CHAPTER 10

THE MARGINAL PROPENSITY TO CONSUME AND

THE MULTIPLIER

We established in Chapter 8 that, unless something occurs to change the propensity to consume, employ- ment can only increase pari passu with investment. We can now carry this line of thought a stage further. For in given circumstances a definite ratio, to be called the Multiplier, can be established between income and in- vestment and, subject to certain simplifications, between the total employment and the employment directly employed on investment (which we shall call the primary employment). This further step is an integral part of our theory of employment, since it establishes a precise relationship, given the propensity to consume, between aggregate employment and income and the rate of investment. The conception of the multiplier was first introduced into economic theory by Mr. R. F. Kahn in his article on “The Relation of Home Invest- ment to Unemployment” (Economic Journal, June 1931). His argument in this article depended on the fundamental notion that, if the propensity to consume in various hypothetical circumstances is (together with certain other conditions) taken as given and we con- ceive the monetary or other public authority to take steps to stimulate or to retard investment, the change in the amount of employment will be a function of the net change in the amount of investment; and it aimed at laying down general principles by which to estimate the actual quantitative relationship between an incre-

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