CH. 3 THE PRINCIPLE OF EFFECTIVE DEMAND 29

(3) The amount of labour N which the entre-preneurs decide to employ depends on the sum (D) oftwo quantities, namely D1, the amount which the com-munity is expected to spend on consumption, and D2 ,the amount which it is expected to devote to newinvestment. D is what we have called above theeffective demands

(4) Since D1 + D2 = D =ϕ(N), where ϕ is the aggre-gate supply function, and since, as we have seen in (2)above, D1 is a function of N, which we may write χ(N),depending on the propensity to consume, it followsthatϕ(N) - χ(N) =D 2 .

(5) Hence the volume of employment in equili-brium depends on (i) the aggregate supply function,ϕ,(ii) the propensity to consume, χ, and (iii) the volume ofinvestment, D2. This is the essence of the GeneralTheory of Employment.

(6) For every value of N there is a correspondingmarginal productivity of labour in the wage-goodsindustries; and it is this which determines the realwage. (5) is, therefore, subject to the condition thatN cannot exceed the value which reduces the real wageto equality with the marginal disutility of labour. Thismeans that not all changes in D are compatible withour temporary assumption that money-wages are con-stant. Thus it will be essential to a full statement ofour theory to dispense with this assumption.

(7) On the classical theory, according to whichD = ϕ(N) for all values of N, the volume of employ-ment is in neutral equilibrium for all values of N lessthan its maximum value; so that the forces of com-petition between entrepreneurs may be expected topush it to this maximum value. Only at this point,on the classical theory, can there be stable equilibrium.

(8) When employment increases , D1 will increase , butnot by so much as D; since when our income increasesour consumption increases also, but not by so much.The key to our practical problem is to be found in this