CH. 3 THE PRINCIPLE OF EFFECTIVE DEMAND 27

II

A brief summary of the theory of employment tobe worked out in the course of the following chaptersmay, perhaps, help the reader at this stage, even thoughit may not be fully intelligible. The terms involvedwill be more carefully defined in due course. In thissummary we shall assume that the money-wage andother factor costs are constant per unit of labouremployed. But this simplification, with which we shalldispense later, is introduced solely to facilitate theexposition. The essential character of the argument isprecisely the same whether or not money-wages, etc.,are liable to change.

The outline of our theory can be expressed asfollows. When employment increases, aggregate realincome is increased. The psychology of the com-munity is such that when aggregate real income isincreased aggregate consumption is increased, but notby so much as income. Hence employers wouldmake a loss if the whole of the increased employmentwere to be devoted to satisfying the increased demandfor immediate consumption. Thus, to justify anygiven amount of employment there must be an amountof current investment sufficient to absorb the excess oftotal output over what the community chooses toconsume when employment is at the given level. Forunless there is this amount of investment, the receiptsof the entrepreneurs will be less than is required toinduce them to offer the given amount of employment.It follows, therefore, that, given what we shall call thecommunity’s propensity to consume, the equilibriumlevel of employment, i.e. the level at which there is noinducement to employers as a whole either to expandor to contract employment, will depend on the amountof current investment. The amount of current invest-ment will depend, in turn, on what we shall call theinducement to invest; and the inducement to invest will