WEBVTT NOTE 10. "The Propensity To Consume": II 1 00:00:00.000 --> 00:00:14.000 Chapter 10. The Propensity to Consume, Part 2. Reasons for Not Spending 2 00:00:14.000 --> 00:00:32.000 After a first chapter of eighteen pages on the propensity to consume part one, the objective factors, Keynes has a chapter of only five pages on the propensity to consume part two, the subjective factors. 3 00:00:32.000 --> 00:00:51.000 He begins by declaring that There are, in general, eight main motives or objects of a subjective character which lead individuals to refrain from spending out of their incomes, page 107. It is worth quoting these practically in full. 4 00:00:51.000 --> 00:00:57.000 1. To build up a reserve against unforeseen contingencies. 5 00:00:57.000 --> 00:01:06.000 2. To provide for an anticipated future relation between the income and the needs of the individual or his family, 6 00:01:06.000 --> 00:01:17.000 different from that which exists in the present, as, for example, in relation to old age, family education, or the maintenance of dependents. 7 00:01:17.000 --> 00:01:29.000 3. To enjoy interest and appreciation, i.e., because a larger real consumption at a later date is preferred to a smaller immediate consumption. 8 00:01:29.000 --> 00:01:46.000 4. To enjoy a gradually increasing expenditure, since it gratifies a common instinct to look forward to a gradually improving standard of life rather than the contrary, even though the capacity for enjoyment may be diminishing. 9 00:01:46.000 --> 00:01:52.300 5. To enjoy a sense of independence and the power to do things, though without a clear 10 00:01:52.300 --> 00:02:00.040 idea or definite intention of specific action. 6. To secure a masse de manoeuvre to carry 11 00:02:00.040 --> 00:02:06.000 out speculative or business projects. 7. To bequeath a fortune. 12 00:02:06.000 --> 00:02:14.500 8. To satisfy pure miserliness, i.e., unreasonable but insistent inhibitions against acts of 13 00:02:14.500 --> 00:02:20.700 of Expenditure as such, pages 107 through 108. 14 00:02:20.700 --> 00:02:25.500 Even if there were nothing seriously invalid about this particular classification of the 15 00:02:25.500 --> 00:02:31.320 motives to personal saving, there is certainly nothing uniquely illuminating or inevitable 16 00:02:31.320 --> 00:02:32.740 about it. 17 00:02:32.740 --> 00:02:38.880 One can list eight motives or objects of saving, or if one wishes to be as specific as Keynes 18 00:02:38.880 --> 00:02:43.500 is in some instances, one can list 28. 19 00:02:43.500 --> 00:02:48.640 It is striking that the most important reason in relation to the light it throws on business 20 00:02:48.640 --> 00:02:54.880 cycles, why individuals sometimes refrain from spending, is not specifically contained 21 00:02:54.880 --> 00:02:57.460 in Keynes list. 22 00:02:57.460 --> 00:03:03.500 This is simply the expectation that prices are going to fall, or to fall further, and 23 00:03:03.500 --> 00:03:09.120 that if the buyer waits long enough, he can get what he wants cheaper. 24 00:03:09.120 --> 00:03:15.040 It could be argued that this might find a place under Keynes's sixth reason, but for 25 00:03:15.040 --> 00:03:21.040 that matter, it could be argued that all of the more specific motives for personal saving 26 00:03:21.040 --> 00:03:27.580 could be summed up under a single broad motive, to build up a reserve against future requirements 27 00:03:27.580 --> 00:03:33.720 or contingencies, whether these are definite, probable or merely possible. 28 00:03:33.720 --> 00:03:39.000 The motive, in other words, is to provide both for the certainties and the uncertainties 29 00:03:39.000 --> 00:03:45.760 of the future, from buying tomorrow's dinner or paying next month's rent, to taking advantage 30 00:03:45.760 --> 00:03:52.120 of a speculative opportunity or leaving one's family comfortably off in the event of one's 31 00:03:52.120 --> 00:03:53.120 death. 32 00:03:53.120 --> 00:03:59.140 Such things as pure miserliness, emphasized by Keynes, can safely be left out of account 33 00:03:59.140 --> 00:04:06.020 for Practical Analysis, first because relatively few people are addicted to it in a modern 34 00:04:06.020 --> 00:04:12.540 industrial society, and secondly because the relative amount of it probably remains unchanged 35 00:04:12.540 --> 00:04:17.820 from year to year, if not from generation to generation. 36 00:04:17.820 --> 00:04:23.340 If we are talking of all the motives to saving, there is a serious omission from Keynes's 37 00:04:23.340 --> 00:04:31.180 People save to make roundabout methods of production possible, so that their productive 38 00:04:31.180 --> 00:04:37.780 capacity may be increased, and their future incomes, whether thought of in terms of money 39 00:04:37.780 --> 00:04:43.060 or of the flow of goods and services, may be correspondingly enlarged. 40 00:04:43.060 --> 00:04:49.740 True, they do this usually in their capacity as entrepreneurs or corporate managers, in 41 00:04:49.740 --> 00:04:55.780 and their role as producers rather than consumers, and Keynes listed merely the motives which 42 00:04:55.780 --> 00:05:02.380 lead individuals, presumably thought of as consumers only, to refrain from spending out 43 00:05:02.380 --> 00:05:04.440 of their incomes. 44 00:05:04.440 --> 00:05:09.700 But by omitting this productive motive, he omits the very consequence that makes saving 45 00:05:09.700 --> 00:05:16.900 so essential for total economic growth, and so beneficent for society as a whole. 46 00:05:16.900 --> 00:05:23.260 If we wished to reduce our classification of the main motives to saving to just two, 47 00:05:23.260 --> 00:05:29.220 we should have to say that they were, one, to provide for future needs or contingencies 48 00:05:29.220 --> 00:05:36.500 out of part of present income, plain saving, and two, to make roundabout methods of production 49 00:05:36.500 --> 00:05:42.340 possible, capitalistic saving, so as to increase future income. 50 00:05:42.340 --> 00:05:48.580 It is Keynes's almost total blindness to this second motive and result that accounts for 51 00:05:48.580 --> 00:05:52.600 his strange lifelong bias against thrift. 52 00:05:52.600 --> 00:05:58.660 For Keynes had a definite bias against thrift, of at least 20 years standing. 53 00:05:58.660 --> 00:06:05.760 See my quotation on pages 85 through 86 from Economic Consequences of the Peace. 54 00:06:05.760 --> 00:06:11.400 This is revealed again in spite of Keynes's effort to seem impartial in the paragraph 55 00:06:11.400 --> 00:06:17.160 immediately following the eight motives to saving quoted above. 56 00:06:17.160 --> 00:06:24.600 These eight motives might be called the motives of precaution, foresight, calculation, improvement, 57 00:06:24.600 --> 00:06:31.560 independence, enterprise, pride and avarice, and we could also draw up a corresponding 58 00:06:31.560 --> 00:06:40.120 list of motives to consumption such as enjoyment, short-sightedness, generosity, miscalculation, 59 00:06:40.120 --> 00:06:48.340 Ostentation and Extravagance, page 108 It may seem carping to notice it, but whereas 60 00:06:48.340 --> 00:06:54.740 Keynes lists eight motives, including pride and aberrous for saving, he lists only six 61 00:06:54.740 --> 00:06:57.060 motives for spending. 62 00:06:57.060 --> 00:07:03.940 He might easily have rounded out the latter list by adding recklessness and improvidence. 63 00:07:03.940 --> 00:07:09.660 It is true that these might overlap on some of the motives he does list, but the overlapping 64 00:07:09.660 --> 00:07:16.420 Banking could hardly be greater than that of precaution, foresight and calculation. 65 00:07:16.420 --> 00:07:21.260 Keynes does supplement his list of motives for individual saving with a list of four 66 00:07:21.260 --> 00:07:27.380 motives for institutional saving by governments and business corporations. 67 00:07:27.380 --> 00:07:33.580 These four motives are listed under the heads of enterprise, liquidity, improvement and 68 00:07:33.580 --> 00:07:36.100 financial prudence. 69 00:07:36.100 --> 00:07:41.820 But Keynes treats these motives curtly and disparagingly, and hints that the last is 70 00:07:41.820 --> 00:07:45.900 almost certain to be excessive. 71 00:07:45.900 --> 00:07:51.180 The Fear of Thrift In the second section of his chapter on the 72 00:07:51.180 --> 00:07:57.860 subjective factors and the propensity to consume, Keynes explains more in detail the reasons 73 00:07:57.860 --> 00:08:01.380 for his hatred and fear of thrift. 74 00:08:01.380 --> 00:08:07.300 But let us begin with his conclusion rather than with his reasons. 75 00:08:07.300 --> 00:08:13.600 The more virtuous we are, the more determinedly thrifty, the more obstinately orthodox in our 76 00:08:13.600 --> 00:08:19.580 national and personal finance, the more our incomes will have to fall when interest rises 77 00:08:19.580 --> 00:08:24.040 relatively to the marginal efficiency of capital. 78 00:08:24.040 --> 00:08:32.620 Policy can bring only a penalty and no reward, for the result is inevitable, page 111. 79 00:08:32.620 --> 00:08:38.740 As Keynes here anticipates some of his later arguments, we can also defer a closer analysis 80 00:08:38.740 --> 00:08:41.020 of them until later. 81 00:08:41.020 --> 00:08:46.300 But as the argument that he puts forward concerning interest rates is of central importance to 82 00:08:46.300 --> 00:08:53.380 his theory and to his recommendations concerning economic policy, some brief comment seems 83 00:08:53.380 --> 00:09:01.740 The influence of changes in the rate of interest on the amount actually saved is of paramount 84 00:09:01.740 --> 00:09:07.940 importance, but is in the opposite direction to that usually supposed. 85 00:09:07.940 --> 00:09:13.140 For even if the attraction of the larger future income to be earned from a higher rate of 86 00:09:13.140 --> 00:09:19.580 interest has the effect of diminishing the propensity to consume, nevertheless we can 87 00:09:19.580 --> 00:09:24.300 can be certain that a rise in the rate of interest will have the effect of reducing 88 00:09:24.300 --> 00:09:27.560 the amount actually saved. 89 00:09:27.560 --> 00:09:31.340 For aggregate saving is governed by aggregate investment. 90 00:09:31.340 --> 00:09:36.460 A rise in the rate of interest, unless it is offset by a corresponding change in the 91 00:09:36.460 --> 00:09:40.860 demand schedule for investment, will diminish investment. 92 00:09:40.860 --> 00:09:47.340 Hence, a rise in the rate of interest must have the effect of reducing incomes to a level 93 00:09:47.340 --> 00:09:54.980 All at which saving is decreased in the same measure as investment, page 110. 94 00:09:54.980 --> 00:10:03.060 And Keynes goes on to conclude further that therefore, saving and spending will both decrease, 95 00:10:03.060 --> 00:10:05.620 page 111. 96 00:10:05.620 --> 00:10:12.940 It is amazing how many fallacies and inversions Keynes can pack into a small space, and especially 97 00:10:12.940 --> 00:10:26.600 A rise in the rate of interest, Keynes here argues, will not normally encourage an increase 98 00:10:26.600 --> 00:10:33.800 in the amount of savings, but a decrease. Why? Because while a higher rate of interest 99 00:10:33.800 --> 00:10:40.700 might encourage more saving, it would discourage borrowing. True, but the same sort of thing 100 00:10:40.700 --> 00:10:45.820 Everything could be said not only about the price of loanable funds, but about the price 101 00:10:45.820 --> 00:10:48.260 of anything else. 102 00:10:48.260 --> 00:10:54.780 A higher price for any commodity will reduce the amount demanded unless the demand schedule 103 00:10:54.780 --> 00:11:02.060 is also higher, but it may be precisely because the demand for that commodity has increased 104 00:11:02.060 --> 00:11:05.300 that the price has been bid up in the first place. 105 00:11:05.300 --> 00:11:10.980 Therefore, the higher price will not cause a reduction in the amount demanded for the 106 00:11:10.980 --> 00:11:18.140 simple reason that it is the increase in demand that has forced up the price. 107 00:11:18.140 --> 00:11:22.920 The same reasoning applies to the interest rate, which is another name for the price 108 00:11:22.920 --> 00:11:25.020 of loanable funds. 109 00:11:25.020 --> 00:11:31.620 An arbitrary, uncaused rise in the rate of interest would, other things remaining equal, 110 00:11:31.620 --> 00:11:38.340 lead to a reduction of borrowing, a reduction in the amount of loanable funds demanded. 111 00:11:38.340 --> 00:11:45.460 But a rise or fall of every sensitive competitive price is caused by something. 112 00:11:45.460 --> 00:11:51.420 If the rise in interest rates had been itself caused by a rise in the demand schedule for 113 00:11:51.420 --> 00:11:59.100 investment as Keynes parenthetically and left-handedly admits to be possible, then the rise in interest 114 00:11:59.100 --> 00:12:10.100 is merely an adjustment to the rise in the demand schedule for investment and will not necessarily cause less loanable funds to be demanded than before. 115 00:12:10.100 --> 00:12:18.100 Indeed, if the rise in interest rates is not sufficient to offset the rise in the demand schedule for investment, 116 00:12:18.100 --> 00:12:24.100 more capital will be demanded at the higher interest rate than at the previous lower one. 117 00:12:24.100 --> 00:12:38.100 And as a rise in interest rates may encourage saving and lending, this rise in interest rates may be precisely what is needed to bring forth more loanable funds to meet the increased demand. 118 00:12:38.100 --> 00:13:01.100 What Keynes illustrates in the paragraph quoted above is his persistent fallacy upon which the whole structure of his general theory rests, of considering the effects of interest rates only on borrowers and not on lenders, the effect of wage rates only on workers' incomes and never on entrepreneurs' costs. 119 00:13:01.100 --> 00:13:29.100 It is this willful blindness to the two-sidedness of every transaction, this concentration on the incentives to borrowing and obliviousness of those to lending, on the incentives of the buyer and not of the seller, of the consumer and not of the producer, this terrific to-do about the propensity to consume while the propensity to work is taken for granted or forgotten. 120 00:13:29.100 --> 00:13:35.100 It is this one-eyed vision that constitutes the Keynesian Revolution. 121 00:13:35.100 --> 00:13:43.100 The natural consequences of the Keynesian economic philosophy were vividly portrayed by Patrick Barrington, 122 00:13:43.100 --> 00:13:52.100 two years before the particular rationalization that appeared in The General Theory, in his poem in Punch. 123 00:13:52.100 --> 00:13:56.100 I want to be a consumer. 124 00:13:56.100 --> 00:14:05.100 And what do you mean to be, the kind old bishop said, as he took the boy on his ample knee and patted his curly head? 125 00:14:05.100 --> 00:14:10.100 We should all of us choose a calling to help society's plan. 126 00:14:10.100 --> 00:14:14.100 Then what do you mean to be, my boy, when you grow to be a man? 127 00:14:14.100 --> 00:14:23.100 I want to be a consumer, the bright-haired lad replied, as he gazed up into the bishop's face in innocence open-eyed. 128 00:14:23.100 --> 00:14:24.100 Open-eyed. 129 00:14:24.100 --> 00:14:29.220 I've never had aims of a self as short, for that, as I know, is wrong. 130 00:14:29.220 --> 00:14:33.740 I want to be a consumer, sir, and help the world along. 131 00:14:33.740 --> 00:14:38.140 I want to be a consumer and work both night and day. 132 00:14:38.140 --> 00:14:42.540 For that is the thing that's needed most, I've heard economists say. 133 00:14:42.540 --> 00:14:47.220 I won't just be a producer, like Bobby and James and John. 134 00:14:47.220 --> 00:14:52.060 I want to be a consumer, sir, and help the nation on. 135 00:14:52.060 --> 00:14:56.300 But what do you want to be, the bishop said again? 136 00:14:56.300 --> 00:15:01.420 For we all of us have to work, said he, as must, I think, be playing. 137 00:15:01.420 --> 00:15:06.100 Are you thinking of studying medicine, or taking a bar exam? 138 00:15:06.100 --> 00:15:10.540 Why no, the bright-haired lad replied, as he helped himself to jam. 139 00:15:10.540 --> 00:15:14.940 I want to be a consumer, and live in a useful way. 140 00:15:14.940 --> 00:15:19.660 For that is the thing that's needed most, I've heard economists say. 141 00:15:19.660 --> 00:15:23.720 There are too many people working, and too many things are made. 142 00:15:23.720 --> 00:15:28.760 I want to be a consumer, sir, and help to further trade. 143 00:15:28.760 --> 00:15:33.060 I want to be a consumer, and do my duty well. 144 00:15:33.060 --> 00:15:37.540 For that is the thing that's needed most, I've heard economists tell. 145 00:15:37.540 --> 00:15:42.340 I've made up my mind, the lad was heard, as he lit a cigar to say. 146 00:15:42.340 --> 00:15:46.220 I want to be a consumer, sir, and I want to begin today.