Chapter 9
THE PROPENSITY TO CONSUME:
II. THE SUBJECTIVE FACTORS
I
There remains the second category of factors which affect the
amount of consumption out of a given income¾namely,
those subjective and social incentives which determine how much
is spent, given the aggregate of income in terms of wage-units
and given the relevant objective factors which we have already
discussed. Since, however, the analysis of these factors raises
no point of novelty, it may be sufficient if we give a catalogue
of the more important, without enlarging on them at any length.
There are, in general, eight main motives or objects of a
subjective character which lead individuals to refrain from
spending out of their incomes:
(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.
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.
Apart from the savings accumulated by individuals, there is
also the large amount of income, varying perhaps from one-third
to two-thirds of the total accumulation in a modern industrial
community such as Great Britain or the United States, which is
withheld by central and local government, by institutions and by
business corporations¾for motives
largely analogous to, but not identical with, those actuating
individuals, and mainly the four following:
(i) The motive of enterprise¾to
secure resources to carry out further capital investment
without incurring debt or raising further capital on the
market;
(ii) The motive of liquidity¾to
secure liquid resources to meet emergencies, difficulties and
depressions;
(iii) The motive of improvement¾to secure a gradually increasing
income, which, incidentally, will protect the management from
criticism, since increasing income due to accumulation is
seldom distinguished from increasing income due to
efficiency;
(iv) The motive of financial prudence and the
anxiety to be 'on the right side' by making a financial
provision in excess of user and supplementary cost, so as to
discharge debt and write off the cost of assets ahead of;
rather than behind, the actual rate of wastage and
obsolescence, the strength of this motive mainly depending on
the quantity and character of the capital equipment and the
rate of technical change.
Corresponding to these motives which favour the withholding of
a part of income from consumption, there are also operative at
times motives which lead to an excess of consumption over income.
Several of the motives towards positive saving catalogued above
as affecting individuals have their intended counterpart in
negative saving at a later date, as, for example, with saving to
provide for family needs or old age. Unemployment relief financed
by borrowing is best regarded as negative saving.
Now the strength of all these motives will vary enormously
according to the institutions and organisation of the economic
society which we presume, according to habits formed by race,
education, convention, religion and current morals, according to
present hopes and past experience, according to the scale and
technique of capital equipment, and according to the prevailing
distribution of wealth and the established standards of life. In
the argument of this book, however, we shall not concern
ourselves, except in occasional digressions, with the results of
far-reaching social changes or with the slow effects of secular
progress. We shall, that is to say, take as given the main
background of subjective motives to saving and to consumption respectively. In so far
as the distribution of wealth is determined by the more or less
permanent social structure of the community, this also can be
reckoned a factor, subject only to slow change and over a long
period, which we can take as given in our present context.
II
Since, therefore, the main background of subjective and social
incentives changes slowly, whilst the short-period influence of
changes in the rate of interest and the other objective factors
is often of secondary importance, we are left with the conclusion
that short-period changes in consumption largely depend on
changes in the rate at which income (measured in wage-units) is
being earned and not on changes in the propensity to consume out
of a given income.
We must, however, guard against a misunderstanding. The above
means that the influence of moderate changes in the rate of
interest on the propensity to consume is usually small. It
does not mean that changes in the rate of interest have only a
small influence on the amounts actually saved and consumed. Quite
the contrary. 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. Since incomes will decrease by a
greater absolute amount than investment, it is, indeed, true
that, when the rate of interest rises, the rate of consumption
will decrease. But this does not mean that there will be a wider
margin for saving. On the contrary, saving and spending will both
decrease.
Thus, even if it is the case that a rise in the rate of
interest would cause the community to save more out of a given
income, we can be quite sure that a rise in the rate of
interest (assuming no favourable change in the demand-schedule
for investment) will decrease the actual aggregate of savings.
The same line of argument can even tell us by how much a rise in
the rate of interest will, cet. par., decrease incomes.
For incomes will have to fall (or be redistributed) by just that
amount which is required, with the existing propensity to consume
to decrease savings by the same amount by which the rise in the
rate of interest will, with the existing marginal efficiency of
capital, decrease investment. A detailed examination of this
aspect will occupy our next chapter.
The rise in the rate of interest might induce us to save more,
if our incomes were unchanged. But if the higher rate of
interest retards investment, our incomes will not, and cannot, be
unchanged. They must necessarily fall, until the declining
capacity to save has sufficiently offset the stimulus to save
given by the higher rate of interest. 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.
Thus, after all, the actual rates of aggregate saving and
spending do not depend on Precaution, Foresight, Calculation,
Improvement, Independence, Enterprise, Pride or Avarice. Virtue
and vice play no part. It all depends on how far the rate of interest is favourable to
investment, after taking account of the marginal efficiency of
capital.
No, this is an overstatement. If the rate of interest were so
governed as to maintain continuous full employment, virtue would
resume her sway;¾the rate of capital
accumulation would depend on the weakness of the propensity to
consume. Thus, once again, the tribute that classical economists
pay to her is due to their concealed assumption that the rate of
interest always is so governed.