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　　IV

　　Ihavementionedinpassingthatthenewsystemmightbemorefavourabletopeacethantheoldhasbeen。Itisworthwhiletorepeatandemphasisethataspect。Warhasseveralcauses。Dictatorsandotherssuch，towhomwaroffers，inexpectationatleast，apleasurableexcitement，finditeasytoworkonthenaturalbellicosityoftheirpeoples。But，overandabovethis，facilitatingtheirtaskoffanningthepopularflame，aretheeconomiccausesofwar，namely，thepressureofpopulationandthecompetitivestruggleformarkets。Itisthesecondfactor，whichprobablyplayedapre-

　　[Page382]THE

　　GENERALTHEORYOFEMPLOYMENT

　　dominantpartinthenineteenthcentury，andmightagain，thatisgermanetothisdiscussion。

　　Ihavepointedoutintheprecedingchapterthat，underthesystemofdomesticlaissez-faireandaninternationalgoldstandardsuchaswasorthodoxinthelatterhalfofthenineteenthcentury，therewasnomeansopentoagovernmentwherebytomitigateeconomicdistressathomeexceptthroughthecompetitivestruggleformarkets。Forallmeasureshelpfultoastateofchronicorintermittentunder-employmentwereruledout，exceptmeasurestoimprovethebalanceoftradeonincomeaccount。

　　Thus，whilsteconomistswereaccustomedtoapplaudtheprevailinginternationalsystemasfurnishingthefruitsoftheinternationaldivisionoflabourandharmonisingatthesametimetheinterestsofdifferentnations，therelayconcealedalessbenigninfluence；andthosestatesmenweremovedbycommonsenseandacorrectapprehensionofthetruecourseofevents，whobelievedthatifarich，oldcountryweretoneglectthestruggleformarketsitsprosperitywoulddroopandfail。Butifnationscanlearntoprovidethemselveswithfullemploymentbytheirdomesticpolicyand，wemustadd，iftheycanalsoattainequilibriuminthetrendoftheirpopulation，thereneedbenoimportanteconomicforcescalculatedtosettheinterestofonecountryagainstthatofitsneighbours。Therewouldstillberoomfortheinternationaldivisionoflabourandforinternationallendinginappropriateconditions。Buttherewouldnolongerbeapressingmotivewhyonecountryneedforceitswaresonanotherorrepulsetheofferingsofitsneighbour，notbecausethiswasnecessarytoenableittopayforwhatitwishedtopurchase，butwiththeexpressobjectofupsettingtheequilibriumofpaymentssoastodevelopabalanceoftradeinitsownfavour。Internationaltradewouldceasetobewhatitis，namely，adesperateexpedienttomaintainemploymentathomebyforcingsalesonforeign[Page383]CONCLUDING

　　NOTES

　　marketsandrestrictingpurchases，which，ifsuccessful，willmerelyshifttheproblemofunemploymenttotheneighbourwhichisworstedinthestruggle，butawillingandunimpededexchangeofgoodsandservicesinconditionsofmutualadvantage。

　　V

　　Isthefulfilmentoftheseideasavisionaryhope？Havetheyinsufficientrootsinthemotiveswhichgoverntheevolutionofpoliticalsociety？Aretheinterestswhichtheywillthwartstrongerandmoreobviousthanthosewhichtheywillserve？

　　Idonotattemptananswerinthisplace。Itwouldneedavolumeofadifferentcharacterfromthisonetoindicateeveninoutlinethepracticalmeasuresinwhichtheymightbegraduallyclothed。Butiftheideasarecorrect&frac34；anhypothesisonwhichtheauthorhimselfmustnecessarilybasewhathewrites&frac34；itwouldbeamistake，Ipredict，todisputetheirpotencyoveraperiodoftime。Atthepresentmomentpeopleareunusuallyexpectantofamorefundamentaldiagnosis；moreparticularlyreadytoreceiveit；eagertotryitout，ifitshouldbeevenplausible。Butapartfromthiscontemporarymood，theideasofeconomistsandpoliticalphilosophers，bothwhentheyarerightandwhentheyarewrong，aremorepowerfulthaniscommonlyunderstood。

　　Indeedtheworldisruledbylittleelse。Practicalmen，whobelievethemselvestobequiteexemptfromanyintellectualinfluences，areusuallytheslavesofsomedefuncteconomist。Madmeninauthority，whohearvoicesintheair，aredistillingtheirfrenzyfromsomeacademicscribblerofafewyearsback。Iamsurethatthepowerofvestedinterestsisvastlyexaggeratedcomparedwiththegradualencroachmentofideas。Not，indeed，immediately，butafteracertaininterval；forinthefieldofeconomicandpoliticalphilosophytherearenotmanywhoare[Page384]THE

　　GENERALTHEORYOFEMPLOYMENT

　　influencedbynewtheoriesaftertheyaretwenty-fiveorthirtyyearsofage，sothattheideaswhichcivilservantsandpoliticiansandevenagitatorsapplytocurrenteventsarenotlikelytobethenewest。But，soonorlate，itisideas，notvestedinterests，whicharedangerousforgoodorevil。

　　PrintingErrorsinFirstEditionAppendixI

　　PRINTINGERRORSINTHEFIRSTEDITIONCORRECTEDINTHEPRESENTEDITION

　　PageLineCorrection[60]6For\'possession\'read\'possessions\'

　　[83]12For\'has\'read\'had\'

　　[126]13For\'23\'read\'19\'

　　[126]footnoteI，line2For\'th\'read\'the\'

　　[172]21For\'security\'read\'precautionary\'

　　[212]9For\'than\'read\'that\'

　　[229]32For\'output\'read\'thestockofassetsingeneral\'

　　[233]25For\'their\'read\'its\'

　　[237]31For\'or\'read\'of\'

　　[267]28For\'three\'read\'four\'

　　[271]4For\'technique\'read\'techniques\'

　　[319]23For\'income\'read\'incomes\'

　　[341]7For\'Mercantilist\'read\'Mercantilists\'ThesecorrectionscometolightinpreparingvariousforeigneditionsofTheGeneralTheory，inpreparingthevariorumversionofearlierdraftswhichappearsinvolumeXIV，orinsettingthisbookforpress。

　　Thecorrectionsdonotcovermoresubstantialerrorssuchastheunsatisfactorypresentationofaggregatesupplyanddemandonpage29ortheinadequatederivationoftheequationsonpage305。

　　FluctuationsinU。S。NetInvestment[Page386]

　　Appendix2

　　FromTheEconomicJournal，September1936

　　FLUCTUATIONSINNETINVESTMENTINTHEUNITEDSTATES

　　InmyGeneralTheoryofEmployment，InterestandMoney，chap。

　　8，pp。98-104，Imadeabriefattempttoillustratethewiderangeoffluctuationsinnetinvestment，basingmyselfoncertaincalculationsbyMrColinClarkforGreatBritainandbyMrKuznetsfortheUnitedStates。[208]

　　InthecaseofMrKuznets\'figuresIpointedoutp。103thathisallowancesfordepreciation，etc。，included\'nodeductionatallinrespectofhousesandotherdurablecommoditiesinthehandsofindividuals\'。Butthetablewhichimmediatelyfollowedthisdidnotmakeitsufficientlycleartothereaderthatthefirstlinerelatingto\'grosscapitalformation\'comprisedmuchwidercategoriesofcapitalgoodsthanthesecondlinerelatingtoentrepreneurs\'depreciation，etc。\'；andIwasmyselfmisledonthenextpage，whereIexpresseddoubtsastothesufficiencyofthelatteriteminrelationtotheformerforgettingthatthelatterrelatedonlytoapartoftheformer。Theresultwasthatthetableasprintedconsiderablyunder-statedtheforceofthephenomenonwhichIwasconcernedtodescribe，sinceacompletecalculationinrespectofdepreciation，etc。，coveringalltheitemsinthefirstlineofthetable，wouldleadtomuchlargerfiguresthanthosegiveninthesecondline。SomecorrespondencewithMrKuznetsnowenablesmetoexplaintheseimportantfiguresmorefullyandclearly，andinthelightoflaterinformation。

　　MrKuznetsdivideshisaggregateofgrosscapitalformationashecallsitfortheUnitedStatesintoanumberofcategoriesasfollows:

　　1Consumers\'DurableCommoditiesThesecomprisemotor-cars，furnitureandhouseequipmentandothermoreorlessdurablearticles，apartfromhouses，pur-

　　[Page387]APPENDIX

　　2

　　chasedandownedbythosewhoconsumethem。Whetherornottheseitemsshouldbeincludedininvestmentdependssofarasthedefinitionisconcerned

　　onwhethertheexpenditureonthemwhenitisinitiallymadeisincludedincurrentsavingorincurrentexpenditure；anditdependssofarasthepracticalapplicationisconcernedonwhetherinsubsequentyearstheownersfeelunderamotivetomakeprovisionforcurrentdepreciationoutoftheirincomesevenwhentheyarenotreplacingorrenewingthem。

　　Doubtlessitisnotpossibletodrawahard-and-fastline。Butitisprobablethatfewindividualsfeelitnecessaryinsuchcasestomakeafinancialprovisionfordepreciationapartfromactualrepairsandrenewals。This，incombinationwiththedifficultyofobtainingproperstatisticsandofdrawingaclearline，makesitpreferable，Ithink，toexcludesuchequipmentfrominvestmentandtoincludeitinconsumption-expenditureintheyearinwhichitisincurred。ThisisinaccordancewiththedefinitionofconsumptiongiveninmyGeneralTheory，p。54。[209]

　　Ishall，therefore，excludethiscategoryfromthefinalcalculation；

　　[210]thoughIhopetodealwiththeproblemmorethoroughlyatalatertime。NeverthelessitmaybeinterestingtoquoteMrKuznets\'estimates，whichareofsubstantialmagnitude:

　　Millionsofdollars。

　　192519261927192819291930193119321933

　　Consumer\'sdurablecommodities8，6649，3168，8879，17510，0587，8925，8854，0223，737Theabovefigurefor1929includes3，400milliondollarsformotor-cars，whilstthedepreciationinrespectofthesameitemforthatyearisestimatedat2，500milliondollars。

　　2ResidentialConstructionThisisanimportantandhighlyfluctuatingitemwhichshouldundoubtedlybeincludedininvestment，andnotinconsumptionexpenditure，sincehousesareusuallyregardedas[Page388]THE

　　GENERALTHEORYOFEMPLOYMENT

　　purchasedoutofsavingsandnotoutofincome，andareoftenownedbyothersthantheoccupiers。IntheBulletinfromwhichthesefiguresaretakenMrKuznetsgivesnoestimatefortheannualrateofdepreciation，etc。Morerecently，however，hiscolleague，MrSolomonFabricant，haspublishedsuchestimates，[211]whichIhaveusedinthefollowingtable:

　　Millionsofdollars。

　　192519261927192819291930193119321933

　　Residentialconstruction3，0502，9652，8563，0952，1271，222900311276

　　Depreciation*1，5541，6761，7541，8421，9111，9011，6981，4601，567

　　Netinvestment1，4961，2891，1021，253216-679-798-1，149-1，291*Thesefiguresarecalculatedintermsofcurrentreproductioncosts。

　　MrFabricanthasalsoprovidedestimatesintermsoforiginalcost，whichfortheyearspriorto1932areconsiderablylower。

　　3BusinessFixedCapitalMrKuznetsheredistinguishesexpenditureonnewproducers\'durablegoodsandbusinessconstructionfromthenetchangein\'businessinventories，\'

　　i。e。inworkingandliquidcapital；andweshall，therefore，dealwiththelatterunderaseparateheading。

　　Theamountofthedeductiontoobtainnetinvestmentinrespectofparts，repairsandservicing，andrepairsandmaintenanceofbusinessconstructionasdistinctfromdepreciationanddepletion，whichisnotmadegood，depends，ofcourse，onwhethertheformerhavebeenincludedingrossinvestment。

　　MrKuznetsgivesapartialestimatefortheformerbutthefiguresgivenbelowexcludetheseitemsbothfromgrossandfromnetinvestment。Butwhilsttheresultofdeductingboththerepairsitemandthedepreciationitemprobablycorrespondsfairlycloselytomynetinvestment，thetwodeductionstakenseparatelydonotcloselycorrespondtomydeductionsforusercostandsupplementarycost；sothatitisnotpossibletocalculatefromMrKuznets\'dataafigurecorrespondingtomygrossinvestment。

　　Thefollowingtablegivesinthefirstline\'theformationofgrosscapitaldestinedforbusinessuse，exclusiveofparts，repairsandservicing，andrepairsandmaintenanceofbusinessconstruction，andexcludingchangesinbusinessinventories\'；

　　[Page389]APPENDIX

　　2

　　andinthesecondlinetheestimated\'depreciationanddepletion\'onthesameitems:

　　Millionsofdollars。

　　192519261927192819291930193119321933

　　Grossbusinesscapitalformationasabove9，0709，8159，55510，01911，3969，3365，9333，2052，894

　　Depreciationanddepletion*5，6856，2696，3126，4477，0396，7126，1545，0924，971

　　Netinvestment3，3853，5463，2433，5724，3572，624-221-1，887-2，077*ThesefiguresarenottakenfromMrKuznets\'memoranda，hutfromMrFabricant\'slaterandrevisedestimates。Asbeforetheyareintermsofcurrentreplacement

　　cost。Intermsoforiginalcosttheyareappreciablylowerpriorto1931

　　andhighersubsequently。

　　4BusinessInventoriesForthefinancialgainsorlossesarisingoutofthisitemthereappeartobefairlyadequatestatisticsintheUnitedStates，thoughnotinthiscountry。MrKuznets\'figuresareasfollows:

　　Millionsofdollars。

　　192519261927192819291930193119321933

　　Netgainorlossinbusinessinventories9162，664-1765111，800100-500-2，250-2，250Thistablecoversnotonlymanufacturers\'stocksbutalsostocksoffarmers，mines，traders，governmentagencies，etc。From1929onwardsthefiguresgiveninMrKuznets\'memorandumof1934provedtorequirecorrection。Thosegivenaboveareprovisionalandapproximateestimates，pendingthepublicationofrevisedfiguresbytheNationalBureau。

　　5PublicConstructionandBorrowingTherelevantfigureinthiscontextisnotsomuchthegrossornet

　　expenditureonconstruction，astheamountofexpendituremetoutofanetincreaseinborrowing。Thatistosayinthecaseofpublicauthoritiesandthelike，theirnetinvestmentmaybebestregardedasbeingmeasuredbythenetincreaseintheirborrowing。Insofarastheirexpendituresaremetbycompulsorytransferfromthecurrentincomeofthepublic，theyhavenocorrelativeinprivatesaving；whilstpublicsaving，ifweweretofindasatisfactorydefinitionforthisconcept，wouldbesubject[Page390]THE

　　GENERALTHEORYOFEMPLOYMENT

　　toquitedifferentpsychologicalinfluencesfromprivatesaving。IhavetouchedontheprobleminmyGeneralTheory，p。128，footnote。I

　　propose，therefore，toinsertinplaceofthefiguresofpublicconstructionthe\'loanexpenditure\'ofpublicbodies。

　　MrKuznetshasverykindlysuppliedmewithfiguresforthenetchangesintheamountofpublicdebtFederal，StateandlocaloutstandingintheUnitedStates，which，exceptforminorchangesintheGovernment\'scashbalances，representtheamountofpublicexpenditurenotcoveredbytaxesandotherrevenues。[212]Thisisgivenbelowinparallelwithhisestimatesoftheamountofconstructionbypublicauthorities。Theinterestingresultemergesthatupto1928therewasanetreductioninthepublicdebtinspiteofalargeexpenditureonpublicconstruction，andthatevenupto1931somepartofpublicconstructionwasmetoutofrevenue。Theexcessofborrowingoverconstructionin1932and1933represents，ofcourse，variousmeasuresofpublicrelief。

　　Millionsofdollars。

　　192519261927192819291930193119321933

　　Publicconstruction2，7172，6123，0453，0232，7763，3002，9062，0971，659

　　Netchangeinoutstandingpublicdebt**-43-280-244-504411，7122，8222，5652，796*SeeMrKuznets\'Bulletin，TableII，line22，broughtuptodateonthebasisofmorerecentdata。

　　**Seecol。9ofthetablegivenintheappendixbelow。

　　6ForeignInvestmentFinally，wehavethenetchangeinclaimscountries，estimatedbyMrKuznetsasfollows:

　　Millionsofdollars。

　　192519261927192819291930193119321933

　　42844606957312371326402937AggregateNetInvestmentWearenowinapositiontocombinetheaboveitemsintoasingleaggregate。

　　Thistotalisnotquitecomprehensive，sinceitexcludesconstructionbysemi-publicagencies，andasmall[Page391]APPENDIX

　　2

　　amountunallocableconstruction。ButMrKuznetsisoftheopinionthatbothomissionsarequiteminorincharacterandcouldnotmuchaffectthemovementsofnetinvestmentinthetablewhichnowfollows。

　　Millionsofdollars。

　　192519261927192819291930193119321933

　　Residentialconstruction1，4961，2891，1021，253216-679-798-1，149-1，291

　　Businessfixedcapital3，3853，5463，2433，5724，3572，624-221-1，887-2，077

　　Businessinventories9162，664-1765111，800100-500-2，250-2，250

　　Netloanexpendituresbypublicauthorities-43-280-244-104411，7122，8222，5652，796

　　Foreigninvestment4284460695731237132640293

　　Aggregatenetinvestment6，1827，2634，5316，2837，1264，1281，629-2，681-2，529Itisevidentthatthistableisoffirst-classimportancefortheinterpretationofbusinessfluctuationsintheUnitedStates。Inmattersofdetailthefollowingpointsstandout:

　　aThearrearsofresidentialconstructionattheendof1933musthavebeenenormous。Fortherehadbeennonetinvestmentinthisfieldsince1925。Thisdoesnotmean，ofcourse，thattheactualstateofhousingwassobadasthis。Somegrossinvestmentinhousingcontinuedthroughout，andthegradualdeteriorationinthestateofaccommodation，throughobsolescenceanddecaynotmadegood，doesnotimpairforthwithtoanequalextenttheactualaccommodationavailableforthetimebeing。

　　bThepartplayedbyfluctuationsinbusinessinventoriesisverymarked，especiallyinaccentuatingthedepressionatthebottomoftheslump。Theincreaseininventoriesin1929wasprobablyforthemostpartdesignedtomeetdemandwhichdidnotfullymaterialise；whilstthesmallfurtherincreasein1930representedaccumulationsofunsoldstocks。In1932and1933，manufacturersmetcurrentdemandtoanextraordinaryextentoutofstocks，sothateffectivedemandfelllargelybehindactualconsumption。Butthis，fortunately，isastateofaffairswhichcouldnotcontinueindefinitely。Afurtherdepletionofstocksonthisscalecouldnotpossiblytakeplace，sincethestockswerenolongerthere。AlevelofbusinessinventoriessolowasthatwhichexistedintheUnitedStatesattheendof1933wasanalmostcertainheraldofsomemeasureofrecovery。

　　Ingeneralanaggregateofnetinvestmentwhichisbasedonanincreaseinbusinessinventoriesbeyondnormalisclearlyprecarious；andit[Page392]THE

　　GENERALTHEORYOFEMPLOYMENT

　　iseasytoseeinretrospectthatalargegrowthofinventoriesin1929，coupledwithadeclineinresidentialconstruction，wasominous。Thefiguresfor1934，1935，and1936willbemostinterestingwhenwehavethem。Onewouldexpectthattherecoveryofthetwoformeryearshasbeenbasedonareturnofinventoriestonormalandonpublicloanexpenditure，butthatby1936durableinvestmentwasbeginningtosupplantinventoriesinmakingupthetotal。Itisonthecontinuedsteadinessofthefirsttwoitemsoftheabovetableatfiguresnotlessthanthoseof1925to1928thatthemaintenanceofprosperitymustdepend；anditisforthisreasonthatalowlong-termrateofinterestissovitallyimportant。

　　cThemannerinwhichthechangesinpublicloanexpenditurecameintomoderatethefluctuations，whichwouldhaveoccurredotherwise，isveryapparent。Themannerinwhichfrom1931FederalborrowingtooktheplaceofStateandlocalborrowing，asshownintheAppendixbelow，isstriking。From30June1924，to30June1930，Federalloansoutstandingfellfrom21to15billions，whilstinthesameperiodStateandlocalloansrosefrom10to16billions，thetotalremainingunchanged；whereasfrom30June1930to30June1935，Federalloansrosefrom15to26billionsandtheothersfrom16onlyto17billions。Theappendix，whichgivesthefiguresofpublicborrowingupto30June1935，shows&frac34；contrary，perhaps，tothegeneralimpression&frac34；thatpublicborrowingwasatitsheightin1931，andthatin1934-35

　　itwasbutlittlemorethanin1929-30。

　　dWhencomparablefiguresofincomeareavailable，weshallbeabletomakesomecomputationsastothevalueoftheMultiplierintheconditionsoftheUnitedStates，thoughtherearemanystatisticaldifficultiesstilltoovercome。If，however，asaverycrude，preliminarytestwetaketheDept。ofCommerceestimatesofincomeuncorrectedforpricechanges，wefindthatduringthelargemovementsoftheyearsfrom1929to1932thechangesinmoney-incomeswerefromthreetofivetimesthechangesinnetinvestmentshownabove。In1933incomesandinvestmentbothincreasedslightly，butthemovementsweretoonarrowtoallowtheratiooftheonetotheothertobecalculatedwithinareasonablemarginoferror。

　　J。M。KEYNES

　　[Page393]APPENDIX

　　2

　　ANotetoAppendix2

　　TOTALANDNETOUTSTANDINGISSUESOFPUBLICDEBT

　　Millionsofdollars。

　　TotaloutstandingissuesNetoutstandingissuesDate30June1

　　Federal2State，county，city，etc。3

　　Combined4

　　Federal5State，county，city，etc。6

　　Combined7Netchange8Averageforcalendaryear9

　　192420，98211，63332，61520，6279，92130，548——

　　192520，21112，83033，04119，73710，97530，712164-43

　　192619，38413，66433，04818，79011，67230，462-250-280

　　192718，25114，73532，98617，54212，61030，152-310-244

　　192817，31815，69933，01716，52213，45229，974-178-10

　　192916，63916，76033，39915，77314，35830，131157441

　　193015，92217，98533，90714，96915，88730，8567251，712

　　193116，52019，18835，70816，09817，45733，5552，6992，822

　　193219，16119，63535，79618，67317，82836，5012，9462，565

　　193322，15819，10741，26521，61317，07236，6852，1842，796

　　193426，48018，94245，42225，32316，77142，0943，4092，173

　　193527，64519，27746，92226，13716，89543，032938-Source:ReportoftheSecretaryoftheTreasuryforyearended30June1935，p。424。

　　Totaloutstandingissuesexcludeasmallvolumeofmaturedandnon-interestbearingobligationsseeibid。，p。379。

　　NetoutstandingissuesareequaltototaloutstandingissueslessthoseheldinU。S。Governmenttrustfunds，orownedbyU。S。Governmentorbygovernmentalagenciesandheldinsinkingfunds。

　　ThetableabovedoesnotincludethecontingentdebtoftheFederalGovernment，i。e。obligationsguaranteedbytheUnitedStates。These，comprisinglargelydebtissuesoftheFederalFarmMortgageCorporation，HomeOwnersLoanCorporationandtheReconstructionFinanceCorporation，wereasfollows:

　　DateMillionsofdollars30June1934691

　　31December19343，079

　　30June19354，151

　　31December19354，525SeeCostofGovernmentintheUnitedStates，bytheNationalIndustrialConferenceBoard，pub。no。223，NewYork，1936，Table26，p。68。

　　MovementsofRealWagesandOutput[Page394]

　　Appendix3

　　FromTheEconomicJournal，March1939

　　RELATIVEMOVEMENTSOFREALWAGESANDOUTPUT

　　AnarticlebyMrJ。G。DunlopinthisJournalSeptember1938，Vol。XLVIII，p。413onTheMovementofRealandMoneyWageRates，andthenotebyMrL。Tarshisprintedbelow[intheEconomicJournal，March1939]p。150，[213]clearlyindicatethatacommonbelieftowhichIaccededinmyGeneralTheoryofEmploymentneedstobereconsidered。

　　Itheresaid:Itwouldbeinterestingtoseetheresultsofastatisticalenquiryintotheactualrelationshipbetweenchangesinmoneywagesandchangesinrealwages。Inthecaseofachangepeculiartoaparticularindustryonewouldexpectthechangeinrealwagestobeinthesamedirectionasthechangeinmoneywages。Butinthecaseofchangesinthegenerallevelofwages，itwillbefound，Ithink，thatthechangeinrealwagesassociatedwithachangeinmoneywages，sofarfrombeingusuallyinthesamedirection，isalmostalwaysintheoppositedirection……Thisisbecause，intheshortperiod，fallingmoneywagesandrisingrealwagesareeach，forindependentreasons，likelytoaccompanydecreasingemployment；

　　labourbeingreadiertoacceptwage-cutswhenemploymentisfallingoff，yetrealwagesinevitablyrisinginthesamecircumstancesonaccountoftheincreasingmarginalreturntoagivencapitalequipmentwhenoutputisdiminished。ButMrDunlop\'sinvestigationsintotheBritishstatisticsappeartoshowthat，whenmoneywagesarerising，realwageshaveusuallyrisenalso；

　　whilst，whenmoneywagesarefalling，realwagesarenomorelikelytorisethantofall。AndMrTarshishasreachedbroadlysimilarresultsinrespectofrecentyearsintheUnitedStates。

　　InthepassagequotedabovefrommyGeneralTheoryIwasaccepting，withouttakingcaretocheckthefactsformyself，abeliefwhichhasbeenwidelyheldbyBritisheconomistsuptothelastyearortwo。SincethematerialonwhichMrDunlopmainlydepends&frac34；namely，theindicesofrealandmoneywages[Page395]APPENDIX

　　3

　　preparedbyMrG。H。WoodandProf。Bowley-&frac34；havebeenavailabletoallofusformanyyears，itisstrangethatthecorrectionhasnotbeenmadebefore。[214]Buttheunderlyingproblemisnotsimple，andisnotcompletelydisposedofbythestatisticalstudiesinquestion。

　　Firstofallitisnecessarytodistinguishbetweentwodifferentproblems。

　　InthepassagequotedaboveIwasdealingwiththereactionofrealwagestochangesinoutput，andhadinmindsituationswherechangesinrealandmoneywageswereareflectionofchangesinthelevelofemploymentcausedbychangesineffectivedemand。Thisis，infact，thecasewhich，ifIunderstandthemrightly，MrDunlopandMrTarshishaveprimarilyinview。[215]Butthereisalsothecasewherechangesinwagesreflectchangesinpricesorintheconditionsgoverningthewagebargainwhichdonotcorrespondto，orarenotprimarilytheresultof，changesinthelevelofoutputandemploymentandarenotcausedbythoughtheymaycause

　　changesineffectivedemand。ThisquestionIdiscussedinadifferentpartofmyGeneralTheorynamelychapter19，\'ChangesinMoneyWages\'，whereIreachedtheconclusionthatwagechanges，whicharenotinthefirstinstanceduetochangesinoutput，havecomplexreactionsonoutputwhichmaybeineitherdirectionaccordingtocircumstancesandaboutwhichitisdifficulttogeneralise。ItiswiththefirstproblemonlythatI

　　amconcernedinwhatfollows。[216]

　　Thequestionoftheinfluenceonrealwagesofperiodsofboomanddepressionhasalonghistory。Butweneednotgofartherbackthantheperiodofthe\'eightiesand\'ninetiesofthelastcentury，whenitwasthesubjectofinvestigationbyvariousofficialbodiesbeforewhichMarshallgaveevidenceorintheworkofwhichhetookpart。IwasmyselfbroughtupupontheevidencehegavebeforetheGoldandSilverCommissionin1887

　　andtheIndianCurrencyCommitteein1899。

　　[217]Itisnotalwaysclear[Page396]THE

　　GENERALTHEORYOFEMPLOYMENT

　　whetherMarshallhasinmindariseinmoneywagesassociatedwithariseinoutput，oronewhichmerelyreflectsachangeinpricesdue，forexample，toachangeinthestandardwhichwastheparticularsubjectonwhichhewasgivingevidence；butinsomepassagesitisevidentthatheisdealingwithchangesinrealwagesattimeswhenoutputisexpanding。

　　Itisclear，however，thathisconclusionisbased，notlikesomelaterargumentson&agrave；priorigroundsarisingoutofincreasingmarginalcostintheshortperiod，butonstatisticalgroundswhichshowed&frac34；sohethought&frac34；thatintheshortperiodwageswerestickierthanprices。InhispreliminarymemorandumfortheGoldandSilverCommissionOfficialPapers，p。19hewrote:\'[Duringaslowandgradualfallofprices]apowerfulfrictiontendstopreventmoneywagesinmosttradesfromfallingasfastasprices；andthistendsalmostimperceptiblytoestablishahigherstandardoflivingamongtheworkingclasses，andtodiminishtheinequalitiesofwealth。Thesebenefitsareoftenignored；butinmyopiniontheyareoftennearlyasimportantastheevilswhichresultfromthatgradualfallofpriceswhichissometimescalledadepressionoftrade。\'AndwhenMrChaplinaskedhimop。cit。，p。99，\'Youthinkthatduringaperiodofdepressiontheemployedworkingclasseshavebeengettingmorethantheydidbefore？\'hereplied，\'Morethantheydidbefore，ontheaverage。\'

　　Subsequently，asappearsfromanimportantletterofApril1897hithertounpublishedtoFoxwell，[218]whoheldsomewhatstronglytheoppositeopinion，Marshall\'sopinionbecamerathermoretentative；thoughthefollowingextractrefersmoretohisgeneralattitudetowardsrisingpricesthantotheirparticulareffectonrealwages:Youknow，myviewsonthismatterareanotveryconfident，bnotverywarmlyadvocatedbyme，cnotveryold，d

　　basedentirelyonnon-academicarguments&amp；observation。

　　Intheyears68to77Iwasstronglyonthesideyounowadvocate。TheobservationofeventsinBristolmademedoubt。In85，or86IwroteaMemnfortheComnon[Page397]APPENDIX

　　3Depressionshowingaslightpreferenceforrisingprices。ButinthefollowingtwoyearsIstudiedthematterclosely，IreadandanalysedtheevidenceofbusinessmenbeforethatCommission；&amp；bythetimetheGold&amp；SilverCommissioncame，Ihadjustturnedthecorner。

　　SincethenIhavereadagreatdeal，butalmostexclusivelyofanon-academicorderonthesubject:&amp；wasthinkingaboutitduhngagreatpartoftheevidencegivenbybusinessmen&amp；workingmenbeforetheLabourCommission。Ihavefoundagooddealthatisnewtostrengthenmynewconviction，nothingtoshakeit。IamfarfromcertainIamright。IamabsolutelycertainthattheevidencebroughtforwardinprinttothecontraryinEnglandandAmericaIhavenotreadlargelyforothercountriesdoesnotprovewhatitclaimsto，&amp；doesnotmeetoranticipatemyarguments，inthesimplewayyouseemtoimagine。ShortlyafterwardshebegantoworkathisevidencefortheIndianCurrencyCommitteewhichseemstohavehadtheeffectofconfirminghiminhispreviousopinion。HisfinalconsideredopinionisgiveninQuestion11，781:[219

　　]Iwillconfessthat，fortenorfifteenyearsafterIbegantostudypoliticaleconomy，Iheldthecommondoctrine，thatariseofpriceswasgenerallybeneficialtobusinessmendirectly，andindirectlytotheworkingclasses。But，afterthattime，Ichangedmyviews，andI

　　havebeenconfirmedinmynewopinionsbyfindingthattheyarelargelyheldinAmerica，whichhasrecentlypassedthroughexperiencessomewhatsimilartothoseofEnglandearlyinthecentury。Thereasonsforthechangeinmyopinionareratherlong，andIgavethematsomelengthbeforetheGoldandSilverCommission。Ithink，perhaps，Ihadbettercontentmyselfnowwithcallingyourattentiontothefactthatthestatisticalaspectofthematterisinadifferentpositionnow。Theassertionsthatariseinpricesincreasedtherealwagesoftheworkerweresoconsonantwiththecommonopinionofpeoplewhohadnotspeciallystudiedthematter，thatitwasacceptedalmostasanaxiom；but，withinthelasttenyears，thestatisticsofwageshavebeencarriedsofarincertaincountries，andespeciallyinEnglandandAmerica，thatweareabletobringittothetest。Ihaveaccumulatedagreatnumberoffacts，butnearlyeverythingIhaveaccumulatedisimpliedinthistable。ItiscopiedfromthearticlebyMrBowleyintheEconomicJournalforlastDecember。Itistheresultofworkthathasbeengoingonforanumberofyears，andseemstometobepracticallydecisive。It[Page398]THE

　　GENERALTHEORYOFEMPLOYMENTcollectstheaveragewagesinEnglandfromtheyear1844totheyear1891，andthencalculateswhatpurchasingpowerthewageswouldgiveatthedifferenttimes，anditshowsthattheriseofrealwagesafter1873whenpriceswerefallingwasgreaterthanbefore1873whenpriceswererising。HerefollowsatablefromProf。Bowley\'sarticleinthisJournalforDecember1898。Marshall\'sfinalconclusionwascrystallisedinapassageinthePrinciplesBookVI，ch。VIII，&sect；6:\'[Whenpricesrisetheemployer]willthereforebemoreableandmorewillingtopaythehighwages；andwageswilltendupwards。Butexperienceshowsthatwhethertheyaregovernedbyslidingscalesornot

　　theyseldomriseasmuchinproportionasprices；andthereforetheydonotrisenearlyasmuchinproportionasprofits。\'AlthoughMarshall\'sevidencebeforetheIndianCurrencyCommitteewasgivenin1899，Prof。Bowley\'sstatisticsonwhichhewasrelyingdonotrelateeffectivelytoadatelaterthan1891or1893atlatest。Itisclear，Ithink，thatMarshall\'sgeneralisationwasbasedonexperiencefrom1880

　　to1886whichdidinfactbearitout。Ifwedividetheyearsfrom1880

　　to1914intosuccessiveperiodsofrecoveryanddepression，thebroadresult，allowingfortrend，appearstobeasfollows:

　　Realwages1880-1884RecoveryFalling1884-1886DepressionRising1886-1890RecoveryRising1890-1896DepressionFalling1896-1899RecoveryRising1899-1905DepressionFalling1905-1907RecoveryRising1907-1910DepressionFalling1910-1914RecoveryRisingAccordingtothis，Marshall\'sgeneralisationholdsfortheperiodsfrom1880to1884andfrom1884to1886，butfornosubsequentperiods。[220

　　]Itseemsthatwehavebeenlivingalltheseyearsonageneralisationwhichheldgood，byexception，intheyears1880-86，whichwastheformativeperiodinMarshall\'sthoughtinthismatter，buthasneveronceheldgoodinthefiftyyearssincehecrystallisedit！ForMarshall\'sviewmainlyprevailed，andFoxwell\'scontraryopinionwasdiscardedastheheresyofan[Page399]APPENDIX

　　3

　　inflationist。ItistobeobservedthatMarshallofferedhisgeneralisationmerelyasanobservedstatisticalfact，and，beyondexplainingitasprobablyduetowagesbeingstickierthanprices，hedidnotattempttosupportitby&agrave；priorireasoning。Thefactthatithassurvivedasadogmaconfidentlyacceptedbymygenerationmustbeexplained，Ithink，bythemoretheoreticalsupportwhichithassubsequentlyreceived。

　　TomystatementthatMarshall\'sgeneralisationhasremaineduncorrecteduntilrecentlythereis，however，animportantexception。InhisIndustrialFluctuations，publishedin1927，ProfessorPigoupointedoutp。217

　　that\'theupperhalvesoftradecycleshave，onthewhole，beenassociatedwithhigherratesofrealwagesthanthelowerhalves，\'andheprintedinsupportofthisalargescalechartfortheperiodfrom1850to1910。

　　Subsequently，however，heseemstohaverevertedtotheMarshalliantradition，andinhisTheoryofUnemployment，publishedin1933，hewritesp。296:Ingeneral，thetranslationofinertiafromrealwage-ratestomoneywage-ratescausesrealratestomoveinamannernotcompensatory，butcomplementary，tomovementsintherealdemandfunction。Realwage-ratesnotmerelyfailtofallwhentherealdemandforlabourisfalling，butactuallyrise；and，inlikemanner，whentherealdemandforlabourisexpanding，realwage-ratesfall。AboutthattimeM。Rueffhadattractedmuchattentionbythepublicationofstatisticswhichpurportedtoshowthatariseinrealwagestendedtogowithanincreaseinunemployment，Prof。PigoupointsoutthatthesestatisticsarevitiatedbythefactthatM。Rueffdividedmoneywagesbythewholesaleindexinsteadofbythecost-of-livingindex，andhedoesnotagreewithM。Rueffthattheobservedriseinrealwageswasthemaincauseoftheincreasedunemploymentwithwhichitwasassociated。Butheconcludes，neverthelessp。300，onabalanceofconsiderations，that\'therecanbelittledoubtthatinmodernindustrialcommunitiesthislattertendencyi。e。forshiftsinrealdemandtobeassociatedwithshiftsintheoppositesenseintherateofrealwagesforwhichworkpeoplestipulateispredominant\'。

　　LikeMarshall，Prof。Pigoubasedhisconclusionprimarilyonthestickinessofmoneywagesrelativelytoprices。Butmyownreadinesstoaccepttheprevailinggeneralisation，atthetimewhenIwaswritingmyGeneralTheory，wasmuchin-

　　[Page400]THE

　　GENERALTHEORYOFEMPLOYMENT

　　fluencedbyan&agrave；prioriargument，whichhadrecentlywonwideacceptance，tobefoundinMrR。F。Kahn\'sarticleon\'TheRelationofHomeInvestmenttoEmployment，\'publishedintheEconomicJournalforJune1931。[221]Thesupposedempiricalfact，thatintheshortperiodrealwagestendtomoveintheoppositedirectiontothelevelofoutput，appeared，thatistosay，tobeinconformitywiththemorefundamentalgeneralisationsthatindustryissubjecttoincreasingmarginalcostintheshortperiod，thatforaclosed[222]systemasawholemarginalcostintheshortperiodissubstantiallythesamethingasmarginalwagecost，andthatincompetitiveconditionspricesaregovernedbymarginalcost；allthisbeingsubject，ofcourse，tovariousqualificationsinparticularcases，butremainingareliablegeneralisationbyandlarge。

　　Inowrecognisethattheconclusionistoosimple，anddoesnotallowsufficientlyforthecomplexityofthefacts。ButIstillholdtothemainstructureoftheargument，andbelievethatitneedstobeamendedratherthandiscarded。ThatIwasaneasyvictimofthetraditionalconclusionbecauseitfittedmytheoryistheoppositeofthetruth。Formyowntheorythisconclusionwasinconvenient，sinceithadatendencytooffsettheinfluenceofthemainforceswhichIwasdiscussingandmadeitnecessaryformetointroducequalifications，whichIneednothavetroubledwithifIcouldhaveadoptedthecontrarygeneralisationfavouredbyFoxwell，MrDunlopandMrTarshis。Inparticular，thetraditionalconclusionplayedanimportantpart，itwillberemembered，inthediscussions，sometenyearsago，astotheeffectofexpansionistpoliciesonemployment，atatimewhenIhadnotdevelopedmyownargumentinascompleteaformasIdidsubsequently。Iwasalreadyarguingatthattimethatthegoodeffectofanexpansionistinvestmentpolicyonemployment，thefactofwhichnoonedenied，wasduetothestimulantwhichitgavetoeffectivedemand。

　　Prof。Pigou，ontheotherhand，andmanyothereconomistsexplainedtheobservedresultbythereductioninrealwagescovertlyeffectedbytheriseinpriceswhichensuedontheincreaseineffectivedemand。Itwasheldthat[Page401]APPENDIX

　　3

　　publicinvestmentpoliciesandalsoanimprovementinthetradebalancethroughtariffsproducedtheireffectbydeceiving，sotospeak，theworkingclassesintoacceptingalowerrealwage，effectingbythismeansthesamefavourableinfluenceonemploymentwhich，accordingtotheseeconomists，wouldhaveresultedfromamoredirectattackonrealwagese。g。byreducingmoneywageswhilstenforcingacreditpolicycalculatedtoleavepricesunchanged。Ifthefallingtendencyofrealwagesinperiodsofrisingdemandisdenied，thisalternativeexplanationmust，ofcourse，falltotheground。SinceIsharedatthetimetheprevailingbeliefastothefacts，Iwasnotinapositiontomakethisdenial。If，however，itprovesrighttoadoptthecontrarygeneralisation，itwouldbepossibletosimplifyconsiderablythemorecomplicatedversionofmyfundamentalexplanationwhichIhaveexpoundedinmyGeneralTheory。[223]Mypracticalconclusionswouldhave，inthatcase，&agrave；fortioriforce。IfwecanadvancefartherontheroadtowardsfullemploymentthanIhadpreviouslysupposedwithoutseriouslyaffectingrealhourlywagesortherateofprofitsperunitofoutput，thewarningsoftheanti-expansionistsneedcauseuslessanxiety。

　　Nevertheless，weshould，Isubmit，hesitatesomewhatandcarryourinquiriesfurtherbeforewediscardtoomuchofourformerconclusionswhich，subjecttotherightqualifications，have&agrave；priorisupportandhavesurvivedformanyyearsthescrutinyofexperienceandcommonsense。I

　　offer，[224]therefore，forfurtherstatisticalinvestigationananalysisoftheelementsoftheproblemwithaviewtodiscoveringatwhatpointstheweaknessesoftheformerargumentemerge。Therearefiveheadswhichdeserveseparateconsideration。

　　I

　　Firstofall，arethestatisticsonwhichMrDunlopandMrTarshisarerelyingsufficientlyaccurateandsufficientlyuniformintheirindicationstoformthebasisofareliableinduction？

　　Forexample，insorecentacompilationastheLeagueofNationsWorldEconomicSurvey1937-38，preparedbyMrJ。E。Meade，thetraditionalconclusionreceivessupport，noton&agrave；priori[Page402]THE

　　GENERALTHEORYOFEMPLOYMENT

　　grounds，butonthebasisofthemostrecentlyavailablestatistics。

　　Iquotethefollowingfrompp。54-55:Duringthegreatdepressionafter1929，thedemandforgoodsandservicesdiminished，andinconsequencethepriceofcommoditiesfellrapidly。Inmostcountries，ascanbeseenfromthegraphonp。52，hourlymoneywageswerereducedasthedemandforlabourfell；butineverycasetherewasagreaterfallinprices，sothathourlyrealwagesrose……[Itisthenexplainedthatthesamewasnottrueofweeklywages。]……Sincetherecovery，theoppositemovementsmaybeobserved。Inmostcountries，increaseddemandforgoodsandserviceshascausedcommoditypricestorisemorerapidlythanhourlymoneywages，andthehourlyrealwagehasfallen……IntheUnitedStates[225]andFrance，[226]however，theriseinmoneywageswassorapidbetween1936and1937thatthehourlyrealwagecontinuedtorise……Whenrealhourlywagesareraised&frac34；i。e。

　　whenthemarginbetweencommoditypricesandthemoney-wagecostbecomeslessfavourable&frac34；employersarelikelytodiminishtheamountofemploymentwhichtheyoffertolabour。Whiletherewere，nodoubt，otherinfluencesaffectingthedemandforlabour，theimportanceofthisfactoriswellillustratedbythegraphonp。53。

　　Inthecaseofallthecountriesrepresentedforwhichinformationisavailable，thefallincommoditypricesbetween1929and1932causedariseinthehourlyrealwage，andthiswasaccompaniedbyadiminutioninemployment……itisshownthatontherecoverytherehasbeenagreatervarietyofexperience……Thisauthoritativestudyhavinginternationalscopeindicatesthatthenewgeneralisationsmustbeacceptedwithreserve。InanycaseMrTarshis\'sscatterdiagramprintedbelow[intheEconomicJournal，March1939]

　　p。150，whilstitshowsadefinitepreponderanceinthesouth-westandnorth-eastcompartmentsandahighcoefficientofassociation，includesaconsiderablenumberofdivergentcases，andtheabsoluterangeofmostofthescatterisextremelysmall，withamarkedclusteringintheneighbourhoodofthezerolineforchangesinrealwages；andmuchthesameistrueofMrDunlop\'sresults。ThegreatmajorityofMrTarshis\'sobservationsrelatetochangesoflessthan1。5percent。IntheintroductiontohisWagesandIncomeintheUnitedKingdomsince1860，Prof。Bowleyindicatesthatthisisprobablylessthanthemarginoferrorforstatisticsofthiskind。Thisgeneralconclusion[Page403]APPENDIX

　　3

　　isreinforcedbythefactthatitishourlywageswhicharerelevantinthepresentcontext，forwhichaccuratestatisticsarenotavailable。

　　[227]Moreover，inthepost-scriptumtohisnote，MrTarshisexplainsthatwhilstrealwagestendtomoveinthesamedirectionasmoneywages，theymoveintheoppositedirection，thoughonlyslightly，tothelevelofoutputasmeasuredbyman-hoursofemployment；fromwhichitappearsthatMrTarshis\'sfinalresultisinconformitywithmyoriginalassumption，whichis，ofcourse，concernedwithhourlywages。Itseemspossible，therefore，takingaccountofMrMeade\'sresults，thatImaynot，afterall，havebeenseriouslywrong。

　　Furthermore，forreasonsgivenbelow，itisimportanttoseparatetheobservationsaccordingastheabsolutelevelofemploymentisdistinctlygoodoronlymediocre。Itmaybethatwecananalyseourresultssoastogivetwodistinctgeneralisationsaccordingtotheabsolutelevelreachedbyemployment。If，atthepresentstageoftheinquiry，wearetomakeanysinglestatisticalgeneralisation，Ishouldpreferonetotheeffectthat，forfluctuationswithintherangewhichhasbeenusualintheperiodsinvestigatedwhichseldomapproachconditionsoffullemployment，short-periodchangesinrealwagesareusuallysosmallcomparedwiththechangesinotherfactorsthatweshallnotoftengofarwrongifwetreatrealwagesassubstantiallyconstantintheshortperiodaveryhelpfulsimplificationifitisjustified。Theconclusion，thatchangesinrealwagesarenotusuallyanimportantfactorinshort-periodfluctuationsuntilthepointoffullemploymentisapproaching，isonewhichhasbeenalreadyreachedbyDrKaleckionthebasisofhisowninvestigations。[228]

　　II

　　Itmaybethatwehaveunder-estimatedthequantitativeeffectofafactorofwhichwehavealwaysbeenaware。Ourargumentassumedthat，broadlyspeaking，labourisremuneratedintermsofitsowncompositeproduct，oratleastthatthepriceofwage-goodsmovesinthesamewayasthepriceofoutputasawhole。Butnoonehassupposedthatthiswasstrictlythecaseorwasbetterthananapproximation；anditmaybethatthe[Page404]THE

　　GENERALTHEORYOFEMPLOYMENT

　　proportionofwage-goods，whicharenotthecurrentproductofthelabourinquestionandthepricesofwhicharenotgovernedbythemarginalcostofsuchproduct，issogreatastointerferewiththereliabilityofourapproximation。House-rentandgoodsimportedonchangingtermsoftradeareleadingexamplesofthisfactor。Ifintheshortperiodrentsareconstantandthetermsoftradetendtoimprovewhenmoneywagesriseandtodeterioratewhenmoneywagesfall，ourconclusionwillbeupsetinpracticeinspiteoftherestofourpremissesholdinggood。

　　Inthecaseofthiscountryonehasbeeninthehabitofsupposingthatthesetwofactorshaveinfacttendedtooffsetoneanother，thoughtheoppositemightbethecaseintheraw-materialcountries。Forwhereasrents，beinglargelyfixed，riseandfalllessthanmoneywages，thepriceofimportedfood-stuffstendstorisemorethanmoneywagesinperiodsofactivityandtofallmoreinperiodsofdepression。AtanyratebothMrDunlopandMrTarshisclaimtoshowthatfluctuationsinthetermsoftradetermsofforeigntradeinMrDunlop\'sBritishinquiryandtermsoftradebetweenindustryandagricultureinMrTarshis\'sAmericaninquiryarenotsufficienttoaffectthegeneraltendencyoftheirresults，thoughtheyclearlymodifythemquantitativelytoaconsiderableextent。[229

　　]Nevertheless，theeffectofexpenditureonitemssuchasrent，gas，electricity，water，transport，etc。，ofwhichthepricesdonotchangemateriallyintheshortperiod，needstobeseparatelycalculatedbeforewecanbeclear。

　　Ifitshouldemergethatitisthisfactorwhichexplainstheresults，therestofourfundamentalgeneralisationswouldremainundisturbed。Itisimportant，therefore，ifwearetounderstandthesituation，thatthestatisticiansshouldendeavourtocalculatewagesintermsoftheactualproductofthelabourinquestion。

　　III

　　Hastheidentificationofmarginalcostwithmarginalwagecostintroducedarelevanterror？InmyGeneralTheoryofEmployment，chapter6

　　Appendix，IhavearguedthatthisidentificationisdangerousinthatitignoresafactorwhichIhavecalled\'marginalusercost\'。Itisunlikely，however，thatthiscanhelpusinthepresentcontext。Formarginalusercostislikelytoincreasewhenoutputisincreasing，sothatthisfactor[Page405]APPENDIX

　　3

　　wouldworkintheoppositedirectionfromthatrequiredtoexplainourpresentproblem，andwouldbeanadditionalreasonforexpectingpricestorisemorethanwages。Indeed，onewould，ongeneralgrounds，expectmarginaltotalcosttoincreasemore，andnotless，thanmarginalwagecost。

　　IV

　　Isittheassumptionofincreasingmarginalrealcostintheshortperiodwhichweoughttosuspect？MrTarshisfindspartoftheexplanationhere；

　　andDrKaleckiisinclinedtoinferapproximatelyconstantmarginalrealcost。[230]Butthereisanimportantdistinctionwhichwehavetomake。

　　Weshouldallagreethatifwestartfromalevelofoutputverygreatlybelowcapacity，sothateventhemostefficientplantandlabourareonlypartiallyemployed，marginalrealcostmaybeexpectedtodeclinewithincreasingoutput，or，attheworst，remainconstant。Butapointmustsurelycome，longbeforeplantandlabourarefullyemployed，whenlessefficientplantandlabourhavetobebroughtintocommissionortheefficientorganisationemployedbeyondtheoptimumdegreeofintensiveness。Evenifoneconcedesthatthecourseoftheshort-periodmarginalcostcurveisdownwardsinitsearlyreaches，MrKahn\'sassumptionthatiteventuallyturnsupwardsis，ongeneralcommon-sensegrounds，surelybeyondreasonablequestion；andthatthishappens，moreover，onapartofthecurvewhichishighlyrelevantforpracticalpurposes。Certainlyitwouldrequiremoreconvincingevidencethanyetexiststopersuademetogiveupthispresumption。

　　Nevertheless，itisofgreatpracticalimportancethatthestatisticiansshouldendeavourtodetermineatwhatlevelofemploymentandoutputtheshort-periodmarginal-costcurveforthecompositeproductasawholebeginstoturnupwardandhowsharplyitrisesaftertheturning-pointhasbeenreached。Thisknowledgeisessentialfortheinterpretationofthetradecycle。ItisforthisreasonthatIsuggestedabovethattheobservationsoftherelativemovementofrealandmoneywagesshouldbeseparatelyclassifiedaccordingtotheaveragelevelofemploymentwhichhadbeenreached。

　　Itmayprove，indeed，atanyrateinthecaseofstatisticsrelatingtorecentyearsthatthelevelofemploymenthasbeen[Page406]THE

　　GENERALTHEORYOFEMPLOYMENT

　　preponderantlysolowthatwehavebeenlivingmoreoftenthannotonthereachesofthecurvebeforethecriticalpointofupturnhasbeenattained。

　　ItshouldbenoticedthatMrTarshis\'sAmericanfiguresrelateonlytotheperiodfrom1932to1938，duringthewholeofwhichperiodtherehasbeensuchintenseunemploymentintheUnitedStates，bothoflabourandofplant，thatitwouldbequiteplausibletosupposethatthecriticalpointofthemarginalcostcurvehadneverbeenreached。Ifthishasbeenthecase，itisimportantthatweshouldknowit。Butsuchanexperiencemustnotmisleadusintosupposingthatthismustnecessarilybethecase，orintoforgettingthesharplydifferenttheorywhichbecomesapplicableaftertheturning-pointhasbeenreached。

　　If，indeed，theshapeofthemarginal-costcurveprovestobesuchthatwetendtobeliving，withconditionsastheyareatpresent，moreoftentotheleftthantotherightofitscriticalpoint，thepracticalcaseforaplannedexpansionistpolicyisconsiderablyreinforced；formanycaveatstowhichwemustattendafterthispointhasbeenreachedcanbe，inthatcase，frequentlyneglected。Intakingitasmygeneralassumptionthatweareoftenontherightofthecriticalpoint，IhavebeentakingthecaseinwhichthepracticalpolicywhichIhaveadvocatedneedsthemostcarefulhandling。Inparticularthewarningsgiven，quiterightly，byMrD。H。Robertsonofthedangerswhichmayarisewhenweencourageorallowtheactivityofthesystemtoadvancetoorapidlyalongtheupwardslopesofthemarginal-costcurvetowardsthegoaloffullemployment，canbemoreoftenneglected，forthetimebeingatleast，whentheassumptionwhichIhavepreviouslyadmittedasnormalandreasonableisabandoned。

　　V

　　Thereremainsthequestionwhetherthemistakeliesintheapproximateidentificationofmarginalcostwithprice，orratherintheassumptionthatforoutputasawholetheybearamoreorlessproportionaterelationshiptooneanotherirrespectiveoftheintensityofoutput。Foritmaybethecasethatthepracticalworkingsofthelawsofimperfectcompetitioninthemodernquasi-competitivesystemaresuchthat，whenoutputincreasesandmoneywagesrise，pricesriselessthaninproportiontotheincreaseinmarginalmoneycost。Itisscarcelylikely，perhaps，thatthe[Page407]APPENDIX

　　3

　　narrowinggapcouldbesufficienttopreventadeclineinrealwagesinaphaseinwhichmarginalrealcostwasincreasingrapidly。Butitmightbesufficienttooffsettheeffectonrealwagesofamodestriseinmarginalrealcost，andeventodominatethesituationintheeventofthemarginalrealcostcurveprovingtobealmosthorizontaloverasubstantialportionofitsrelevantlength。

　　Itisevidentlypossiblethatsomesuchfactorshouldexist。Itmightbe，inasense，merelyanextensionofthestickinessofpricesofwhichwehavealreadytakenaccountinIIabove。Apartfromthosepriceswhicharevirtuallyconstantintheshortperiod，thereareobviouslymanyotherswhichare，forvariousreasons，moreorlesssticky。Butthisfactorwouldbeparticularlylikelytoemergewhenoutputincreases，insofarasproducersareinfluencedintheirpracticalpricepoliciesandintheirexploitationoftheopportunitiesgiventhembytheimperfectionsofcompetition，bytheirlong-periodaveragecost，andarelessattentivethaneconomiststotheirshort-periodmarginalcost。Indeed，itisrareforanyonebutaneconomisttosupposethatpriceispredominantlygovernedbymarginalcost。Mostbusinessmenaresurprisedbythesuggestionthatitisaclosecalculationofshort-periodmarginalcostorofmarginalrevenuewhichshoulddominatetheirpricepolicies。Theymaintainthatsuchapolicywouldrapidlylandinbankruptcyanyonewhopractisedit。Andifitistruethattheyareproducingmoreoftenthannotonascaleatwhichmarginalcostisfallingwithanincreaseinoutput，theywouldclearlyberight；

　　foritwouldbeonlyonrareoccasionsthattheywouldbecollectinganythingwhatevertowardstheiroverhead。Itis，beyonddoubt，thepracticalassumptionoftheproducerthathispricepolicyoughttobeinfluencedbythefactthatheisnormallyoperatingsubjecttodecreasingaveragecost，evenifintheshort-periodhismarginalcostisrising。Hiseffortistomaintainpriceswhenoutputfallsand，whenoutputincreases，hemayraisethembylessthanthefullamountrequiredtooffsethighercostsincludinghigherwages。Hewouldadmitthatthis，regardedbyhimasthereasonable，prudentandfar-sightedpolicy，goesbytheboardwhen，attheheightoftheboom，heisoverwhelmedbymoreordersthanhecansupply；butevensoheisfilledwithforebodingastotheultimateconsequencesofhisbeingforcedsofarfromtherightandreasonablepolicyoffixinghispricesbyreferencetohislong-periodoverheadaswellashiscurrentcosts。Rightlyorderedcompetitionconsists，inhis[Page408]THE

　　GENERALTHEORYOFEMPLOYMENT

　　opinion，inaproperpressuretosecureanadjustmentofpricestochangesinlong-periodaveragecost；andthesuggestionthatheisbecomingadangerousandanti-socialmonopolistwhenever，byopenortacitagreementwithhiscompetitors，heendeavourstopreventpricesfromhollowingshort-periodmarginalcost，howevermuchthismayfallawayfromlong-periodaveragecost，strikeshimasdisastrous。ItisthefailureofthelatestphaseoftheNewDealintheUnitedStates，incontrasttotheearliestphase，ofwhichtheoppositeistrue，todistinguishbetweenpriceagreementsformaintainingpricesinrightrelationtoaveragelong-periodcostandthosewhichaimatobtainingamonopolisticprofitinexcessofaveragelong-periodcostwhichstrikeshimasparticularlyunfair。

　　Thus，sinceitistheavowedpolicyofindustrialiststobecontentwithasmallergrossprofitperunitofoutputwhenoutputincreasesthanwhenitdeclines，itisnotunlikelythatthispolicymaybe，atleastpartially，operative。Itwouldbeofgreatinterestifthestatisticianscouldshowindetailinwhatwaygrossprofitperunitofoutputchangesindifferentindustrieswithachangingratiobetweenactualandcapacityoutput。Suchaninvestigationshoulddistinguish，ifpossible，betweentheeffectofincreasingoutputonunit-profitandthatofhighercostsintheshapeofhighermoneywagesandotherexpenses。IfitshouldappearthatIncreasingoutputassuchhasatendencytodecreaseunit-profit，itwouldfollowthatthepolicysuggestedaboveisactualaswellasprofessed。

　　If，however，thedeclineinunit-profitappearstobemainlytheresultofatendencyofpricestooffsethighercostsincompletely，irrespectiveofchangesinthelevelofoutput，thenwehavemerelyanexampleofthestickinessofpricesarisingoutoftheimperfectionofcompetitionintrinsictothemarketconditions。Unfortunatelyitisoftendifficultorimpossibletodistinguishclearlybetweentheeffectsofthetwoinfluences，sincehighermoneycostsandincreasingoutputwillgenerallygotogether。

　　Awell-knownstatisticalphenomenonwhichoughttohaveputmeonmyguardconfirmstheprobabilityofconstantordiminishing，ratherthanincreasing，profitperunitofoutputwhenoutputincreases。Imeanthestabilityoftheproportionofthenationaldividendaccruingtolabour，irrespectiveapparentlyofthelevelofoutputasawholeandofthephaseofthetradecycle。Thisisoneofthemostsurprising，yetbest-established，[Page409]APPENDIX

　　3

　　factsinthewholerangeofeconomicstatistics，bothforGreatBritainandfortheUnitedStates。Thefollowingfiguressummarisebrieflywhatare，Ibelieve，theundisputedfacts:[231]

　　RELATIVESHAREOFMANUALLABOURINTHENATIONALINCOMEOFGREATBRITAIN

　　[232]

　　191140。7192443。0192843。0193243。0

　　192540。8192942。4193342。7

　　192642。0193041。1193442。0

　　192743。0193143。7193541。8RELATIVESHAREOFMANUALLABOURINTHENATIONALINCOMEOFU。S。A。[233

　　]

　　191934。9192339。3192737。0193134。9

　　192037。4192437。6192835。8193236。0

　　192135。0192537。1192936。1193337。2

　　192237。0192636。7193035。0193435。8Thefluctuationsinthesefiguresfromyeartoyearappeartobeofarandomcharacter，andcertainlygivenosignificantindicationsofanytendencytomoveagainstlabourinyearsofincreasingoutput。Itisthestabilityoftheratioforeachcountrywhichischieflyremarkable，andthisappearstobealong-run，andnotmerelyashort-period，phenomenon。[234]Moreover，itwouldbeinterestingtodiscoverwhetherthedifferencebetweentheBritishandtheAmericanratioisduetoadiscrepancyinthebasisofreckoningadoptedinthetwosetsofstatisticsortoasignificantdifferenceinthedegreesofmonopolyprevalentinthetwocountriesortotechnicalconditions。

　　Inanycase，thesefactsdonotsupporttherecentlyprevailingassumptionsastotherelativemovementsofrealwagesandoutput，andareinconsistentwiththeideaoftherebeinganymarkedtendencytoincreasingunit-profitwithincreasingoutput。Indeed，eveninthelightoftheaboveconsiderations，theresultremainsabitofamiracle。Forevenifpricepoliciesaresuchas[Page410]THE

　　GENERALTHEORYOFEMPLOYMENT

　　tocauseunit-profittodecreaseinthesamecircumstancesasthoseinwhichmarginalrealcostisincreasing，whyshouldthetwoquantitiesbesorelatedthat，regardlessofotherconditions，themovementoftheonealmostexactlyoffsetsthemovementoftheother？Irecentlyofferedtheproblemofexplainingthis，asEdgeworthwouldhavecalledit，totheresearchstudentsatCambridge。TheonlysolutionwasofferedbyDrKaleckiinthebrilliantarticlewhichhasbeenpublishedinEconometrica。

　　[235]DrKaleckihereemploysahighlyoriginaltechniqueofanalysisintothedistributionalproblembetweenthefactorsofproductioninconditionsofimperfectcompetition，whichmayprovetobeanimportantpieceofpioneerwork。ButthemainupshotiswhatIhaveindicatedabove，andDrKaleckimakes，tothebestofmyunderstanding，nodefiniteprogresstowardsexplainingwhy，whenthereisachangeintheratioofactualtocapacityoutput，thecorrespondingchangesinthedegreeoftheimperfectionofcompetitionshouldsoexactlyoffsetotherchanges。Nordoesheexplainwhythedistributionoftheproductbetweencapitalandlabourshouldbestableinthelongrun，beyondsuggestionthatchangesofonekindalwaysjustservetooffsetchangesofanother；yetitisverysurprisingthatonbalancethereshouldhavebeenaconstantdegreeofmonopolyoverthelasttwentyyearsorlonger。Hisownexplanationisbasedontheassumptionsthatmarginalrealcostsareconstant，thatthedegreeoftheimperfectionofthemarketchangesintheoppositedirectiontooutput，butthatthischangeispreciselyoffsetbythefactthatthepricesofbasicrawmaterialspurchasedbythesystemfromoutsiderelativelytomoneywagesincreaseanddecreasewithoutput。Yetthereisnoobviousreasonwhythesechangesshouldsonearlyoffsetoneanother；anditwouldseemsafernottoassumethatmarginalrealcostsareconstant，buttoconcludethatinactualfact，whenoutputchanges，thechangeinthedegreeoftheimperfectionofthemarketissuchastooffsetthecombinedeffectofchangesinmarginalcostsandofchangesinthepricesofmaterialsboughtfromoutsidethesystemrelativelytomoneywages。ItmaybenoticedthatDrKalecki\'sargumentassumestheexistenceofanoppositechangeinthedegreeoftheimperfectionofcompetitionorinthedegreeinwhichproducerstakeadvantageofitwhenoutputincreasesfromthatexpectedbyMrR。F。

　　[Page411]APPENDIX