Chapter X “THE PROPENSITY TO CONSUME”: II

1. Reasons for Not Spending

After a first chapter of eighteen pages on “The Propensity to Consume: I. The Objective Factors,” Keynes has a chapter of only five pages on “The Propensity to Consume: II. The Subjective Factors.” 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” (p. 107). It is worth quoting these practically in full:

(i) To build up a reserve against unforeseen contingencies;

(ii) To provide for an anticipated future relation between the income and the needs of the individual or his family different from that which exists in the present, as, for example, in relation to old age, family education, or the maintenance of dependents;

(iii) To enjoy interest and appreciation, i.e., because a larger real consumption at a later date is preferred to a smaller immediate consumption;

(iv) 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;

(v) To enjoy a sense of independence and the power to do things, though without a clear idea or definite intention of specific action;

(vi) To secure a masse de manoeuvre to carry out speculative or business projects;

(vii) To bequeath a fortune;

(viii) To satisfy pure miserliness, i.e. unreasonable but insistent inhibitions against acts of expenditure as such (pp. 107-108).

Now even if there were nothing seriously invalid about this particular classification of the motives to personal saving, there is certainly nothing uniquely illuminating or inevitable about it. One can list eight motives or objects of saving; or, if one wishes to be as specific as Keynes is in some instances, one can list twenty-eight.

It is striking that the most important reason (in relation to the light it throws on business cycles) why individuals sometimes refrain from spending is not specifically contained in Keynes’s list. This is simply the expectation that prices are going to fall, or to fall further; and that if the buyer waits long enough he can get what he wants cheaper.

It could be argued that this might find a place under Keynes’s sixth reason. But, for that matter, it could be argued that all of the more specific motives for personal saving could be summed up under a single broad motive—to build up a reserve against future requirements or contingencies, whether these are definite, probable, or merely possible.

The motive, in other words, is to provide both for the certainties and the uncertainties of the future—from buying tomorrow’s dinner or paying next month’s rent to taking advantage of a speculative opportunity or leaving one’s family comfortably off in the event of one’s death. Such things as pure miserliness, emphasized by Keynes, can safely be left out of account for practical analysis—first, because relatively few people are addicted to it (in a modern industrial society), and secondly, because the relative amount of it probably remains unchanged from year to year, if not from generation to generation.

If we are talking of all the motives to saving, there is a serious omission from Keynes’s elaborate list of eight. People save to make roundabout methods of production possible, so that their productive capacity may be increased and their future incomes (whether thought of in terms of money or of the flow of goods and services) may be correspondingly enlarged. True, they do this usually in their capacity as entrepreneurs or corporation managers, in their role as “producers” rather than “consumers”; and Keynes listed merely the motives which lead “individuals” (presumably thought of as consumers only) “to refrain from spending out of their incomes.”

But by omitting this productive motive he omits the very consequence that makes saving so essential for total economic growth, and so beneficent for society as a whole. If we wished to reduce our classification of the main motives to saving to just two, we should have to say that they were (1) to provide for future needs or contingencies out of part of present income (plain saving); and (2) to make roundabout methods of production possible (capitalistic saving) so as to increase future income. It is Keynes’s almost total blindness to this second motive—and result—that accounts for his strange lifelong bias against thrift.

For Keynes had a definite bias against thrift, of at least twenty years standing (see my quotation on pp. 85-86 from Economic Consequences of the Peace). This is revealed again, in spite of Keynes’s effort to seem impartial, in the paragraph immediately following the eight motives to saving quoted above:

These eight motives might be called the motives of Precaution, Foresight, Calculation, Improvement, Independence, Enterprise, Pride, and Avarice; and we could also draw up a corresponding list of motives to consumption such as Enjoyment, Shortsightedness, Generosity, Miscalculation, Ostentation, and Extravagance (p. 108).

It may seem carping to notice it, but whereas Keynes lists eight motives, including Pride and Avarice, for saving, he lists only six motives for spending. He might easily have rounded out the latter list by adding Recklessness and Improvidence. It is true that these might overlap on some of the motives he does list, but the overlapping could hardly be greater than that of Precaution, Foresight, and Calculation.

Keynes does supplement his list of motives for individual saving with a list of four motives for institutional saving (by governments and business corporations). These four motives are listed under the heads of Enterprise, Liquidity, Improvement, and Financial Prudence. But Keynes treats these motives curtly and disparagingly, and hints that the last is almost certain to be excessive.

2. The Fear of Thrift

In the second section of his chapter on the subjective factors in the propensity to consume, Keynes explains more in detail the reasons for his hatred and fear of thrift. But let us begin with his conclusion rather than with his reasons:

The more virtuous we are, the more determinedly thrifty, the more obstinately orthodox in our national and personal finance, the more our incomes will have to fall when interest rises relatively to the marginal efficiency of capital. Obstinacy can bring only a penalty and no reward. For the result is inevitable (p. 111).

As Keynes here anticipates some of his later arguments, we can also defer a closer analysis of them until later. But as the argument that he puts forward concerning interest rates is of central importance to his theory and to his recommendations concerning economic policy, some brief comment seems desirable.

The influence of changes in the rate of interest on the amount actually saved is of paramount importance, but is in the opposite direction to that usually supposed. For even if the attraction of the larger future income to be earned from a higher rate of interest has the effect of diminishing the propensity to consume, nevertheless we can be certain that a rise in the rate of interest will have the effect of reducing the amount actually saved. For aggregate saving is governed by aggregate investment; a rise in the rate of interest (unless it is offset by a corresponding change in the demand-schedule for investment) will diminish investment; hence a rise in the rate of interest must have the effect of reducing incomes to a level at which saving is decreased in the same measure as investment (p. 110). [And Keynes goes on to conclude further that therefore] saving and spending will both decrease (p. 111).

It is amazing how many fallacies and inversions Keynes can pack into a small space, and especially how many fallacies, like a set of Chinese boxes, he can pack inside other fallacies.

A rise in the rate of interest, Keynes here argues, will not normally encourage an increase in the amount of savings but a decrease. Why? Because while a higher rate of interest might encourage more saving it would discourage borrowing. True. But the same sort of thing could be said not only about the price of loanable funds, but about the price of anything else. A higher price for any commodity will reduce the amount demanded unless the demand schedule is also higher. But it may be precisely because the demand for that commodity has increased that the price has been bid up in the first place. Therefore the higher price will not cause a reduction in the amount demanded for the simple reason that it is the increase in demand that has forced up the price.

The same reasoning applies to the interest rate, which is another name for the price of loanable funds. An arbitrary uncaused rise in the rate of interest would, other things remaining equal, lead to a reduction of borrowing, a reduction in the amount of loanable funds demanded. But a rise or fall of every sensitive competitive price is caused by something. If the rise in interest rates has been itself caused by a rise in the “demand schedule for investment” (as Keynes parenthetically and left-handedly admits to be possible) then the rise in interest rates 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. Indeed, if the rise in interest rates is not sufficient to offset the rise in the demand schedule for investment, more capital will be demanded at the higher interest rate than at the previous lower one. 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.

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. It is this wilful 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—it is this one-eyed vision that constitutes the Keynesian “revolution.”

The natural consequences of the Keynesian economic philosophy were vividly portrayed by Patrick Barrington (two years before the particular rationalization that appeared in the General Theory) in his poem in Punch:¹

I Want to be a Consumer

“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.

“We should all of us choose a calling

To help Society’s plan;

Then what do you mean to be, my boy,

When you grow to be a man?”

“I want to be a Consumer,”

The bright-haired lad replied

As he gazed up into the Bishop’s face

In innocence open-eyed.

“I’ve never had aims of a selfish sort,

For that, as I know, is wrong.

I want to be a Consumer, Sir,

And help the world along.

“I want to be a Consumer

And work both night and day,

For that is the thing that’s needed most,

I’ve heard Economists say,

I won’t just be a Producer,

Like Bobby and James and John;

I want to be a Consumer, Sir,

And help the nation on.”

“But what do you want to be?”

The Bishop said again,

“For we all of us have to work,” said he,

“As must, I think, be plain.

Are you thinking of studying medicine

Or taking a Bar exam?”

“Why, no!” the bright-haired lad replied

As he helped himself to jam.

“I want to be a Consumer

And live in a useful way;

For that is the thing that’s needed most,

I’ve heard Economists say.

There are too many people working

And too many things are made.

I want to be a Consumer, Sir,

And help to further Trade.

“I want to be a Consumer

And do my duty well;

For that is the thing that’s needed most,

I’ve heard Economists tell.

I’ve made up my mind,” the lad was heard,

As he lit a cigar, to say;

“I want to be a Consumer, Sir,

And I want to begin today.”

¹ Issue of April 25, 1934. Reprinted by permission of Punch, London.