ABSTRACT

IN CONNECTION with our discussion of Keynes’ psychological law of consumption we suggested that in the short run it is logically sound and practically wise to concentrate our effort on increasing investment, for the reason that the consumption function does not change and cannot be changed quickly, given the existing psychological-institutional complex. We alluded, however, to the desirability of maintaining full employment via promoting both consumption and investment in the long run. In the short run it is easier to change a single point on the consumption-function curve by increasing income than to change the position or shape of the curve itself. This was made clear in our analysis of the multiplier effect of the increase in investment. A public-works program, for example, has the effect of changing the income variable and therefore the amount of consumption outlays without affecting the position of the consumption schedule. Such a cyclical policy is different from a long-range policy of changing the position and shape of the entire consumption function. Given the stable consumption function, it is realistic to rely upon the measures to increase investment for combating cyclical depression and to relegate the measures to raise the consumption function to a longer term policy of maintaining the full-employment savings-investment equilibrium. We are therefore largely concerned with the measures to “educate” the consuming public to change its fundamental habits of saving and consumption.