CH. 3 THE PRINCIPLE OF EFFECTIVE DEMAND 31

ment has been reached. The insufficiency of effectivedemand will inhibit the process of production in spiteof the fact that the marginal product of labour stillexceeds in value the marginal disutility of employment.

Moreover the richer the community, the wider willtend to be the gap between its actual and its potentialproduction; and therefore the more obvious and out-rageous the defects of the economic system. For apoor community will be prone to consume by far thegreater part of its output, so that a very modest measureof investment will be sufficient to provide full employ-ment; whereas a wealthy community will have to dis-cover much ampler opportunities for investment ifthe saving propensities of its wealthier members areto be compatible with the employment of its poorermembers. If in a potentially wealthy community theinducement to invest is weak, then, in spite of itspotential wealth, the working of the principle ofeffective demand will compel it to reduce its actualoutput, until, in spite of its potential wealth, it hasbecome so poor that its surplus over its consumption issufficiently diminished to correspond to the weakness ofthe inducement to invest.

But worse still. Not only is the marginal pro-pensity to consume1 weaker in a wealthy community,but, owing to its accumulation of capital being alreadylarger, the opportunities for further investment are lessattractive unless the rate of interest falls at a sufficientlyrapid rate; which brings us to the theory of the rateof interest and to the reasons why it does not auto-matically fall to the appropriate level, which will occupyBook IV.

Thus the analysis of the Propensity to Consume,the definition of the Marginal Efficiency of Capitaland the theory of the Rate of Interest are the threemain gaps in our existing knowledge which it will benecessary to fill. When this has been accomplished,

1 Defined in Chapter 10, below.