ABSTRACT
The aggregate volume of output, and therefore the employment given to factors of production, was determined, in a regime of state ownership, by a decision of the central government. Output targets were set deliberately to ensure that all scarce material resources were fully taken up and that everyone who wished to work, at the current wage rate, could do so. In a system of unregulated private enterprise, on the other hand, the level of aggregate output and employment is determined, not by any single policy decision, but by the many independent and unco-ordinated production plans of individual entrepreneurs. These plans depend, in turn, upon the amount of goods which entrepreneurs expect to sell. Future demand will itself depend, very substantially, on the incomes which consumers will receive, and therefore on the production plans, and implied factor requirements, of entrepreneurs. Here therefore we have a circular relationship. All firms taken together, that is to say, by virtue of the
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money they pay workers and the owners of material resources, create the demand for which they also cater. In this respect, the production programmes of different firms are complementary, in that each of them generates incomes which feed the demand upon which others depend for their profitability. The dependence of the demand for any one firm's products upon its own production programme or on that of any other single firm will be very slight, for the incomes paid out in fulfilment of the programme will be spent on a great variety of goods. But the demand for a firm's output will be decisively affected by the expenditure-on wages, interest and rent-of all other entrepreneurs taken as a whole. We have already studied that form of inter-dependence which owes its existence to the fact that firms may compete for the same market or may purchase each other's output; here now is an additional and much more pervasive form of inter-dependence, deriving from the fact that production creates income.
