find it e x p e d i e n t
to issue large a m o u n t s in times of world or local s l u m p ,
it w o u l d not necessarily h a v e to confine its issue to those
periods. T h a t is precisely w h a t will h a v e to be d e t e r m i n e d
by trial a n d error. T h a t is w h y 1 said t h a t the t r a d e cycle
m a y b e of positive assistance in framing policy. It estab-
Ushes a n u r g e n t r e q u i r e m e n t for a Stabilization F u n d
of this kind ; it calls for tentative a n d ad hoc t r e a t m e n t in
its various phases. E a c h p a r t i c u l a r issue of m o n e y by
the F u n d would relate to t h e c u r r e n t phase. T h e r e need
b e wo long p r e d e t e r m i n e d policy. W h e t h e r , in fact,
we shall h a v e a c h r o n i c t e n d e n c y to insufficient d e m a n d
in t h e c o m i n g years we d o not k n o w ; it c a n n o t be p r e -
dicted. As the fund proceeded with its operations,
adjusting i h c m to w h a t was required from time to time,
it w o u l d g r a d u a l l y b e c o m e clear w h e t h e r there was such
a t e n d e n c y . W e should find, if events so t u r n e d out, t h a t
we h a d m a d e t h e transition to a l o n g - t e r m p o h c y of sus-
tained s u b v e n t i o n to p u r c h a s i n g power. I n t h e years
i m m e d i a t e l y p r e c e d i n g 1929 L o r d Keynes was a d v o c a t i n g
a policy of public works, designed to overcome u n e m p l o y -
m e n t , implicitly t a k e n to be a b n o r m a l ; a n d w h e n t h e
world s l u m p c a m e so t h a t the years of 1926-29 in Britain
were retrospectively viewed in perspective as years of
b o o m r a t h e r t h a n s l u m p , there was a t e n d e n c y to a r g u e
t h a t it was r a t h e r a b s u r d of h i m to have a d v o c a t e d a n
a n t i - s l u m p policy at tha^ time. It was not, of course,
a b s u r d b u t perfectly p r o p e r . T h e Stabilization F u n d ,
h a d it existed t h e n , would h?vS d o n e right to release some
140
 IS I N T E R E S T O B S O L E T E ?
p u r c h a s i n g p o w e r ; t h e n w h e n the s t u m p of 1929-31
c a m e , it should h a v e stepped u p its r a t e of release c o n -
siderably.
I should m a k e a digression h e r e r e g a r d i n g foreign
investment. If this w e r e developed on a l a r g e scale it
m i g h t seriously check the fall in t h e r a t e of interest t h a t
w o u l d otherwise b e r e q u i r e d . T h e p r o b l e m of h o w m u c h
foreign i n v e s t m e n t this c o u n t r y should u n d e r t a k e i n a
steadily progressive period of the future should solve itself
u n d e r t h e Bretton W o o d s m a c h i n e r y . I assume t h a t the
U n i t e d States will also b e p u r s u i n g a policy of falling
domestic interest rates, i n d e e d will b e a h e a d in t h a t
policy, so t h a t the pull of c a p i t a l a w a y from Britain in
search of h i g h e r interest will n o t b e t o w a r d s the U n i t e d
States b u t t o w a r d s o t h e r countries w h e r e c a p i t a ! is less
certainly secure. If interest rates r e m a i n higher in (^ther
countries, this m a y b e n o m o r e t h a n a t r u l y assessed risk
p r e m i u m . R a t e s o n foreign investment h a v e always b e e n
m u c h h i g h e r t h a n rates o b t a i n a b l e here, b u t this has not
entailed a n y d e v a s t a t i n g flight of c a p i t a l from this c o u n t r y .
T h e risk was j u d g e d to b e h i g h , a n d so i n d e e d it has
p r o v e d . T h e interest c h a r g e o n loans g u a r a n t e e d or m a d e
b y the I n t e r n a t i o n a l Bank w o u l d p r e s u m a b l y follow t h e
U n i t e d States r a t e d o w n w a r d s , r e m a i n i n g slightly a b o v e
it. T h i s need n o t lead to a n excessive m o v e m e n t , since
the necessity to p a y a m o r t i z a t i o n limits the p o w e r of
o t h e r countries to a b s o r b capital w h a t e v e r the r a t e of
interest.
If the v o l u m e of foreign investment b y Britain r e m a i n s
u n d e r control, t h e Stabilization F u n d w o u l d n o d o u b t
act in concert with the d e p a r t m e n t of t h e T r e a s u r y exerting
t h a t control a n d w i t h t h e I n t e r n a t i o n a l Bank. Setting
u p such a F u n d w o u l d be a n o t a b l e c o n t r i b u t i o n to the
p o h c y of m a i n t a i n i n g ful'f e m p l o y m e n t ar h o m e , w h i c h
141
 TOWARDS A DYNAMIC ECONOMICS

m e m b e r s of t h e I n t e r n a t i o n a l T r a d e O r g a n i z a t i o n a r e
u n d e r obligation to e n d e a v o u r to i m p l e m e n t .
I n t h e event of effective d e m a n d p r o v i n g chronically
insuflicient, t h e operations of t h e F u n d would lead to
a piling u p of interest-free g o v e r n m e n t obligations. Is
t h e r e substance in t h e fear of those w h o hold t h a t this
m o u n t i n g total would involve a risk of inflation? In
principle this should not b e so, provided t h a t the size of
the deficit is rightly adjusted from t i m e to t i m e . In
psychology, however, the m a t t e r m a y b e different, a n d
it seems t h a t s o m e g u a r a n t e e should b e furnished. To
secure this t h e r e are two possibilities. O n e is t h a t there
should b e issued s o m e p a p e r of special format, w h i c h
m i g h t be called " savings certificates " , h a v i n g a g u a r a n -
teed goods v a l u e . If t h e v a l u e of the c u r r e n c y d e t e r i o r a t e d ,
these could b e convertible into c u r r e n c y a t a p r e m i u m .
T h e w h o l e of the Budget deficit could b e financed b y such
certificates. T h e r e a i ^ , however, objections to m a k i n g
a distinction b e t w e e n such savings certificates a n d o r d i n a r y
m o n e y . If it was not t h o u g h t desirable to m a k e the
distinction, then p r e s u m a b l y it would b e desirable to
g u a r a n t e e t h e goods v a l u e of the c u r r e n c y Itself. I p r o -
p o u n d e d such a s c h e m e in The Times last year, with w h i c h
I will not b o t h e r you n o w . ' I n this scheme the g u a r a n t e e
of the goods v a l u e of t h e c u r r e n c y would be i m p l e m e n t e d
by t h e issue on d e m a n d of goods from buffer stocks. I t
is to be h o p e d t h a t w e shall h a v e the buffer stocks in
a n y case as a contra-cyclical m e a s u r e . It w o u l d be a n
elegance if w e could fink these buffer stocks to t h e p l a n
for B u d g e t deficits. I t m i g h t t h e n b e possible, as I sug-
gested in the articles, to t a k e all p l a n n i n g decision out
of t h e deficit s c h e m e . Tfce size of the deficit w o u l d b e
a u t o m a t i c a l l y r e g u l a t e d b y the state of the buffer stocks.
Sec Appclidix.
142
 IS I N T E R E S T O B S O L E T E ?
F r o m a m e c h a n i c ' s p o i n t of view there is a beautiful
simplicity a b o u t this, a l t h o u g h to t h e a d m i n i s t r a t o r ' s
m i n d it m a y s o u n d c o m p l i c a t e d , a n d therefore not very
feasible as a p r a c t i c a l proposition. Devising a u t o m a t i c
self-regulating a r r a n g e m e n t s of this kind is w h a t I call
e c o n o m i c p l a n n i n g . It is s o m e t h i n g very different, I fear,
from p l a n n i n g as c o m m o n l y discussed.
T h e only serious p u b l i s h e d criticism of The Times p l a n
was t h a t of M r . M a c D o u g a l l w h o feared t h a t fixing the
goods v a l u e of t h e c u r r e n c y w o u l d m e a n d e p r i v i n g t h e
e c o n o m y of a n indispensable safety valve to m e e t the
possibility of excessive m o n e y - w a g e increases. T h i s is
n o d o u b t an i m p o r t a n t point. N o d a n g e r of this sort
a p p e a r e d to t h r e a t e n in the period b e t w e e n 1922 a n d
1939, b u t m a t t e r s m a y not be the same in this respect in
the period a h e a d . If this objection were d e e m e d * im-
p o r t a n t , we could confine t h e g u a r a n t e e of goods v a l u e
to t h e special class of savings certificates. T h i s need not
b e h o n o u r e d by t e n d e r of goods, b u t merely by h a v i n g
t h e m convertible i n t o c u r r e n c y a t a p r e m i u m (or dis-
count) v a r y i n g w i t h t h e i n d e x n u m b e r of prices. T h e r e
w o u l d thus b e a choice o p e n to individuals b e t w e e n hold-
i n g o r d i n a r y c u r r e n c y a n d holding t h e certificates w i t h
a goods g u a r a n t e e . O n l y t h e former w o u l d b e legal
t e n d e r . T h e t w o assets w o u l d be freely convertible i n t o
o n e a n o t h e r , n o r m a l l y one w o u l d h o p e a t p a r , b u t , s h o u l d
some inflations of m o n e y wages h a v e occurred, a t a r a t e
such as to m a i n t a i n the goods v a l u e of t h e certificates.
T h e certificates w o u l d be o b t a i n a b l e , w i t h o u t s t a m p tax,
b y all desiring t h e m , in e x c h a n g e for c u r r e n c y . The
B u d g e t deficit, alternatively called " release of m o n e y
from t h e StabillzaUon F u n d ", *vould be e q u a l to t h e n e t
increase of c u r r e n c y notes d u r i n g t h e v e a r olus t h e n e t
issue of savings certificates.
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 TOWARDS A DYNAMIC ECONOMICS
It might be thought desirable that the banks should
be required to take up some or all of the savings certificates.
If the public did not at first fancy them, the Budget deficits
might lead to a large growth in the volume of bank
deposits — since the extra currency notes would be turned
into the banks. This would entirely upset the normal
ratios of the banks a n d might lead to some confusion.
If they endeavoured to restore their normal proportion
of interest-earning assets to cash — they would probably
prefer, like the American banks for so long, to carry
" excess reserves " — this wouid greatly enhance their
incomes in a way that does not seem justified. O n e may
say this without subscribing to all the faUacies uttered by
m a n y of the " i oo per cent money " c r a n k s ! T h e banks,
then, could be required to take u p the savings certificates
in pKoportions related to their total assets. But they should
not be required to do this, unless their total earning assets
were rising, in consequence of the deficit policy, sufficiently
to cover the additional expenses of increased turnover.
If the gilt-edged rate of interest eventually fell to very
low levels, approaching zero, the banks would have to
consider covering their expenses by service charges.

I think we must face the possibilit)' that neither

deepening nor saving will react sufficiendy to a falling
interest rate. If at zero interest there were still a re-
d u n d a n c y of saving, equilibrium could be secured by
the continued issue of the savings certificates. The
rationale of this would be that certain individuals within
the whole community want to exchange present con-
sumption for titles to future consumption, to provide for
their old age, for their children and all the rest of it,
CapitaHsm, while it was* growing rapidly, provided an
extraordinarily^ elegant device by which these wishes
could be fulfilled. Would-Jid' transferrers of income to
144
 IS I N T E R E S T OBSOLETE?
t h e future could b e c o m e o w n e r s of n e w physical assets.
Since these w e r e p r o d u c t i v e , interest could b e p a i d . But
suppose t h a t the t i m e comes w h e n it is not possible to
think of a n y further assets, or of a sufficiently large n u m b e r
of t h e m , to p r o v i d e this link b e t w e e n present savings a n d ,
future i n c o m e for all those w h o wish to m a k e t h e transfer.
M u s t saving c o m e to a n e n d ? Surely the r i g h t to save,
to transfer v a l u e t h a t we c a n c o n s u m e from the p r e s e n t
to a future d a t e o r t o o u r d e s c e n d a n t s , is a freedom funda-
m e n t a l to civilization. T h e lack of a sufficient n u m b e r
of c a p i t a l assets to c a r r y this saving forward does not m e a n
t h a t further saving m u s t c o m e to a n e n d , b u t o n l y t h a t
interest m u s t c o m e to a n end. I n the c i r c u m s t a n c e s
suggested, it w o u l d b e n o longer r e q u i r e d . Savings w o u l d
b e carried f o r w a r d b y g u a r a n t e e d savings certificates,
h a v i n g the greatest security t h a t o u r civilized comm^anity
c a n p r o v i d e for this purpose, t h r o u g h t h e g o v e r n m e n t ;
m e a n w h i l e , because this large n u m b e r of people wished
to forgo c o n s u m p t i o n n o w in e x c h a n g e for such titles,
t h e c o m m u n i t y as a whole w o u l d b e a b l e to c o n s u m e m o r e
t h a n it otherwise could, this extra p o w e r of c o n s u m p t i o n
b e i n g transferred to it t h r o u g h t h e r e d u c t i o n of t a x a t i o n .
T h e s c h e m e is surely q u i t e sensible.
But it has g r a v e social implications o n w h i c h I w o u l d
ask you to let y o u r m i n d s dwell for a few m i n u t e s a t t h e
close of these five lectures. I n t h e c o n c l u d i n g section
of his General Theory,^ K e y n e s , in his usual carefree m a n n e r ,
used t h e m e m o r a b l e a n d m o m e n t o u s expression " t h e
e u t h a n a s i a of the r e n t i e r " . T h e context makes it p l a i n
t h a t this expression was i n t e n d e d to be t a k e n q u i t e
literally. M a y I q u o t e ?
This would not mean that the use of capital instruments
would cost almost nothing, but only that the-*cturn from them
Pt375-

145
 TOWARDS A DYNAMIC ECONOMICS

w o u l d h a v e to c o v e r h t t l e m o r e t h a n their e x h a u s t i o n b y
w a s t a g e a n d obsolescence t o g e t h e r w i t h s o m e m a r g i n to cover
risk a n d t h e exercise of skill a n d j u d g m e n t . I n short, t h e
a g g r e g a t e r e t u r n from d u r a b l e g o o d s i n t h e course of their life
w o u l d , as in t h e case of short-lived g o o d s , j u s t c o v e r their
l a b o u r - c o s t s of p r o d u c t i o n p l u s a n a l l o w a n c e for risk a n d t h e
costs of skill a n d supervision.
N o w , t h o u g h this s t a t e of affairs w o u l d b e q u i t e c o m -
p a t i b l e w i t h s o m e m e a s u r e of i n d i v i d u a l i s m [I m u s t p u t in a
gloss h e r e — it strikes m e t h a t it w o u l d b e c o m p a t i b l e w i t h
a g r e a t r e v i v a l of i n d i v i d u a l i s m a n d p l a i n l y call for i t ] , y e t it
w o u l d m e a n t h e e u t h a n a s i a of t h e r e n t i e r , a n d , c o n s e q u e n t l y
t h e e u t h a n a s i a of t h e c u m u l a t i v e oppressive p o w e r of t h e
c a p i t a l i s t to exploit t h e s c a r c i t y - v a l u e of c a p i t a l . Interest
t o - d a y r e w a r d s n o g e n u i n e sacrifice, a n y m o r e t h a n does t h e
r e n t of l a n d . T h e o w n e r of c a p i t a l c a n o b t a i n interest b e c a u s e
capii£il is scarce, j u s t as t h e o w n e r of l a n d c a n o b t a i n r e n t
b e c a u s e l a n d is scarce. B u t whilst t h e r e m a y b e intrinsic
reasons for t h e scarcity of l a n d , t h e r e a r e n o intrinsic reasons
for t h e scarcity of c a p i t a l . A n intrinsic r e a s o n for s u c h scarcity
i n t h e sense of a g e n u i n e sacrifice w h i c h c o u l d only b e called
forth b y t h e offer of a r e w a r d in t h e s h a p e of interest, w o u l d
n o t exist, in t h e l o n g r u n , e x c e p t in t h e event of t h e i n d i v i d u a l
. p r o p e n s i t y to c o n s u m e p r o v i n g to b e of s u c h a c h a r a c t e r t h a t
I n e t saving in c o n d i t i o n s of full e m p l o y m e n t c o m e s to a n e n d
before c a p i t a l h a s b e c o m e sufficiently a b u n d a n t . ^

I r e p e a t t h a t t h e a p p r o a c h t o t h i s s t a t e of s o c i e t y , if
e v e r it c o m e s a b o u t , m u s t b e g r a d u a l a n d t e n t a t i v e . B u t
still i t is s o m e t h i n g t h a t w e s h o u l d l o o k a t w i t h a l l i t s
implications. It would certainly be a totally new kind
of society.
A c c o r d i n g t o m y n o t i o n , it w o u l d b e t h e c o r r e c t a n d
' In another place (p. 220) Kej^ics suggests that the rate of interest would
be brought to zero within a single generation (presumably thirty years).
The destruction caixrd by the war would rcauirc this estimate to be in-
creased somewhat.
146
 IS I N T E R E S T O B S O L E T E ?
final answer to all t h a t is j u s t l y a d v a n c e d b y the critics
of capitalism. A n d , because it was the right answer, it
w o u l d e n a b l e us to dispense with the collectivist m e t h o d
of a t t a c k i n g capitalism. W h a t is b e h i n d all this col-
lectivism in t h e h e a r t s of m a n ? It is n o t really a longing
for a t o t a l i t a r i a n society. Surely, r a t h e r , t h e collectivist
m o v e m e n t has g a t h e r e d its s t r e n g t h simply because it
seemed the only m e a n s of displacing t h e capitafist from
*' his c u m u l a t i v e oppressive p o w e r to exploit t h e scarcity-
v a l u e of c a p i t a l
Is n o t this interest-free society, if w e c a n envisage it
n o t too far b e y o n d t h e horizon, a n a l t e r n a t i v e to col-
lectivism ? W o u l d n o t the age-long r e s e n t m e n t of those
w h o h a v e b e e n d o w n t r o d d e n a n d suffered be a s s u a g e d ?
W o u l d t h e y not then be p r e p a r e d to t a k e a different
view of free enterprise a n d its i n e q u a l i t y of e a r n i n g s ?
Surely it is not t h e p o w e r of (he m a n w h o does fine w o r k
a n d gets a large m e a s u r e of profit from it t h a t is resented,
so m u c h as the p o w e r t h a t he a n d his descendants h a v e
to consolidate themselves on t h e basis of a large u n e a r n e d
i n c o m e . W e m u s t assume, of course, t h a t t h e r e are legal
safeguards against his m a k i n g the profit by exploitation.
C o u l d we not thus revive the p o p u l a r esteem of free e n t e r -
prise, of profit, yes, of the profit m o t i v e itself? Surely
it is not t h e profit itself, e a r n e d by service, b y assiduity,
b y i m a g i n a t i o n , by c o u r a g e , b u t t h e c o n t i n u e d interest
a c c r u i n g from t h e a c c u m u l a t i o n t h a t makes the profit-
t a k e r e v e n t u a l l y a p p e a r parasitical. Pubfic service, too,
should h a v e its high r e w a r d s . W e h a v e b e e n told t h a t
t h e v o t i n g of a large p u r s e to the p r i n c i p a l leaders in o u r
r e c e n t conflict was c o n t r a r y to t h e spirit of the t i m e . I
d o not believe t h a t this i d e a has a n y s u p p o r t in the t h o u g h t s
of the a v e r a g e m a n .
As a quid pro quo, so trf speak, for the '* e u t h a n a s i a
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 TOWARDS A DYNAMIC ECONOMICS
it does seem to m e most i m p o r t a n t t h a t large profit should
be allowed a n d e n c o u r a g e d , the corpus of which, if the
e a r n e r did not w a n t to spend it, could pass o n to his
c h i l d r e n . If there were n o u n e a r n e d i n c o m e , I suggest
t h a t it would be right a n d fair a n d widely a p p r o v e d t h a t
d e a t h duties should b e greatly r e d u c e d , if not abolished.
I f one is m a k i n g this bold flight of i m a g i n a t i o n a n d
c o n t e m p l a t i n g a society in which the rentier is n o m o r e ,
t h e n it seems p r o p e r t h a t one should dwell for a m o m e n t
on the virtues of the rentier, very real virtues, a l t h o u g h
one m i g h t n o t b e disposed to p a y t h e m so generous a
panegyric if d e a t h was not in prospect. It is i m p o r t a n t
to recognize h o w greatly i n t e r d e p e n d e n t a r e the various
elements in a civilized society, a n d , if there is d a n g e r
of some element d i s a p p e a r i n g , it is necessary to consider
carefully all the functions w h i c h it performed, a n d to t a k e
steps to see t h a t they are s o m e h o w replaced. T h a t is
w h y I emphasize the i m p o r t a n c e of large profits a n d
incomes b e i n g e n c o u r a g e d a n d their corpus being
transmittable.
O w n e r s h i p is t h e foundation of a n i n d e p e n d e n t a t t i t u d e
of m i n d . O w n e r s h a v e not only themselves been in a
position to sustain this i n d e p e n d e n t a t t i t u d e , but also to
impose it u p o n t h e m a i n b o d y of society. T h e ideal is
t h a t all should h a v e p r o p e r t y , a n d it m u s t be a d m i t t e d
t h a t for generations we h a v e been very far indeed from
t h a t ideal. B u t the influence of ownership in m a k i n g
for i n d e p e n d e n c e of m i n d in t h e society as a whole m u s t
not be u n d e r e s t i m a t e d merely because only a few w e r e
in t h a t privileged position. I t was precisely those few
w h o , because of their position, set t h e tone, a n d established
a code of right thinking, *on which others, less fortunate,
based themselves. Political integrity, for generations so
high in this c o u n t r y , has b e e n Vlosely related to the inde-
 IS I N T E R E S T O B S O L E T E ?
p e n d e n t m e a n s of those p a r t a k i n g in political activity.
T h a t t h e r e should be a class, even if it is only a m i n o r i t y ,
n o t d e p e n d e n t for its o w n livelihood on a n y political
m a c h i n e , is of t h e u t m o s t i m p o r t a n c e for m a i n t a i n i n g
a h i g h record of h o n o u r a b l e d e a l i n g in p u b l i c life a n d
political ^visdom.
T h e existence of this class is also i m p o r t a n t for t h e
arts a n d sciences. O f course one m a y h a v e m a n y highly
e n d o w e d institutions a n d m a n y scholarship ladders, b u t
t h e r e is n o device k n o w n to m a n for the a d e q u a t e selection
of t a l e n t , a n y h o w in t h e a r t s . F u r t h e r m o r e we d e p e n d
for o u r progress on t h e e m e r g e n c e of the n e w idea, Uke
t h e m u t a t i o n in n a t u r a l selection, a n d s t a n d a r d i z e d
m e t h o d s of selection are likely to miss t h e t y p e of m i n d
t h a t nourishes it. I n d e e d the n e w i d e a m a y b e genuinely
n e w in the sense t h a t it lies outside t h e recognized ^ o p c
of t h e arts a n d sciences as c a t e r e d for b y e n d o w m e n t .
T h e r e is a further p o i n t . T h e i n d e p e n d e n t class,
u l t i m a t e l y the r e n d e r class, whose e n d we a r e envisaging,
plays a p a r t in d e v e l o p i n g a n d defining modes of d e c e n t
living, w h a t we call civilization. T h e r e is a n a n a l o g y
with the c o n c e p t t h a t w e all h a v e of R o y a l t y , w h i c h stands
before t h e p u b l i c as a n abstract ideal of perfection. In
a m i n o r w a y the w h o l e class of financially i n d e p e n d e n t
people, m a n y , most of w h o m m a y in fact s u p p l e m e n t t h e i r
livelihoods b y strenuous e a r n i n g activities, furnish forth
a w a y of living, w h i c h b o t h represents w h a t c o n t e m p o r a r y
civihzation stands for a n d provides a n a i m which everyone
m a y seek to achieve for himself. It provides a target for
the a m b i t i o u s m a n . T o achieve it for oneself, or for t h a t
m a t t e r for one's children, makes toil a n d struggle w o r t h
while. T h e c a p a b l e m a n m a y hit the t a r g e t , m a n y d o .
But it is also s o m e t h i n g t h a t , in so far as w e are ideahsts,
w e wish u l t i m a t e l y everjfone to achieve. W e wish a
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 TOWARDS A DYNAMIC ECONOMICS
genera] levelling u p , not a levelling d o w n . If t h e r e is to
b e a levelling d o w n , if we n o longer h a v e a n established
m o d e of life t h a t is graceful a n d c h a r m i n g a n d delightful,
t h e n we take the salt out of socialist h o p e s . W h a t is t h e
good of a g r e a t surge forward for the mass of people, if
it is to lead to s o m e t h i n g not really different in kind from
w h a t they h a d before, to s o m e t h i n g d r a b a n d d r e a r y a n d
w i t h o u t c h a r m or e x c i t e m e n t ?
I m e n t i o n e d t h e question of c h i l d r e n . A n y d e g r a d a t i o n
of the r e n t i e r position touches the p o p u l a t i o n question
at a n u m b e r of places. It is i m p o r t a n t to keep o u r eyes
o p e n for this. J u s t because m a i n t e n a n c e of t h e p o p u l a t i o n
has b e e n successfully m a n a g e d for so long, w e a r e a p t to
take for g r a n t e d t h e forces necessary for it, a n d not to give
t h e m explicit a t t e n t i o n . W e must scrutinize, therefore,
s u c h a radical c h a n g e as t h a t proposed for its implications
in this r e g a r d .
T a k i n g first the question of excellence, it is p r o b a b l y
true to say t h a t fitness for t h e most i m p o r t a n t tasks of
society c a n n o t be achieved in less t h a n two or three
generations. O n e m u s t always m a k e exception for t h e
m a n of o u t s t a n d i n g genius, w h o can achieve a n y t h i n g
out of n o t h i n g . T h e m a i n positions in all the n u m e r o u s
b r a n c h e s of activity c a n n o t be held by such m e n a l o n e ;
there a r e n o t e n o u g h of t h e m . Life is short, a n d it is rarely
possible to glean in a lifetime all the experience required
to m a k e a m a n of b a l a n c e d j u d g m e n t , c a p a b l e of the
higlit'r responsibilities. Experience has to be passed on
from father to son. W h e r e the father has m a d e a b e -
g i n n i n g , has shown himself well fitted for m6re i m p o r t a n t
tasks t h a n unskilled l a b o u r , t h e n it is i m p o r t a n t t h a t his
sons should b e r e g a r d e d as especially quafified c a n d i d a t e s
for assistance towards further p r o m o t i o n . They have
the benefit of their father's, Hietime, a benefit w h i c h is
150
 IS I N T E R E S T O B S O L E T E ?

not enjoyed by, a n d c a n n o t b e t n a d e a v a i l a b l e to, t h e sons

of those w h o h a v e r e m a i n e d unskilled l a b o u r e r s . I t is
q u i t e a b s u r d to suppose t h a t w e c a n c a r r y o u r e g a h t a r i a n
ideas to the p o i n t a t w h i c h all w o u l d s t a r t from scratch,
one w i t h n o m o r e a d v a n t a g e s t h a n a n o t h e r . Equality
of o p p o r t u n i t y m u s t b e r e g a r d e d as a p p l y i n g n o t to e a c h
g e n e r a t i o n in isolation, b u t as covering a r u n of g e n e r a -
tions. T h e son must start n o t w h e r e his father started,
b u t w h e r e his father left off. O f course m a n y sons m a y
p r o v e u n w o r t h y of t h e o p p o r t u n i t i e s t h u s given t h e m .
S u c h w a s t a g e is the price t h a t w e h a v e t o p a y for excel-
lence. If w e d o n o t p a y , o u r c o m m u n i t y will cease to
progress a n d r u n d o w n to t h e s e c o n d - r a t e or s o m e t h i n g
very m u c h worse.
Secondly, t h e r e is also i n this m a t t e r of excellence the
question of h e r e d i t y . M y last a r g u m e n t w a s b a s e d o n
the i d e a of t h e father passing on t h e fruits of his lifetime
experience. T h e r e is also the n o t i o n t h a t success in life
selects good stock. W e o u g h t to t a k e a d v a n t a g e of this
help given us in t h e selection of citizens likely in their
t u r n to b e a b l e to r e n d e r v a l u a b l e service. As a n e d u -
cationist I m u s t stand u p for the p r o f o u n d w i s d o m of
e x a m i n e r s , a t least a t t h e h i g h e r level. But I a m b o u n d
to recognize h o w far from perfect e x a m i n a t i o n is as a
m e t h o d of selection ; 1 a m sure t h a t m u c h , p e r h a p s most,
of o u r t a l e n t w o u l d b e lost if w e relied on t h a t m e t h o d
alone. O n e m u s t p a y t r i b u t e of course to t h e w e e k - e n d
parties so a d m i r a b l y o r g a n i z e d b y t h e Civil Service
Commissioners. E v e n t h e y c a n n o t b e expected solely '
to fill the g a p . A n d , a n y h o w , w h o will get asked to t h e
p a r t i e s ? T h e r e is n o d o u b t m u c h d e b a t e a n d u n c e r t a i n t y
a b o u t the i m p o r t a n c e of stock a n its influence o n t h e
qualities of t h e i n d i v i d u a l . I suppose t h a t it c a n n o t b e
d e n i e d t h a t it is supremeliy i m p o r t a n t . '"-There is o n e
'5''
 TOWARDS A DYNAMIC ECONOMICS
a r g u m e n t a t a p o p u l a r level t h a t I d o not seem to h a v e
seen a d v a n c e d , a very simple a r g u m e n t . Consider the
e n o r m o u s difference b e t w e e n c h i l d r e n of t h e s a m e p a r e n t s .
It is surely impossible t h a t these should be d u e to differ-
ence of e n v i r o n m e n t ; these children h a v e almost identical
e n v i r o n m e n t . O f course the child a year or two y o u n g e r
m a y c o m e i n t o t h e family a t a .slightly different phase of
t h e p a r e n t s ' success in love or finance. T h i s c a n h a r d l y
a c c o u n t for the e n o r m o u s differences t h a t we frequently
m e e t with ; a n d they must therefore b e d u e to difference
of genctical composition.
T h e r e is t h e c o u n t e r - a r g u m e n t t h a t qualities m a k i n g
for success in t h e p a r e n t s are largely anti-social a n d there-
fore u n d e s i r a b l e . T h i s is r a t h e r a self-defeating m a x i m .
A n y h o w in o u r b r a v e n e w world we a r e p r e s u m a b l y b e n t
o n peeing to it t h a t people with desirable qualities are
p r o m o t e d . B u t I w o u l d also say a w o r d o n behalf of the
b r a v e old world of three centuries of British d e v e l o p m e n t ,
a n d t h e r e b y of the v a l u e of t h e stock w h i c h is found in
t h e u p p e r a n d m i d d l e classes. T h i s is not to d e n y w h a t
I a m sure is t r u e , t h a t there is a vast mass of good q u a l i t y
l a t e n t in the r e m a i n d e r w h i c h c a n , a n d should, b e raised
to h i g h e r service by o u r e d u c a t i o n a l o p p o r t u n i t i e s . M a r x
of course held t h a t the p r i m a r y characteristics of these
u p p e r a n d m i d d l e classes were those of b r i g a n d s a n d
exploiters. H e has to b e confronted with the histories,
diaries, letters a n d novels of these centuries of British
history. T a k i n g the w h o l e scene of science, a r t , industry,
'efficiency a n d political m a n a g e m e n t , surely w e c a n n o t
b u t believe t h a t t h e Bridsh constitution a n d m o d e of
civilization h a v e b e e n such t h a t o n the w h o l e the leaders
h a v e h a d to h a v e qualities p r e d o m i n a n t l y social a n d
useful. F o r o t h e r countries, some o t h e r countries, this
a r g u m e n t ma)^ h a v e a differect m o r a l .
h2
 IS I N T E R E S T O B S O L E T E ?

Finally, t h e r e is t h e question of t h e b a r e m a i n t e n a n c e
of n u m b e r s . I a m convinced t h a t t h e a v e r a g e size of
families will not increase, as it m u s t if we are to avoid
extinction, unless those h o l d i n g t h e m o r e responsible
a n d n o t e w o r t h y positions h a v e l a r g e r families. It is
really r a t h e r a b s u r d to ask those w h o d r u d g e a n d toil in
all o t h e r ways also to d o t h e m a i n p a r t of the d r u d g e r y
in p r o v i d i n g t h e next g e n e r a t i o n , while those w h o enjoy
m o r e i m p o r t a n t positions fail to play their p r o p o r t i o n a t e
p a r t . O n e m a y ask it, b u t I suggest t h a t it will not h a p p e n .
A n d as for these people in responsible positions, I believe
t h a t they will not h a v e c h i l d r e n merely as so m u c h , I d o
n o t say c a n n o n , b u t merely as so m u c h social fodder.
T h e y must h a v e the idea t h a t their c h i l d r e n will b e
v a l u a b l e a n d , to some e x t e n t , o u t s t a n d i n g m e m b e r s of
the community. T h e r e was t h e i d e a , it sounds <old-
fashioned, b u t it will h a v e to c o m e back, t h a t t h e father's
o w n personality was in some sense b e i n g carried forward
in his c h i l d r e n . O n t h a t basis h e was willing to work a n d
strive in o r d e r to give t h e m of his best, b u t also, a n d this
is i m p o r t a n t , to h a v e t h e c h i l d r e n . H e c o u l d feel t h a t
his d i s a p p o i n t m e n t s , his failure to achieve w h a t was in
h i m a n d express his o w n personality — a n d this is the
c o m m o n h u m a n lot — would be r e d e e m e d by their lives.
O f course this a t t i t u d e h a s its b a d side, excessive posses-
siveness a n d a d o m i n e e r i n g a t t i t u d e to t h e children, b u t
this will surely be m i t i g a t e d b y t h e g u i d i n g counsels of
o u r m o d e r n psychology. F o r these reasons it seems^
necessary t h a t we should h a v e a condition in which
p a r e n t s still c a n a d v a n c e their c h i l d r e n ' s interests a n d
p r o m o t e their welfare a n d leave t h e m their savings.
T h u s , if t h e r e n t i e r position i! to be l i q u i d a t e d , it is
i m p o r t a n t t h a t as a b a l a n c i n g factor large earnings should
be allowed to those w h o peiTojm good service, a n d bequest
153 "-2
 TOWARDS A DYNAMIC ECONOMICS
facilitated. W i t h the l i q u i d a t i o n of the rentier, in fine,
I e m p h a s i z e the proposal t h a t d e a t h duties should be
r e d u c e d to a m i n i m u m , if n o t abolished a l t o g e t h e r .
T h u s m e n w o u l d e n t e r life with a corpus of inherited
w e a l t h , all, we h o p e , with some, some w i t h m o r e t h a n
others. A l t o g e t h e r the m o r e t h e better. T h i s would give
t h e m freedom of manoeuvre, freedom of choice, i n d e e d
freedom - - for t h e r e is t r u t h in t h a t old t e r m used by t h e
critics of capitalism, wage-slaves. T h e c o n t e n t of freedom
is t h i n a n d m e a g r e w h e r e t h e r e is n o b a n k b a l a n c e . T h i s
corpus m i g h t n o r m a l l y be used to b u y a life a n n u i t y , a n d
its o w n e r m i g h t set himself t h e task of saving, sooner
or l a t e r d u r i n g his life, from his earnings a n d t h e proceeds
of t h e a n n u i t y , sufficient to h a n d o n a larger c o r p u s .
O r a t his choice he m i g h t decide to risk it in business
enteitprise, his o w n or t h a t of others, to invest it in his
o w n further e d u c a t i o n or travel, seeking t h e r e b y in the e n d
to enlarge it. M o s t w o u l d take o n e or other of these p a t h s .
B u t it m a y b e t h a t some, looking deeply into their
hearts, w o u l d decide otherwise, w o u l d decide t h a t they
h a d a task to fulfil i n life t h a t w o u l d yield n o m o n e y ;
for e c o n o m i c activity is n o t the only good. P e r h a p s t h e y
w o u l d devote themselves to public affairs; p e r h a p s they
w o u l d b e artists, students, p h i l a n t h r o p i s t s , or p e r h a p s
n o t h i n g so definite as this, b u t w o u l d g o forward o b e d i e n t
to a n u r g e to seek t h e t r u t h or some special way of life
which would satisfy a n i n n e r c r a v i n g , in observing their
fellow m e n a t h o m e or a b r o a d — m y s t i c s in a m o d e r n sense.
T h e s e are t h e salt of o u r society. N o d o u b t t h e r e will
always b e m a n y w h o , a l t h o u g h they have some inspiration
of this sort, will n o n e the less h a v e to s u b m i t to d r u d g e r y .
Y e t is is i m p o r t a n t t h a t 'there should be some w h o are
free to escape ^from all m o n e y e a r n i n g routine. The
c h u r c h p r o v i d e d for m a n y ^efcturies a status for m e n of
»54
 IS I N T E R E S T O B S O L E T E ?

this type, b u t its d o g m a s h a v e n o w closed its doors to most.

O f course their will b e a n u m b e r — not t h e m a j o r i t y
— w h o dissipate t h e corpus passed to t h e m in e x t r a v a g a n t
living of a futile kind. T h i s is the price of freedom a n d
m u s t b e t o l e r a t e d . T h e cost of a h u n d r e d such wastrels
is w o r t h i n c u r r i n g for t h e sake of o n e m a n w h o enriches
t h e life of the c o m m u n i t y by his e x a m p l e in p u b l i c life
or simply in the a r t of good life. A n d if t h e a v e r a g e
h u m b l e m a n w h o h a s to e a r n it all by h a r d toil c a n n o t b e
c o n v i n c e d t h a t it is good t h a t t h e r e should b e some a m o n g
us w h o are e x e m p t e d from such b u r d e n s , t h e n , i n d e e d ,
w c m a y close t h e book. D e m o c r a c y will h a v e failed.
B u t h e c a n be c o n v i n c e d .
T h e r e h a s b e e n a d e b a t e in a c a d e m i c circles w h e t h e r
i n c o m e s h o u l d be d i s t r i b u t e d equally, a c c o r d i n g to n e e d ,
or a c c o r d i n g to service r e n d e r e d . I suggest t h a t no* o n e
of these criteria will d o . O n e a n d all, t h e y r e p r e s e n t a
n a i v e , almost schoolboy, level of t h i n k i n g — or, alter-
natively, since t h e y h a v e b e e n a d v a n c e d b y learned
professors, they smell very strongly of t h e l a m p . Precise
allocation by need is a recipe of the prison or of t h e n a t i o n
at siege. T h e very stuff of life itself, t h e interest, the basis
of all t h e c h a r m in life, of r o m a n c e , of d r a m a d e p e n d s o n
v a r i e t y . Precise allocation b y t h e v a l u e of services ren-
d e r e d is Httle b e t t e r . T h e society in w h i c h e a c h person
d r e w a n i n c o m e precisely related to his station in the
h i e r a r c h y w o u l d be i n t o l e r a b l y v u l g a r . It would be
inconsistent w i t h o u r c a n o n s of refined society, c a n o n r
w h i c h we m u s t not forswear j u s t because reforms a r e
b r i n g i n g us o t h e r good things. I n uniform, on t h e p a r a d e
g r o u n d , everything goes forward a c c o r d i n g to the precise
r a n k of t h e officers. I n p r i v a t e Hfe t h e G e n e r a l must meet
on e q u a l footing a n d on equal t e r m s sogicone who has
n o G e n e r a l ' s r a n k . T h a t g;iakes for a n d is absolutely
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 TOWARDS A DYNAMIC ECONOMICS
necessary to polished b e h a v i o u r . It is n o t only t h a t real
merit is not to b e identified with r e w a r d a b l e merit,
a l t h o u g h t h a t is a n i m p o r t a n t p o i n t . I t is also t h a t we
need a n a d m i x t u r e of persons of n o k n o w n merit a t all.
T o prove or reinforce my point, I should need qualities
other t h a n those of m y c a p a c i t y as a n economist, in w h i c h
I stand before y o u . I c a n only refer for evidence a n d
e x p l a n a t i o n of m y m e a n i n g to the literature of Britain
a n d F r a n c e since the renaissance.
Y o u must h a v e it in m i n d t h a t if in w h a t I h a v e been
saying t h e r e is a conservative, even a feudal, element,
t h a t is to redress the b a l a n c e in the face of the r e v o l u t i o n a r y
proposal w e are considering.
W h e n we c o m e to look closely at t h e e c o n o m y free
of rentiers, there are n o d o u b t m a n y complications. I will
only*touch in conclusion u p o n a few o u t s t a n d i n g points.
I take it t h a t n e w g o v e r n m e n t d e b t w o u l d b e free of
interest a n d t h a t the w h o l e debt would g r a d u a l l y be
c o n v e r t e d on to this basis. A t t h e s a m e t i m e loans could
b e o b t a i n e d b y e n t r e p r e n e u r s t h r o u g h the b a n k i n g system
free of interest to t h e limit only of the security t h a t could
b e offered. T h e business of life Insurance a n d life a n n u i t i e s
w o u l d go forward as usual, save t h a t the p r e m i u m s would
h a v e to be s o m e w h a t larger in relation to t h e benefits.
C o m p a n i e s would p r e s u m a b l y cease p a y i n g a n n u a l
dividends. A n y o n e actively engaging in a business w o u l d
expect to receive good profit, w h e t h e r in the form of a
salar)' as M a n a g i n g Director or as a rake-off if o p e r a t i n g
o n his o w n account. F u r t h e r m o r e , those l e n d i n g m o n e y
at risk w o u l d h a v e the expectation t h a t the corpus of their
c a p i t a l would be enlarged. C o m p a n i e s would declare
t h e value of their assets from t i m e to time a n d share-
holders could s:?ll, w h e t h e r to reinvest t h e proceeds in
safe interest-free saving certif cates or to spend t h e m .
156
 IS I N T E R E S T O B S O L E T E ?

T h e l a n d is r a t h e r a n a w k w a r d p r o b l e m . I t has b e e n
suggested t h a t , o w i n g to t h e risk e l e m e n t , t h e price of l a n d
w o u l d find some n a t u r a l level at, say, l o o years' p u r c h a s e .
A l t e r n a d v e l y at s o m e suitable p o i n t o n t h e p a t h t o w a r d s
zero interest, freeholds, a n d copyholds if a n y , could b e
c o n v e r t e d into 9 9 - y e a r leaseholds at zero rent, the l a n d
b e i n g vested, as previously, in the C r o w n . T h e conversion
would presumably be carried out when we have reached
a s o m e w h a t lower r a t e of interest t h a n w e h a v e at present.
I n t h e interest of continuity, I should like to suggest o n
b e h a l f of those whose families h a v e b e e n associated with
a p a r t i c u l a r piece of l a n d for g e n e r a t i o n s t h a t o n t h e
e x p i r y of t h e 9 9 y e a r s ' lease t h e y should h a v e t h e first
option of r e n e w a l for a n o t h e r gg years, o n p a y m e n t of
r e n t at t h e t h e n c u r r e n t m a r k e t e v a l u a t i o n to t h e C r o w n .
T h e s e n t i m e n t n o w associated w i t h freehold need not b e
d i s t u r b e d . I t does not seem necessary t h a t l a n d on*ihese
long leases s h o u l d b e i n a l i e n a b l e .
I n the M i d d l e Ages, of course, l a n d was vested in t h e
C r o w n in this c o u n t r y . I t was held b y the t e n a n t s - i n -
chief a n d t h e r e n t s a c c r u e d to t h e m in r e t u r n for services
r e n d e r e d to the S t a t e , m a i n l y of a military c h a r a c t e r .
T h e r e w e r e limits to their right to alienate the holdings.
T h e i d e a o c c u r r e d to m e some time a g o t h a t this inalien-
a b i h t y was c o n n e c t e d with the m e d i a e v a l p r o h i b i t i o n of
u s u r y ; it was c e r t a i n l y necessary as a logical corollary to
t h a t p r o h i b i t i o n . 1 a r g u e d t h a t the l a t e r sophistications
of S. T h o m a s a n d his followers, w h i c h w o u l d allow l a n d
t o h a v e a m a r k e t v a l u e w e r e addressed to reconciling t h e
social revolution p r o c e e d i n g in t h e l a t e r M i d d l e Ages
with C h r i s t i a n principles, a n d represented a d e p a r t u r e
from earlier m o r e rigorous i d ^ s a b o u t interest. O n this
view t h e scholastic sophistications w o u l d resemble t h e
still m o r e c o n t o r t e d sophistications of^the l a t e r J e s u i t s
 TOWARDS A DYNAMIC ECONOMICS
designed to accommodate the rise of modern industry
a n d commerce. But m y learned mediaevalist friends
assure me that in the most rigorous feudal days land was
never really inalienable a n d unmarketable, and t h a t m y
pretty picture is nothing more t h a n a private d r e a m of
m i n e . If this is so, it only confirms the view long held
by economists, that the mediaeval prohibition of usury
never m a d e sense at all a n d was totally ineffective.
I n the conversion of freeholds an exception should
be m a d e in favour of endowed institutions. A d a m Smith
refers to the act of Elizabeth requiring t h a t at least one-
third of college endowments should be in c o m . This was
n o d o u b t in order to safeguard the position of colleges in
the new world in which interest was recognized. Earlier,
land h a d been the only vehicle for endowment by respect-
ablejiersons. Was a William of Wykeham to engage in
usury for the benefit of his Foundations? It would be
therefore in conformity with mediaeval precedent if land
continued to be used as the main vehicle for endowment.
A n d I suggest that this method might be carried a great
deal further. W h y should not the whole education of
the country, not university education only but the whole
system, right down to the elementary schools, be placed
on a permanent basis of endowment, fortified by the law
of the land a n d severed from State subvention? Only
so could we hope to have, taking a long view, a genuinely
free education without taint of Fascism or any other form
of totalitarianism. O t h e r institutions concerned with
the activities of the arts and sciences would qualify for
similar endowment.

H a v e I taken too wide a flight? A very low rate of

interest i.s a fact that we -have before us. 1 suggest that
a low rate maintained at a time, such as the present,
of unprecedented pressure foi* new capital is a revolu-
158
 IS INTEREST OBSOLETE?
tionary fact. Are there not quite practical intentions
that this rate should b e further reduced, both here a n d
in the United States? So far we are on firm g r o u n d ;
but how far will this pressure b e c a r r i e d ? It can at least
d o no h a r m to consider possibilities.
If the Keynesian diagnosis is broadly correct, then this
lowering of the rate should bring a new lease of fife to
private enterprise, a n d indeed m a y be the only condition
in which it can obtain a new lease of life; for in the last
resort public opinion, p r o b a b l y even American public
opinion, will not tolerate a system lhat generates mass
unemployment. T h e other threat to private enterprise
lies in socialist opinion, which derives its main strength
from resentment at a class of rich conceived as purely
parasitical. T a l k of the efficiency of State enterprise a n d
the need for co-ordination is largely a cover a n d recognized
by thinking people to b e mainly flapdoodle. Is it possible
t h a t Socialists m a y be converted by this idea of an interest-
free socict>' a n d deflected from their tiresome totalitarian
proclivities ?
W h a t of the United States? It is there that the crucial
issue of great unemployment in a n economy of free enter-
prise is likely to a p p e a r in a menacing form in the near
future. Perhaps these ideas m a y be considered there
first. Is it too m u c h to hope that in their ever-willing
desire to experiment the Americans might experiment
with t h e m ? If they succeeded in operating an interest-
free system, then we might also join in, if not too entirely
committed meanwhile to the system of collectivism!
T h u s might we all breathe the air of freedom once more,
a n d other nations too.
 APPENDIX

Articles published in The Timei newspaper on February 7

and February 8, 1946

I F after m a n y years of thinking a n d b r o o d i n g u p o n a p r o b l e m

an idea comes into one's m i n d which seems so simple a n d self-
evident t h a t one c a n n o t u n d e r s t a n d w h y it h a d not b e e n
obvious from the outset, there is a p r e s u m p t i o n t h a t it is w o r t h
considering. It is such a n idea t h a t I propose very briefly to
e x p o u n d . It consists of a m e t h o d for m a i n t a i n i n g a reasonably
high level of e m p l o y m e n t .
I present m y p l a n by first referring to two ideas t h a t a r e
a l r e a d y in t h e field. O n e , which was m o r e discussed some
years a g o t h a n recently, is t h a t we should e n d e a v o u r td give
m o n e y a stable value in commodities, so that a general fall
in prices, such as occurs in depression, would be impossible,
a n d thereby the depression itself A t one t i m e it was held t h a t
this might b e achieved by the C e n t r a l Bank using its traditional
methods of Bank r a t e policy a n d open m a r k e t operations, a n d
zealots in the U n i t e d States b r o u g h t the m a t t e r to a seriea of
full discussions before a Congressional C o m m i t t e e in the
'twenties. E x p e r t opinion has inclined to the view t h a t it is
beyond the p o w e r of a C e n t r a l Bank to m a i n t a i n stability in
the commodity value of a c u r r e n c y by such m e t h o d s .
O n e might, however, go further, thereby voyaging in less
familiar waters, a n d u r g e t h a t the link with commodities
should b e achieved by having the unit of currency m a d e
officially convertible into a s t a n d a r d sample of commodities,
of which the central m o n e t a r y authority would hold a reserve.
T h e s t a n d a r d sample would a l s j be convertible into a u n i t
of currency. This idea, while having attractions to-day as
providing a stockpile of cogimodities w h i c h might have v a l u e
61
 TOWARDS A DYNAMIC ECONOMICS
for defence purposes, has hitherto been relegated to the
category of the merely academic by three objections. First,
the cost of storage would be m u c h greater t h a n that of storing
gold. (This cost, however, might be accepted, if we could
really find a solution of the u n e m p l o y m e n t problem thereby.)
Secondly, there is the fear t h a t the traffic might be all one
way, a n d that the stock-pile would grow a n d grow without
limit. T h i r d l y , if the commodities included processed articles
— a n d in a British scheme the major p a r t ought to consist of
s t a n d a r d processed articles, such as cotton piece goods, steel
rails, tin-plate, paint, etc. — there is the danger of obsolescence.
T h e second idea, already in the field, which has h a d m u c h
m o r e vogue just recently, is t h a t the G o v e r n m e n t should make
u p a deficiency in the d e m a n d for consumption a n d capital
goods by spending additional m o n e y on loan account. Public
works are p r o m i n e n t in the discussions of this question. I d o
not d o u b t t h a t there is a great scope for useful public works
i n (TresLt Britain. But h o w big will the g a p in work-giving
expenditure be t h a t has to be filled? A n d will the public
works b e extensive e n o u g h to fill it ? A n d are we not in d a n g e r
of r u n n i n g into a b s u r d i t y ? W e do not w a n t to have to think
u p public works of doubtful utility for the sole purpose of
filling the g a p . W e d o not w a n t to dig holes in the g r o u n d .

If the gap is considerable, it might be a r g u e d , why not fill

it the other w a y ? W h y not, instead of incurring extra public
e x p e n d i t u r e on loan account, merely m a i n t a i n public ex-
p e n d i t u r e at its m i n i m u m necessary level a n d reduce taxation
below t h a t level? T h i s would a d d to total purchasing power.
Surely the cidzen would rather have the money in his pocket
to meet his genuine needs t h a n sponsor public works of doubtful
utiUty.
T h e objection to this is, of course, the interest charge
t h r o w n o n to the future taxpayer. So long as a tangible asset,
a p o r t installation or trunk, road, is created, the charge m a y
b e justified. But would it really be right to finance the police-
m a n ' s wages out«of a n i n t e r e s t - t e a r i n g l o a n ? T h e advocate
16^2
 APPENDIX
of this policy m a y t h e n s a y : W h y charge interest? W h e r e
the increase of p u r c h a s i n g p o w e r is genuinely required to
m a k e u p the b a l a n c e of e m p l o y m e n t , why not issue interest-
free obligations? A n d to this a g a i n the objection is t h a t it
m i g h t lead to a n o u t b r e a k of inflation.
T h u s both lines of t h o u g h t seem to lead to an i m p a s s e ;
b u t only so long as they are considered separately a n d i n
isolation. By c o m b i n i n g the two d i s d n c t ideas of a currency
with a fixed c o m m o d i t y value a n d of a Budget framed to raise
d e m a n d to a high e m p l o y m e n t level, it is possible to remove
the fatal objections to each scheme taken in isolation. H o w
m i g h t this b e d o n e ?
A C o m m o d i t y Reserve would be established. It w o u l d
consist of goods specified on a list which should b e r e p r e -
sentative of all sections of British production a n d all locafities.
Legally a n d formally one p o u n d sterling would b e convertible
on d e m a n d into a sample consisting of specified quantities
of all the goods. I n practice, however, the Reserve iX'ould
usually deal in each article separately. I t would set a n d v a r y
b u y i n g a n d selling prices for each, with a m a r g i n of, say, l o
per cent between t h e m , subject to the rule that the selling
prices of each must a d d u p to a total e q u a l to the legal price
for the sample as a whole, which could only be altered by A c t
of ParHament. T h e Reserve would be obfiged to b u y the
commodities a t its q u o t e d b u y i n g prices without limit of
q u a n t i t y . T h u s each b r a n c h of industry w o u l d be able, w h e n
faced by a recession in Its business, to reabsorb laboiu- on p r o -
ducing certain s t a n d a r d fines for the Reserve. T h e Reserve
Authority w o u l d b e linked to the Bank of E n g l a n d in such a
w a y t h a t purchases of goods w o u l d entail a n expansion of
central b a n k i n g credit a n d sales a contraction (as is t h e case
with a gold reserve). Its power to vary individual prices would
b e used by the A u t h o r i t y to keep its holdings of the different
c o m m o d i u c s in b a l a n c e . But it ^\puld not e n a b l e it to influence
the growth or shrinkage of the Reserve as a whole. For this
the rcsponsibifity would f#ll o n the Chancellor of t h e E x -

63
 TOWARDS A DYNAMIC ECONOMICS
chequer. It would be enacted concurrently t h a t in the event
of a persistent tendency for the C o m m o d i r y Reserve to grow
beyond a suitable size, the Chancellor of the Exchequer would
b e required to supplement the effective purchasing power of
the public b y remitting taxation, the resulting deficiency being
met by the issue of G o v e r n m e n t obligations interest free.
T h i s remission would b e continued, a n d , if necessary, in-
creased, so long as the C o m m o d i t y Reserve tended to a c c u m u -
late. If, on t h e other h a n d , the opposite tendency set in,
he would be obliged not merely to make his Budget balance,
b u t , if necessary, to achieve a surplus for the r e d e m p t i o n of
debt.
I n principle the system would be a u t o m a t i c . Budget deficits
being required w h e n the Reserve tended to a c c u m u l a t e a n d
Budget surpluses w h e n it tended to decline. But there would
be discretion as to the timing a n d size of the deficiencies a n d
surpluses. T h e a i m would be to keep the Reserve in equi-
librium over a reasonably long period. T h e m a i n objection
to t h e commodity scheme considered by itself is that the
C o m m o d i t y Reserve might continue to a c c u m u l a t e . But this
would clearly be impossible if the Chancellor was b o u n d ,
w h e n it began to rise too high, to inject into general circulation
fresh purchasing power without limit. Sooner or later this
additional purchasing power would suffice to keep producers
fully employed in supplying the public, thus m a k i n g a n y
further inflow of goods into the Reserve impossible, a n d eventu-
ally reversing the flow. T h e fatal objection to relying ex-
clusively o n interest-free Exchequer borrowing to secure high
e m p l o y m e n t is that acute inflation might occur before lhat
e n d was achieved. But if the value of sterling is linked to
commodities, inflation is impossible. If t h e r e were a n y
tendency for the general level of prices to rise, goods would
flow out of the Reserve, a n d , w h e n this h a p p e n e d , the C h a n -
cellor would bring bis deficiency spending to an end. Inflation
c a n n o t occur if the value of t h e currency is g u a r a n t e e d . T h e r e
would only b e t'-tficicncy spending w h e n the Commodity
 APPENDIX
Reserve was a b n o r m a l l y high, t h a t is, w h e n the g u a r a n t e e
could quite certainly be effective.
T h u s the two parts of the scheme would give each other
m u t u a l s u p p o r t . I n the long r u n the excess of G o v e r n m e n t
e x p e n d i t u r e over taxation would be the p r i m a r y i n s t r u m e n t
for m a i n t a i n i n g high e m p l o y m e n t in the absence of sufficient
d e m a n d , the C o m m o d i t y Reserve being the gauge which
regulated the p r o p e r a m o u n t of this excess. I n the short r u n
the C o m m o d i t y Reserve would be the p r i m a r y instrument
for keeping business active t h r o u g h its obligation to b u y a
g r e a t r a n g e of goods w i t h o u t limit of q u a n t i t y at a given general
price level, deficit b u d g e t i n g being the safety valve which
p r e v e n t e d a n excessive a c c u m u l a t i o n of goods in the Reserve.

I n t h e preceding article the b a r e bones of a plan for m a i n -

taining e m p l o y m e n t at a high level were set out. It is of the
essence of the plan t h a t it is self-contained, that it segregates
the u n e m p l o y m e n t p r o b l e m from w i d e r questions of policy,
t h a t it w o u l d a p p l y equally well whether the sector of public
enterprise is large or small c o m p a r e d with t h a t of private
enterprise, a n d t h a t it would not involve controls or inter-
ference with individual producers or m e r c h a n t s in the latter
sector. It w o u l d only be necessary to begin to o p e r a t e it when
the " transition period " of shortage is over.
A great merit of this p l a n is t h a t it is entirely consistent
with the type of international m o n e t a r y system proposed a t
Bretton Woods a n d now accepted by this c o u n t r y as well as by
the U n i t e d States a n d others. It would facilitate the working
of such a system, since the state of the C o m m o d i t y Reserve
w o u l d be a b a r o m e t e r additional to those otherwise available
for j u d g i n g w h e n a n adjustment of the country's foreign
exchange rates was desirable. If other countries also adopted
the plan t h a t would b e excellent. But their adoption of it
w o u l d not b e a condition for its saioption here.
Presumably only goods from British production w o u l d - b e
accepted by the Reserve • A u t h o r l t v s a v ? for certain raw
 TOWARDS A DYNAMIC ECONOMICS
materials not produced in this c o u n t r y . But there would b e
n o objection in principle to m a k i n g foreign goods of similar
specification eligible, if the international m o n e t a r y authority
would accept a persistent tendency of foreign goods to a c c u m u -
late in the Reserve as sufficient evidence that the c u r r e n t
foreign exchange rates for sterling were too high a n d o u g h t
to b e reduced. T h e position of gold would not be prejudiced ;
it would retain its functions as a m e d i u m for a n d reserve
against external payments, the C o m m o d i t y Reserve being
held only against internal c o m m i t m e n t s . T h e C o m m o d i t y
Reserve might fill a valuable defence r6le. It is not probable
t h a t m a n y items on the list would be of strategic i m p o r t a n c e ;
a n d the authority would be obliged to hold suitable quantities
of all the goods on the list in order to redeem its obligation
to exchange sterling for the s t a n d a r d sample a n d thus make
inflation impossible. But there might b e some m i n i m u m level
below which the Reserve would not be expected to fall, a n d ,
withifi this m i n i m u m , there seems n o reason why the authority
should not hold a disproportionately large q u a n t i t y of goods
of strategic interest. I n this way a sizable reserve of materials
a n d food, which it might b e t h o u g h t valuable to have on hand
from a defence jwint of view, could be acquired without cost
to the taxpayer.
T h e r e is a further a d v a n t a g e in a semi-automatic plan of
this kind for securing high e m p l o y m e n t . It would m a k e it
possible to re-establish strict economic canons for j u d g i n g
projects of industrial reconstruction a n d public expenditure.
I n spite of adverse factors, it should be possible to achieve a
higher s t a n d a r d of living for all in this country after the
" transition period ". But large prospective increments of
nStional income are already earmarked for various desirable
reforms; o u r position will not b e lush ; we shall have to eke
out our available m a n - p o w e r with careful p r u d e n c e . It would
b e most dangerous to slip in\p the h a b i t of favouring schemes
not, justifiable on economic grounds merely because they
a p p e a r likely to " gr.ve e m p l o y m e n t " .
 APPENDIX
T h e m a i n practical difficulty in t h e scheme would b e in
compiling the hst of commodities. I n principle all industries
a n d regions should b e represented in proportion to their i m -
p o r t a n c e in the e c o n o m y as a whole. But it would not b e
possible to include goods only m a d e to order, highly speciaUzed
articles or b r a n d e d goods. It would b e necessary to select
a n u m b e r of b r e a d - a n d - b u t t e r lines in each t r a d e , in which
the various firms could p r o d u c e to a c o m m o n specification.
This might bias the sample s o m e w h a t in favour of " pro-
ducers' goods " , since so m a n y consumers' goods are b r a n d e d .
This bias would not, however, b e harmful, since it is the o u t p u t
of producers' goods t h a t is most subject to fluctuation in
a c c o r d a n c e with t h e state of t r a d e , a n d it is in their case t h a t
the compensating effect of the purcheses a n d releases by the
C o m m o d i t y Reserve would b e particularly v a l u a b l e . Special
t h o u g h t should b e given to goods suitable to employ on the
spot labour t h r o w n out by a t e m p o r a r y depression in our
export markets. Firms p r o d u c i n g only types of goods ^ h a t
could not b e included w o u l d have n o g r o u n d for grievance,
since they would gain from the high e m p l o y m e n t a n d high
consumption resulting from t h e scheme. I n t h e long r u n
there would be no special a d v a n t a g e in p r o d u c i n g goods on
the list, since after the Reserve h a d been built u p its sales
would o n average b e as great as its purchases. I n general.
Reserve b u y i n g prices would tend to b e somewhat below the
c u r r e n t m a r k e t prices of the goods. I n the case of goods for
which a n organized m a r k e t exists it m i g h t b e necessary to
a h o w t h e Reserve to buy, in limited quantities only, a b o v e
its stated b u y i n g prices in o r d e r to keep u p its c o m p l e m e n t
of such goods. I n other cases producers, when trade tended
to become slack, would be glad to sell a t a small pcrcentag?:
below their n o r m a l prices in order to m a i n t a i n turnover.

It is essential t h a t the Reserve should be willing to b u y

without Umit of q u a n t i t y at its s t a t e d b u y i n g prices. T h i s
standing offer might have a n incidental salutary effect,^in
that it would m a k e it diffioult for rings to4teep prices m u c h
 TOWARDS A DYNAMIC ECONOMICS
a b o v e their competitive level by restrictive agreements.
T h e outsider w h o could p r o d u c e a s t a n d a r d line a t the official
b u y i n g price would have as large a m a r k e t as h e required for
efficient production. T h i s m i g h t well prove a m o r e effective
safeguard for the consumer t h a n a n y anti-trust legislation;
with such a safeguard in being public opinion m i g h t feel at
greater liberty to encourage t r a d e associations a n d similar
bodies in their more beneficent a n d constructive activities.
If m y conviction is correct t h a t with a stationary p o p u l a -
tion the capital outlay required by the c o m m u n i t y to sustain
a rising s t a n d a r d of living will fall considerably short of a n n u a l
saving, substantial remissions of taxation would continue to
be required in order to sustain employment, a n d the volume
of interest-free G o v e r n m e n t obligations would pile u p . T h e
cash a n d deposits of the banks would grow a n d these would
exert a d o w n w a r d pressure on the rate of interest. T h i s is as
it should be. T h e return on safe investments would fall pro-
gressively a n d enterprise would b e stimulated. W h e t h e r a
new equilibrium would eventually be found at a very low r a t e
of interest w h o can say? T h e idea of the large-scale official
purchases of commodities is not unfamiliar t o - d a y ; still less
is t h a t of deficiency b u d g e t i n g ; so t h a t perhaps the ground
is not altogether u n p r e p a r e d for the seed of doctrine that I
have to offer. But the occasional, ad hoc pursuit of such policies
will not suffice to g u a r a n t e e high employment. W h a t is still
lacking, b u t is here suggested, is a body of precise principles
to govern a n d sustain these policies.
Is it too good to be true that a high level of employment
could b e obtained so simply, by w h a t seems in essence to b e
a^mere mechanical device? It is i m p o r t a n t to d r a w a great
distinction between the employment question a n d the standard-
of-living question. A higher standard of living can only b e
achieved in this c o u n t r y if all or most of the individuals in it,
fulfilling their respective rolns, p r o d u c e m o r e , by h a r d e r or
beKer work, greater ingenuity a n d perseverance, greater
enterprise a n d invSitivcness, a n d a m o r c thorough application
 APPENDIX

of scientific method ; and it m a y be found that the State can

help in a variety of ways. T h e r e is no short cut to a higher
standard of living, and no single recipe. T h e unemployment
question is of a different nature. T h e involuntary unemploy-
ment of able-bodied m e n or w o m e n , w h e n so m a n y needs are
unsatisfied, is a mechanical defect in the functioning of our
system, and for this kind of evil a mechanical adjustment of
the kind proposed is precisely the type of remedy for which
w e should be seeking.

THE END

P R I N T E D BY R. * R, CLARK, LTD., EDJNBU-M