“The denial of the crucial role of the interest rate as equilibrator of savings and investment led directly to the Keynesian theory of employment determinants. Given the ‘propensity to consume’ and hence the proportion of any given income that will be spent by individual consumers (on which the size of R. F. Kahn’s ‘multiplier’ depends), the level of output and employment will be a function of investment. According to the level at which investment (also consumption) stands, the level of output and employment may be almost anything between zero and full capacity output. There is at any rate no longer any unique level to which the system is necessarily tending. So far as investment consists of private investment, it will remain governed by the ‘marginal efficiency of capital’ (anticipated profitability), modified, on the one hand, by ‘expectations’ (powerfully swayed by ‘business mood’ and the like) and on the other hand by the cost of borrowing, namely the prevailing rate of interest. Thus was the causal emphasis of theory reversed : instead of any change in saving being translated into an equivalent shift of investment, investment became the independent and (via income changes) the volume of savings the dependent variable.
Interest was converted virtually into a money rate—something influenced on the one hand by monetary policy (affecting the supply of money available) and on the other hand by the current attitude towards it as something worth holding (qua bank deposit e.g.) in preference to other assets (e.g. bonds). This latter constituted the famous ‘liquidity preference’—a preference powerfully influenced by expectations (or uncertainty) about future movements of interest rates (and hence of bond prices).”
—From Maurice Dobb, Theories of Value and Distribution since Adam Smith, page 218–9
There is no unique level of output and employment to which the economic system tends, because
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