출처: J. M. Keynes, A Treatise on Money (October 31, 1930)
자료: http://catalog.hathitrust.org/Record/007150328 ; 차례
※ 발췌 / excerpts of which: Book Ⅲ, The Fundamental Equations of Money,
* * *
Chapter 11. The Conditions of Equilibrium
(1) The Condition of Zero-Profits (p. 151)
We have seen in the previous chapter that, since the Profits (Q) are the difference between the value of current output and E, its cost of production, we have
Q＝I－S;
so that entrepreneurs make a profit or a loss according as the money-value of current Investment exceeds or falls short of current Savings.
Thus we have Profits＝Value of Output－Cost of Production＝Value of Investment－Savings; Profits being the balancing figure not only between Cost of Production and Value of Output, but also between Savings and the Value of Net Investment, both in terms of money.
These Profits (whether positive or negative) are made up of two elements, which we have called (p. 137) Q1 and Q2, namely, Q1(＝I'－S), which is the profit on the output of consumption-goods, and Q2(＝I－I'), which is the profit on the output of investment-goods.
Now equilibrium requires that Q1, Q2, and Q should all be zero. For if either Q1 or Q2 is not zero one class of entrepreneurs will have an incentive to expand their output; and if the total profits Q are not zero, the entrepreneurs will tend, so far as they can, to alter the total volume of employment which they offer to the Factors of Production at a given rate of remunerationㅡupwards or downwards, according as such profits are positive or negative. Thus W1 and therefore P will be in a condition of disequilibrium, which will continue so long as profits (whether Q1 or Q2) have not returned to zero.
Thus the conditions for the equilibrium of the purchasing power of money require that the Banking System should so regulate its rate of lending that the value of Investment is equal to Savings; for otherwise entrepreneurs will, under the influence of positive or negative profits, be both willing in themselves and at the same time influenced by the abundance or scarcity of the bank-credit at their disposal, to increase or diminish (as the case may be) the average rate of remuneration W1 [? W], which they offer to the factors of production. But the conditions for equilibrium also require that the ^cost^ of new Investment should be equal to savings; for otherwise producers of consumption-goods will be endeavouring, under the influence of profits or losses, to alter their scale of output.
In equilibrium, therefore, both the value and the cost of current investment must be equal to the amount of savings, and profits must be zero; and in such circumstances the Purchasing Power of Money and the price-level of output as a whole will both correspond to the money-rate of efficiency earnings of the Factors of Production (i.e. P＝Π＝W1).
The reader will appreciate that the condition of zero-profits means that ^aggregate^ profits are zero. For a stability of the price-level as a whole is perfectly compatible with the profits of particular entrepreneurs or particular classes of entrepreneurs being positive or negative, just as it is compatible with the prices of particular commodities rising or falling.
Thus, the long-period or equilibrium norm of the Purchasing Power of Money is given by the money-rate of efficiency earnings of the Factors of Production; whilst [ the actual Purchasing Power oscillates below or above this equilibrium level according as the cost of current investment is running ahead of, or falling behind, savings.
A principal object of this Treatise is to show that we have here the clue to the way in which the fluctuations of the price-level actually come to pass ]*, whether they are due to oscillations about a steady equilibrium level or to a transition from one equilibrium to another.
By the scale and the terms on which it is prepared to grant loans, the banking system is in a position, under a regime of Representative Money, to determineㅡbroadly speakingㅡthe rate of investment by the business world. At the same time the aggregate result of the decisions of the members of the community, as to how much of their money-incomes they shall expend on consumption and how much they shall save, is determining the rate of saving. According, therefore, as the banking system is allowing the rate of investment to exceed or fall behind the rate of saving, the price-level (assuming that there is no spontaneous change in the rate of efficiency-earnings) will rise or fall. If, however, the prevailing type of contract between entrepreneurs and the factors of production is in terms of effort-earnings W and not in terms of efficiency-earnings W1 (existing arrangements probably lie as a rule somewhat between the two), then it would be 1/e.P, which would tend to rise or fall, where, as before, e is the coefficient of efficiency.
But the disparity between investment and saving sets up a disequilibrium in the rate of profit. The next stage of the argument (to be developed in Book IV) proceeds, therefore, to show how this profit-disequilibrium reactsㅡunless the banking system take steps to counteract itㅡon the ^first^ term of the Fundamental Equation, eventually causing the money-rate of efficiency-earnings (or effort-earnings) to rise or fall, as the case may be, to a point which allow the banking system to establish a new position of equilibrium compatible with the criteria by which this system is governed.
(2) The Rate of Interest, or Bank-Rate (p. 154)
It is now evident in what manner changes in the Bank-rate, orㅡmore strictlyㅡchanges in the rate of interest, are capable of influencing the purchasing power of money.
The attractiveness of investment depends on the prospective income which the entrepreneur anticipates from current investment relatively to the rate of interest which he has to pay in order to be able to finance its production;ㅡor, putting it the other way round, the value of capital-goods depends on the rate of interest at which the prospective income from them is capitalised. That is to say, the higher (e.g.) the rate of interest, the lower, other things being equal, will be the value of capital-goods. Therefore, if the rate of interest rises, P' will tend to fall, which will lower the rate of profit on the production of capital-goods, which will be deterrent to new investment. Thus a high rate of interest will tend to diminish both P' and C, which stands respectively for the price-level and the volume of output of capital-goods. The rate of saving, on the other hand, is stimulated by a high rate of interest and discouraged by a low rate. It follows that an increase in the rate of interest tendsㅡother things being equalㅡto make the rate of investment (whether measured by its value or by its cost) to decline relatively to the rate of saving, i.e. to move the second term of both Fundamental Equations in the negative direction, so that the price-levels tend to fall.
Following Wicksell, it will be convenient to call the rate of interest which would cause the second term of our second Fundamental Equation to be zero the ^natural-rate^ of interest, and the rate which actually prevails the ^market-rate^ of interest. Thus the natural-rate of interest is the rate at which saving and the value of investment are exactly balanced, so that the price-level of output as a whole (Π) exactly corresponds to the money-rate of the efficiency-earnings of the Factors of Production. Every departure of the market-rate from the natural-rate tends, on the other hand, to set up a disturbance of the price-level by causing the second term of the second Fundamental Equation to depart from zero.
We have, therefore, something with which the ordinary Quantity Equation does not furnish us, namely, a simple and direct explanation why a rise in the Bank-rate tends, in so far as it modifies the effective rate of interests, to depress price-levels. To a more complete explanation of the theory of Bank-rate we shall return in Chapter 13 and 37.
(3) Inflation and Deflation (p. 155)
We have seen that there are two main types of fluctuation, which can influence price-levels, corresponding to the two terms of our first Fundamental Equation, of which the second can be divided into two parts.
It follows that [:]
(4) The Causal Direction of Change (p. 156)
It is important for the reader to appreciate that the definition of ^Profits^ given above, and the division of the total value of the product between what we call ^Income^ or ^Earnings^ and what we call ^Profits^, are not arbitrary. The essential characteristic of the entity which we call ^Profits^ is that its having a zero value is the usual condition in the actual economic world of to-day for the equilibrium of the purchasing power of money. It is the introduction of this ^fact^ from the real world which gives significance to the particular Fundamental Equations which we have selected and saves them from the character of being mere identities.
Under a Socialist system the money-rate of efficiency-earnings of the Factors of Production might be suddenly altered by ^fiat^. Theoretically, I suppose, it might change under a system of competitive individualism by an act of collective foresight on the part of entrepreneurs in anticipation of impending monetary changes, or by a ^coup de main^ on the part of Trade Unions. Particularly, as we shall see in a later section of this chapter, prices may be modified as the result of a spontaneous change in the actual rate of earnings relatively to efficiency, on account of a change either in the method of fixing wages or in the coefficient of efficiency. In existing circumstances, however, the most usual and important occasion of change will be the action of the entrepreneurs, under the influence of the actual enjoyment of positive or negative profits, in increasing or diminishing the volume of employment which they offer at the existing rates of remuneration of the Factors of Production, and so bringing about a raising or a lowering of these rates. For the departure of profits from zero is the mainspring of change in the industrial countries of the modern world outside Russia. It is by altering the rate of profits in particular directions that entrepreneurs can be induced to produce this rather than that, and it is by altering the rate of profits in general that they can be induced to modify the average of their offers of remuneration to the factors of production.
Moreover there is a further reason why, in the actual world of to-day, it is appropriate to regard the above as the normal mechanism of change. For when the Central Currency Authority of a country wishes to change the level of money-incomes in the country and thereby the quantity of circulating money which they require, it has no power to order that the money-incomes of individuals shall be reduced;ㅡthe only alternation which it has a power to order relates to the terms of lending. It is, therefore, ^viâ^ the alteration of the terms of lending that the change in the situation is initiated;ㅡthis alteration affects the attractiveness of producing capital-goods, which disturbs the rate of investment relatively to that of saving, which upsets the rate of profits for producers of consumption-goods, thus causing entrepreneurs to modify the average level of their offers to the factors of production, and so finally achieving the ultimate objective of changing the level of money-incomes. This is not the only conceivable way of bringing about the result, but it is the only way which is, in fact, normally in use in most countries of the modern world.
Thusㅡgenerally speakingㅡevery change towards a new equilibrium price-level is initiated by a departure of profits from zero; and the significance of the above analysis lies in the demonstration that this condition of equilibrium comes to the same thing as (1) the equality of Savings and the value of Investment, and (2) equality of the "market-rate" and the "natural-rate" of interest.
If, therefore, the banking system can regulate the amount which it lends in such a way that the market-rate of interest is equal to the natural-rate, then the value of investment will be equal to the volume of saving, total profits will be zero, the price of output, as a whole, will be at an equilibrium level, and there will be a motive moving productive resources between the production of consumption-goods and the production of capital-goods unless or until the purchasing power of money is also at an equilibrium level. The condition for the stability of purchasing power is, therefore, that the banking system should behave in this way and according to this criterion; though we may have to concede that this is not always practicable over short periods, since for short periods the natural-rate may sometimes fluctuate in an extreme degree.
(5) The Behaviour of Entrepreneurs (p. 159)
We have spoken so far as if entrepreneurs were influenced in their prospective arrangements entirely by reference to whether they are making a profit or loss on their current output as they market it. In so far, however, as production takes timeㅡand in Book VI we shall be emphasising the fact that in many cases it does take an appreciable timeㅡand in so far as entrepreneurs are able at the beginning of a production period to forecast the relationship between saving and investment in its effect on the demand for their product at the end of this production-period, it is obviously the anticipated profit or loss on new business, rather than the actual profit or loss on business just concluded, which influences tham in deciding the scale on which to produce and the offers which it is worth while to make to the factors of production. Strictly, therefore, we should say that it is the ^anticipated^ profit or loss which is the mainspring of change, and that it is by causing anticipations of the appropriate kind that the banking system is able to influence the price-level. Indeed it is well known that one reason for the rapid efficacy of changes in bank-rate in modifying the actions of entrepreneurs is the anticipations to which they give rise. Thus entrepreneurs will sometime begin to act before the price-changes which are the justification of their action have actually occurred. Sinceㅡto take an anticipated ^fall^ of prices as our exampleㅡa reduction of costs or a reduction of output may, in the case of a single industry, actually prevent the incurring of losses or the feared fall of prices, each may hope by this means to avoid loss. Neverthelessㅡshort of a complete cessation of output by the whole boy of entrepreneursㅡavoidance of loss is impossible for entrepreneurs as a whole, however much they cut costs and reduce output, if the excess of saving over investment duly materialises.
Furthermore, widely held anticipations will tend for a short time to bring about their own verification, even if they have no basis outside themselves. For a reduced activity of entrepreneurs will diminish the volume of working capital required and so reduce investment; whilst an increased activity will have the opposite effect.
All the same, accurate forecasting in these matters is so difficult and requires so much more information than is usually available, that the average behaviour of entrepreneurs is in fact mainly governed by current experience supplemented by such broad generalisations as those relating to the probable consequences of changes in bank-rate, the supply of credit, and the state of the foreign exchanges. Moreover, action based on inaccurate anticipations will not long survive experiences of a contrary character, so that the facts will soon override anticipations except where they agree.
Thus when I say that the disequilibrium between saving and investment is the mainspring of change, I do not mean to deny that the behaviour of entrepreneurs at any given moment is based on a mixture of experience and anticipation.
There is another matter which deserves a word in passing. When for any reason an entrepreneur feels discouraged about the prospects, one or both of two courses may be open to himㅡhe can reduce his output or he can reduce his costs by lowering his offers to the factors of production. Neither course, if adopted by entrepreneurs as a whole, will relieve in the least their losses as a whole, except in so far as they have the indirect effect of reducing savings or of allowing (or causing) the banking system to relax the terms of credit and so increase investment (neither of which is what the entrepreneurs themselves have in mind); whilst, on the other hand, both courses are likely to aggravate their losses by reducing the cost of investment. Nevertheless these courses will in actual fact appeal to them, because, in so far as any class of entrepreneurs is able to adopt either of these courses in a degree greater than the average, they will be able to protect themselves. A discussion of the precise circumstances which determine the degree in which a class of entrepreneurs or an individual entrepreneur pursues the one course or the other over the short-period would, however, lead me too far into the intricate theory of the economics of the short-period. It must be enough here to repeat the indication already given on p. 125, that we do not require for the purposes of the present analysis to make any particular assumptions as to the time which has to elapse before losses (or profits), actual or anticipated, produce their full reaction on the behaviour of entrepreneurs. It is sufficient that the general tendency of a disequilibrium between saving and investment is in the sense described, and that, if the cause persists, the tendency must materialise sooner or later. Nor do any of the qualifications of this section affect in any way the rigour or the validity of our conclusions as to the quantitative effect of divergences between saving and investment on the price-levels ruling in the market.
(6) The Condition of External Equilibrium (p. 161)
We have stated the argument so far as though we were dealing with a Closed System, which was not susceptible of buying and selling and of borrowing and lending relations with an outside world. But it is typical of the world of to-day that the country whose currency system we are considering should not only buy goods from and sell goods to, but should have the same monetary standard as, and enter into borrowing and lending relations with, the outside world.
Nothing is required, however, in the extension of our argument to an International System which is not already adequately provided for in terms of the Fundamental Equations. The main consequence is to introduce an additional condition of equilibrium.
For [:]
In equilibrium, therefore, both the value and the cost of current investment must be equal to the amount of savings, and profits must be zero; and in such circumstances the Purchasing Power of Money and the price-level of output as a whole will both correspond to the money-rate of efficiency earnings of the Factors of Production (i.e. P＝Π＝W1).
The reader will appreciate that the condition of zero-profits means that ^aggregate^ profits are zero. For a stability of the price-level as a whole is perfectly compatible with the profits of particular entrepreneurs or particular classes of entrepreneurs being positive or negative, just as it is compatible with the prices of particular commodities rising or falling.
Thus, the long-period or equilibrium norm of the Purchasing Power of Money is given by the money-rate of efficiency earnings of the Factors of Production; whilst [ the actual Purchasing Power oscillates below or above this equilibrium level according as the cost of current investment is running ahead of, or falling behind, savings.
A principal object of this Treatise is to show that we have here the clue to the way in which the fluctuations of the price-level actually come to pass ]*, whether they are due to oscillations about a steady equilibrium level or to a transition from one equilibrium to another.
[*] 어떤 다른 이의 저서에서 화폐론의 핵심이라고 인용됐던 구절 중 하나.
p. 153
By the scale and the terms on which it is prepared to grant loans, the banking system is in a position, under a regime of Representative Money, to determineㅡbroadly speakingㅡthe rate of investment by the business world. At the same time the aggregate result of the decisions of the members of the community, as to how much of their money-incomes they shall expend on consumption and how much they shall save, is determining the rate of saving. According, therefore, as the banking system is allowing the rate of investment to exceed or fall behind the rate of saving, the price-level (assuming that there is no spontaneous change in the rate of efficiency-earnings) will rise or fall. If, however, the prevailing type of contract between entrepreneurs and the factors of production is in terms of effort-earnings W and not in terms of efficiency-earnings W1 (existing arrangements probably lie as a rule somewhat between the two), then it would be 1/e.P, which would tend to rise or fall, where, as before, e is the coefficient of efficiency.
But the disparity between investment and saving sets up a disequilibrium in the rate of profit. The next stage of the argument (to be developed in Book IV) proceeds, therefore, to show how this profit-disequilibrium reactsㅡunless the banking system take steps to counteract itㅡon the ^first^ term of the Fundamental Equation, eventually causing the money-rate of efficiency-earnings (or effort-earnings) to rise or fall, as the case may be, to a point which allow the banking system to establish a new position of equilibrium compatible with the criteria by which this system is governed.
(2) The Rate of Interest, or Bank-Rate (p. 154)
It is now evident in what manner changes in the Bank-rate, orㅡmore strictlyㅡchanges in the rate of interest, are capable of influencing the purchasing power of money.
The attractiveness of investment depends on the prospective income which the entrepreneur anticipates from current investment relatively to the rate of interest which he has to pay in order to be able to finance its production;ㅡor, putting it the other way round, the value of capital-goods depends on the rate of interest at which the prospective income from them is capitalised. That is to say, the higher (e.g.) the rate of interest, the lower, other things being equal, will be the value of capital-goods. Therefore, if the rate of interest rises, P' will tend to fall, which will lower the rate of profit on the production of capital-goods, which will be deterrent to new investment. Thus a high rate of interest will tend to diminish both P' and C, which stands respectively for the price-level and the volume of output of capital-goods. The rate of saving, on the other hand, is stimulated by a high rate of interest and discouraged by a low rate. It follows that an increase in the rate of interest tendsㅡother things being equalㅡto make the rate of investment (whether measured by its value or by its cost) to decline relatively to the rate of saving, i.e. to move the second term of both Fundamental Equations in the negative direction, so that the price-levels tend to fall.
Following Wicksell, it will be convenient to call the rate of interest which would cause the second term of our second Fundamental Equation to be zero the ^natural-rate^ of interest, and the rate which actually prevails the ^market-rate^ of interest. Thus the natural-rate of interest is the rate at which saving and the value of investment are exactly balanced, so that the price-level of output as a whole (Π) exactly corresponds to the money-rate of the efficiency-earnings of the Factors of Production. Every departure of the market-rate from the natural-rate tends, on the other hand, to set up a disturbance of the price-level by causing the second term of the second Fundamental Equation to depart from zero.
We have, therefore, something with which the ordinary Quantity Equation does not furnish us, namely, a simple and direct explanation why a rise in the Bank-rate tends, in so far as it modifies the effective rate of interests, to depress price-levels. To a more complete explanation of the theory of Bank-rate we shall return in Chapter 13 and 37.
(3) Inflation and Deflation (p. 155)
We have seen that there are two main types of fluctuation, which can influence price-levels, corresponding to the two terms of our first Fundamental Equation, of which the second can be divided into two parts.
- We may have a rise or fall in W1, the rate of efficiency-earnings. We shall call this Income Inflation (or Deflation), corresponding to changes in the first term of the Fundamental Equation.
- We may have a rise or fall of Q, the total profits above or below zero, due to an inequality between saving and the value of investment. We shall call this Profit Inflation (or Deflation).
- Commodity Inflation measures the change in price of liquid consumption-goods, and Capital Inflation the change in the price of capital-goods, relatively to their cost of production.
It follows that [:]
- (1) changes in Π, the price-level of output as a whole, are measured by the sum of the Income Inflation and the Profit Inflation;
- (2) whilst those in P, the purchasing power of money, are measured by the sum of the Income Inflation and the Commodity Inflation.
(4) The Causal Direction of Change (p. 156)
It is important for the reader to appreciate that the definition of ^Profits^ given above, and the division of the total value of the product between what we call ^Income^ or ^Earnings^ and what we call ^Profits^, are not arbitrary. The essential characteristic of the entity which we call ^Profits^ is that its having a zero value is the usual condition in the actual economic world of to-day for the equilibrium of the purchasing power of money. It is the introduction of this ^fact^ from the real world which gives significance to the particular Fundamental Equations which we have selected and saves them from the character of being mere identities.
Under a Socialist system the money-rate of efficiency-earnings of the Factors of Production might be suddenly altered by ^fiat^. Theoretically, I suppose, it might change under a system of competitive individualism by an act of collective foresight on the part of entrepreneurs in anticipation of impending monetary changes, or by a ^coup de main^ on the part of Trade Unions. Particularly, as we shall see in a later section of this chapter, prices may be modified as the result of a spontaneous change in the actual rate of earnings relatively to efficiency, on account of a change either in the method of fixing wages or in the coefficient of efficiency. In existing circumstances, however, the most usual and important occasion of change will be the action of the entrepreneurs, under the influence of the actual enjoyment of positive or negative profits, in increasing or diminishing the volume of employment which they offer at the existing rates of remuneration of the Factors of Production, and so bringing about a raising or a lowering of these rates. For the departure of profits from zero is the mainspring of change in the industrial countries of the modern world outside Russia. It is by altering the rate of profits in particular directions that entrepreneurs can be induced to produce this rather than that, and it is by altering the rate of profits in general that they can be induced to modify the average of their offers of remuneration to the factors of production.
Moreover there is a further reason why, in the actual world of to-day, it is appropriate to regard the above as the normal mechanism of change. For when the Central Currency Authority of a country wishes to change the level of money-incomes in the country and thereby the quantity of circulating money which they require, it has no power to order that the money-incomes of individuals shall be reduced;ㅡthe only alternation which it has a power to order relates to the terms of lending. It is, therefore, ^viâ^ the alteration of the terms of lending that the change in the situation is initiated;ㅡthis alteration affects the attractiveness of producing capital-goods, which disturbs the rate of investment relatively to that of saving, which upsets the rate of profits for producers of consumption-goods, thus causing entrepreneurs to modify the average level of their offers to the factors of production, and so finally achieving the ultimate objective of changing the level of money-incomes. This is not the only conceivable way of bringing about the result, but it is the only way which is, in fact, normally in use in most countries of the modern world.
Thusㅡgenerally speakingㅡevery change towards a new equilibrium price-level is initiated by a departure of profits from zero; and the significance of the above analysis lies in the demonstration that this condition of equilibrium comes to the same thing as (1) the equality of Savings and the value of Investment, and (2) equality of the "market-rate" and the "natural-rate" of interest.
If, therefore, the banking system can regulate the amount which it lends in such a way that the market-rate of interest is equal to the natural-rate, then the value of investment will be equal to the volume of saving, total profits will be zero, the price of output, as a whole, will be at an equilibrium level, and there will be a motive moving productive resources between the production of consumption-goods and the production of capital-goods unless or until the purchasing power of money is also at an equilibrium level. The condition for the stability of purchasing power is, therefore, that the banking system should behave in this way and according to this criterion; though we may have to concede that this is not always practicable over short periods, since for short periods the natural-rate may sometimes fluctuate in an extreme degree.
(5) The Behaviour of Entrepreneurs (p. 159)
We have spoken so far as if entrepreneurs were influenced in their prospective arrangements entirely by reference to whether they are making a profit or loss on their current output as they market it. In so far, however, as production takes timeㅡand in Book VI we shall be emphasising the fact that in many cases it does take an appreciable timeㅡand in so far as entrepreneurs are able at the beginning of a production period to forecast the relationship between saving and investment in its effect on the demand for their product at the end of this production-period, it is obviously the anticipated profit or loss on new business, rather than the actual profit or loss on business just concluded, which influences tham in deciding the scale on which to produce and the offers which it is worth while to make to the factors of production. Strictly, therefore, we should say that it is the ^anticipated^ profit or loss which is the mainspring of change, and that it is by causing anticipations of the appropriate kind that the banking system is able to influence the price-level. Indeed it is well known that one reason for the rapid efficacy of changes in bank-rate in modifying the actions of entrepreneurs is the anticipations to which they give rise. Thus entrepreneurs will sometime begin to act before the price-changes which are the justification of their action have actually occurred. Sinceㅡto take an anticipated ^fall^ of prices as our exampleㅡa reduction of costs or a reduction of output may, in the case of a single industry, actually prevent the incurring of losses or the feared fall of prices, each may hope by this means to avoid loss. Neverthelessㅡshort of a complete cessation of output by the whole boy of entrepreneursㅡavoidance of loss is impossible for entrepreneurs as a whole, however much they cut costs and reduce output, if the excess of saving over investment duly materialises.
Furthermore, widely held anticipations will tend for a short time to bring about their own verification, even if they have no basis outside themselves. For a reduced activity of entrepreneurs will diminish the volume of working capital required and so reduce investment; whilst an increased activity will have the opposite effect.
All the same, accurate forecasting in these matters is so difficult and requires so much more information than is usually available, that the average behaviour of entrepreneurs is in fact mainly governed by current experience supplemented by such broad generalisations as those relating to the probable consequences of changes in bank-rate, the supply of credit, and the state of the foreign exchanges. Moreover, action based on inaccurate anticipations will not long survive experiences of a contrary character, so that the facts will soon override anticipations except where they agree.
Thus when I say that the disequilibrium between saving and investment is the mainspring of change, I do not mean to deny that the behaviour of entrepreneurs at any given moment is based on a mixture of experience and anticipation.
There is another matter which deserves a word in passing. When for any reason an entrepreneur feels discouraged about the prospects, one or both of two courses may be open to himㅡhe can reduce his output or he can reduce his costs by lowering his offers to the factors of production. Neither course, if adopted by entrepreneurs as a whole, will relieve in the least their losses as a whole, except in so far as they have the indirect effect of reducing savings or of allowing (or causing) the banking system to relax the terms of credit and so increase investment (neither of which is what the entrepreneurs themselves have in mind); whilst, on the other hand, both courses are likely to aggravate their losses by reducing the cost of investment. Nevertheless these courses will in actual fact appeal to them, because, in so far as any class of entrepreneurs is able to adopt either of these courses in a degree greater than the average, they will be able to protect themselves. A discussion of the precise circumstances which determine the degree in which a class of entrepreneurs or an individual entrepreneur pursues the one course or the other over the short-period would, however, lead me too far into the intricate theory of the economics of the short-period. It must be enough here to repeat the indication already given on p. 125, that we do not require for the purposes of the present analysis to make any particular assumptions as to the time which has to elapse before losses (or profits), actual or anticipated, produce their full reaction on the behaviour of entrepreneurs. It is sufficient that the general tendency of a disequilibrium between saving and investment is in the sense described, and that, if the cause persists, the tendency must materialise sooner or later. Nor do any of the qualifications of this section affect in any way the rigour or the validity of our conclusions as to the quantitative effect of divergences between saving and investment on the price-levels ruling in the market.
(6) The Condition of External Equilibrium (p. 161)
We have stated the argument so far as though we were dealing with a Closed System, which was not susceptible of buying and selling and of borrowing and lending relations with an outside world. But it is typical of the world of to-day that the country whose currency system we are considering should not only buy goods from and sell goods to, but should have the same monetary standard as, and enter into borrowing and lending relations with, the outside world.
Nothing is required, however, in the extension of our argument to an International System which is not already adequately provided for in terms of the Fundamental Equations. The main consequence is to introduce an additional condition of equilibrium.
For [:]
- let L and B stand for the values of Foreign Lending and of the Foreign Balance respectively in accordance with the definitions given on pp. 131-2 ;
- G for the exports of gold ;
- S1 for the difference between S, the total volume of Saving, and L, so far as L is not finance by exports of goldㅡwhich we will call the volume of Home Saving ;
※ Home Saving＝S1＝Total Saving－Foreign Lending＝S－L (G=0 일 때)
- I1 for the difference between I, the total value of Investment, and Bㅡwhich we will call the value of Home Investment; and I1' for I1－Q2 ㅡwhich we call the "adjusted" cost of Home Investment ;
※ Value of Home Investment＝I1＝I－B＝Total Investment－Foreign Balance
※ Adjusted cost of Home Investment＝I1'＝I1－Q2
then we have :
and since
Thus we are entitled to substitute I1－S1 for I－S and I1'－S1 for I'－S in our Fundamental Equations. Accordingly[,]
Thus complete equilibrium requires both I1＝S1 and I1＝I1', and that L＝B.
With the implication of this condition of external equilibrium we shall deal in Chapter 21 below. But there are one or two broad conclusions which may be mentioned here.
In the first place, the amount of the Foreign Balance in any given situation depends on the relative ^price-level^ at home and abroad of the goods and services which enter into international trade. The amount of Foreign Lending, on the other hand, depends on relative ^interest rates^ (corrected, of course, for variations of risk, etc., so as to represent the net advantage of lending) at home and abroad. Now there is no direct or automatic connection between these two things; nor has a Central Bank any direct means of altering relative price-levels. The weapon of a Central Bank consists in the power of alter interest rates and the terms of lending generally. Thus when there is a change in the price-level abroad or in the demand-schedules of foreign borrowers (i.e. in their eagerness to borrow at given rates of interest) not reflected in corresponding changes at home, the only means open to the Central Bank for the preservation of external equilibrium is to change the terms of lending at home. But if I1＝S1 at the old terms of lending, they will be unequal at the new terms, so that the first effect of the effort to preserve external equilibrium will be to produce internal disequilibrium. We shall show in Chapter 13 that action by a Central Bank along these lines is capable at long last of producing a new situation in which internal and external equilibrium are both simultaneously restored. But this does not remove the fact of a tendency towards an initial disharmony between the two conditions of equilibrium.
In the second place, with an international currency system, such as gold, the primary duty of a Central Bank is to preserve ^external^ equilibrium. Internal equilibrium must take its chance, or, rather, the internal situation must be forced sooner or later into equilibrium with the external situation. For the duty of preserving the parity of the national currency with the international standard, which is laid on the Central Currency Authority by law, is incompatible with a long continuance of external disequilibrium; whereas no corresponding obligation of a binding character exists relating to internal equilibrium. The same thing applies, in greater or less degree, wherever the Central Currency Authority is required to preserve the parity of its money in terms of any objective standard other than the purchasing power of money itself.
The degree, however, to which an individual country can so dominate the international situation as to bend the position of external equilibrium to suit the conditions of its own internal equilibrium, and the period for which it can afford to disregard external disequilibrium in the interest of preserving its own internal equilibrium (allowing gold to flow freely in or out), are very different in different cases, depending on the various elements of its financial strength. Before the War Great Britain and since the War the United States have had a considerable power of influencing the international situation to suit themselves. Since 1924 France and the United States are examples of countries which have been in a situation to ignore external disequilibrium for long periods at a time in the interests of their own internal equilibrium, whilst Great Britain is an example of a country which has been forced to disregard internal equilibrium in the effort to sustain a self-imposed external equilibrium which was not harmony with the existing internal situation.
The acuteness of the possible disharmony between the conditions of internal and of external equilibrium depends on whether the volume of foreign lending is large relatively to total saving, whether it is susceptible to ^small^ changes in relative rates of interest at home and abroad, and whether the volume of the foreign balance is susceptible to ^small^ changes in relative prices; and the duration of such disharmony depends on the ease with which changes can be effected in the internal money-costs of production. If the volumes of foreign lending and of the foreign balance and the internal money-costs of production are all of them very susceptible to small changes in interest-rates, prices, and the volume of employment respectively, then the simultaneous preservation both of external and of internal equilibrium will present no difficult problem. Much current theory assumes too lightly, I think, that the above conditions of susceptibility are in fact fulfilled in the present-day world. But this assumption is unsafe. In some countries (but not all) the volume of foreign lending is easily influenced, and in most countries the money-costs of production show but little resistance to an upward movement. But in many countries the volume of the foreign balance is sticky when it is a question of increasing it to meet a change in the external situation; and so are the money-costs of production when it is a question of a movement downwards.
In pre-war days no one troubled much about anything but the condition of external equilibrium. But since the War the progress of ideas about Monetary Management and the importance of stabilising the Purchasing Power of Money have led to a more general concern about the preservation of internal equilibrium, without its being clearly realised how far the one is compatible with the other. This, however, is a matter of which we must postpone the further discussion to the later chapters of this Treatise.
(7) Changes in Price-Levels Due to "Spontaneous" Changes in Earnings (p. 166)
We have assumed in previous sections that rates of efficiency-earnings do not, as a rule, change "spontaneously" so to speak, but only as a result of a change in the offers made by entrepreneurs acting under the influence of profits or losses. But this is not the whole of the truth and we must now supplement it.
If money-rates of earnings were uniformly fixed in relation to output, being as it were piece-wages, so that they tended to increase or decrease automatically with every change in the coefficient of efficiency, then we should need to add nothing to what we have written above about the causation of price changes.
If, on the other hand, money-rates of earnings were uniformly fixed in relation to effort, being as it were time-wages, so that they tended to remain the same irrespective of change in the coefficient of efficiency, then the price-level would change (assuming Investment and Saving to be in equilibrium) with every change in efficiency and in inverse proportion to such change. That is to say, there would be a spontaneous tendency for price-level to change in the opposite direction to changes in efficiency, any further change due to a disparity between Investment and Saving being superimposed on this.
In actual fact, earnings are probably fixed on the whole somewhere between an effort-basis and an efficiency-basis. If, as before, W stands for effort-earnings and W1 for efficiency-earnings, and if W2 stands for actual earnings, then, if actual earnings are fixed in a proportion ^a^ on an effort-basis and in a proportion ^b^ on an efficiency-basis, then W2＝(a.e＋b)W1, where ^e^ is the coefficient of efficiency. In this case, there will be a tendency towards spontaneous changes in P (or Π) inversely proportional to such changes as occur in (a.e＋b) for reasons other than a change in entrepreneurs' profits.
Let the reader observe that changes in the average rate of earnings have no direct tendency in themselves to bring about profits or losses, becauseㅡso long as the Currency Authority allows the change without attempting to counteract itㅡentrepreneurs will always be recouped for their changed outlay by the corresponding change in their receipts, which will result from the proportionate change in the price-level. But if such spontaneous changes in the rate of earnings as tend to occur require a supply of money which is incompatible with the ideas of the Currency Authority or with the limitations on its powers, then the latter will be compelled, in its endeavour to redress the situation, to bring influences to bear which will upset the equilibrium of Investment and Saving, and so induce the entrepreneurs to modify their offers to the factors of production in such a way as to counteract the spontaneous changes which have been occurring in the rates of earnings.
Thus we can conveniently distinguish what we have already called "spontaneous" changes in the rates of efficiency-earnings and in the price-levels due to the character of the Wages System (including in this, e.g. the powers and activities of Trade Union), from what we may call the "induced" changes arising from the existence of profits or losses due to the Currency Authority permitting or promoting a disparity between Investment and Saving. If the spontaneous changes which occur do not suit the Currency Authority, the only remedy of the latter lies in promoting induced changes in an equal and opposite degree.
( ... ... ) p. 168.
[Foreign Lending] L＝B＋G ,So that
[Home Saving] S1＝S－L＋G ,
[Value of Home Investment] I1＝I－B ,
I－S＝I1－S1 ; [※ I＝I1＋B, S＝S1＋L－G ⇒ I－S＝I1－S1 ＋(B－L＋G＝0) ]
and since
I1－I1'＝Q2＝I－I' ,
I'－S＝I1'－S1 [※ I'＝I－I1＋I1' , S＝I－I1＋S1 ⇒ I'－S＝I1'－S1 ]
Thus we are entitled to substitute I1－S1 for I－S and I1'－S1 for I'－S in our Fundamental Equations. Accordingly[,]
- the equilibrium of the price-level of output as a whole requires that the volume of Home Saving should be equal to the value of Home Investment,
- and that of Purchasing Power of Money requires that the volume of Home Saving should be equal to the adjusted cost of Home Investment, which is the same thing as its actual cost less the profit on the Foreign Balance, i.e. less the excess of value of B over its cost.
- In accordance with the definitions on p. 132, I include an allowance for exports and imports of gold, but I1 does not ; that is to say, I is equal to the sum of the home investment, the foreign lending, and the imports of gold.
Thus complete equilibrium requires both I1＝S1 and I1＝I1', and that L＝B.
With the implication of this condition of external equilibrium we shall deal in Chapter 21 below. But there are one or two broad conclusions which may be mentioned here.
In the first place, the amount of the Foreign Balance in any given situation depends on the relative ^price-level^ at home and abroad of the goods and services which enter into international trade. The amount of Foreign Lending, on the other hand, depends on relative ^interest rates^ (corrected, of course, for variations of risk, etc., so as to represent the net advantage of lending) at home and abroad. Now there is no direct or automatic connection between these two things; nor has a Central Bank any direct means of altering relative price-levels. The weapon of a Central Bank consists in the power of alter interest rates and the terms of lending generally. Thus when there is a change in the price-level abroad or in the demand-schedules of foreign borrowers (i.e. in their eagerness to borrow at given rates of interest) not reflected in corresponding changes at home, the only means open to the Central Bank for the preservation of external equilibrium is to change the terms of lending at home. But if I1＝S1 at the old terms of lending, they will be unequal at the new terms, so that the first effect of the effort to preserve external equilibrium will be to produce internal disequilibrium. We shall show in Chapter 13 that action by a Central Bank along these lines is capable at long last of producing a new situation in which internal and external equilibrium are both simultaneously restored. But this does not remove the fact of a tendency towards an initial disharmony between the two conditions of equilibrium.
In the second place, with an international currency system, such as gold, the primary duty of a Central Bank is to preserve ^external^ equilibrium. Internal equilibrium must take its chance, or, rather, the internal situation must be forced sooner or later into equilibrium with the external situation. For the duty of preserving the parity of the national currency with the international standard, which is laid on the Central Currency Authority by law, is incompatible with a long continuance of external disequilibrium; whereas no corresponding obligation of a binding character exists relating to internal equilibrium. The same thing applies, in greater or less degree, wherever the Central Currency Authority is required to preserve the parity of its money in terms of any objective standard other than the purchasing power of money itself.
The degree, however, to which an individual country can so dominate the international situation as to bend the position of external equilibrium to suit the conditions of its own internal equilibrium, and the period for which it can afford to disregard external disequilibrium in the interest of preserving its own internal equilibrium (allowing gold to flow freely in or out), are very different in different cases, depending on the various elements of its financial strength. Before the War Great Britain and since the War the United States have had a considerable power of influencing the international situation to suit themselves. Since 1924 France and the United States are examples of countries which have been in a situation to ignore external disequilibrium for long periods at a time in the interests of their own internal equilibrium, whilst Great Britain is an example of a country which has been forced to disregard internal equilibrium in the effort to sustain a self-imposed external equilibrium which was not harmony with the existing internal situation.
The acuteness of the possible disharmony between the conditions of internal and of external equilibrium depends on whether the volume of foreign lending is large relatively to total saving, whether it is susceptible to ^small^ changes in relative rates of interest at home and abroad, and whether the volume of the foreign balance is susceptible to ^small^ changes in relative prices; and the duration of such disharmony depends on the ease with which changes can be effected in the internal money-costs of production. If the volumes of foreign lending and of the foreign balance and the internal money-costs of production are all of them very susceptible to small changes in interest-rates, prices, and the volume of employment respectively, then the simultaneous preservation both of external and of internal equilibrium will present no difficult problem. Much current theory assumes too lightly, I think, that the above conditions of susceptibility are in fact fulfilled in the present-day world. But this assumption is unsafe. In some countries (but not all) the volume of foreign lending is easily influenced, and in most countries the money-costs of production show but little resistance to an upward movement. But in many countries the volume of the foreign balance is sticky when it is a question of increasing it to meet a change in the external situation; and so are the money-costs of production when it is a question of a movement downwards.
In pre-war days no one troubled much about anything but the condition of external equilibrium. But since the War the progress of ideas about Monetary Management and the importance of stabilising the Purchasing Power of Money have led to a more general concern about the preservation of internal equilibrium, without its being clearly realised how far the one is compatible with the other. This, however, is a matter of which we must postpone the further discussion to the later chapters of this Treatise.
(7) Changes in Price-Levels Due to "Spontaneous" Changes in Earnings (p. 166)
We have assumed in previous sections that rates of efficiency-earnings do not, as a rule, change "spontaneously" so to speak, but only as a result of a change in the offers made by entrepreneurs acting under the influence of profits or losses. But this is not the whole of the truth and we must now supplement it.
If money-rates of earnings were uniformly fixed in relation to output, being as it were piece-wages, so that they tended to increase or decrease automatically with every change in the coefficient of efficiency, then we should need to add nothing to what we have written above about the causation of price changes.
If, on the other hand, money-rates of earnings were uniformly fixed in relation to effort, being as it were time-wages, so that they tended to remain the same irrespective of change in the coefficient of efficiency, then the price-level would change (assuming Investment and Saving to be in equilibrium) with every change in efficiency and in inverse proportion to such change. That is to say, there would be a spontaneous tendency for price-level to change in the opposite direction to changes in efficiency, any further change due to a disparity between Investment and Saving being superimposed on this.
In actual fact, earnings are probably fixed on the whole somewhere between an effort-basis and an efficiency-basis. If, as before, W stands for effort-earnings and W1 for efficiency-earnings, and if W2 stands for actual earnings, then, if actual earnings are fixed in a proportion ^a^ on an effort-basis and in a proportion ^b^ on an efficiency-basis, then W2＝(a.e＋b)W1, where ^e^ is the coefficient of efficiency. In this case, there will be a tendency towards spontaneous changes in P (or Π) inversely proportional to such changes as occur in (a.e＋b) for reasons other than a change in entrepreneurs' profits.
Let the reader observe that changes in the average rate of earnings have no direct tendency in themselves to bring about profits or losses, becauseㅡso long as the Currency Authority allows the change without attempting to counteract itㅡentrepreneurs will always be recouped for their changed outlay by the corresponding change in their receipts, which will result from the proportionate change in the price-level. But if such spontaneous changes in the rate of earnings as tend to occur require a supply of money which is incompatible with the ideas of the Currency Authority or with the limitations on its powers, then the latter will be compelled, in its endeavour to redress the situation, to bring influences to bear which will upset the equilibrium of Investment and Saving, and so induce the entrepreneurs to modify their offers to the factors of production in such a way as to counteract the spontaneous changes which have been occurring in the rates of earnings.
Thus we can conveniently distinguish what we have already called "spontaneous" changes in the rates of efficiency-earnings and in the price-levels due to the character of the Wages System (including in this, e.g. the powers and activities of Trade Union), from what we may call the "induced" changes arising from the existence of profits or losses due to the Currency Authority permitting or promoting a disparity between Investment and Saving. If the spontaneous changes which occur do not suit the Currency Authority, the only remedy of the latter lies in promoting induced changes in an equal and opposite degree.
( ... ... ) p. 168.
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