CH. 10 THE MARGINAL PROPENSITY TO CONSUME 119

of the marginal propensity to consume; i.e. we shallhave reached a state of true inflation.1 Up to thispoint, however, rising prices will be associated withan increasing aggregate real income.

III

We have been dealing so'far with a net increment ofinvestment. If, therefore, we wish to apply the abovewithout qualification to the effect of (e.g.) increasedpublic works, we have to assume that there is no offsetthrough decreased investment in other directions,—andalso, of course, no associated change in the propensity ofthe community to consume. Mr. Kahn was mainly con-cerned in the article referred to above in consideringwhat offsets we ought to take into account as likely tobe important, and in suggesting quantitative estimates.For in an actual case there are several factors besidessome specific increase of investment of a given kindwhich enter into the final result. If, for example, aGovernment employs 100,000 additional men on publicworks, and if the multiplier (as defined above) is 4, itis not safe to assume that aggregate employment willincrease by 400,000. For the new policy may haveadverse reactions on investment in other directions.

It would seem (following Mr. Kahn) that the follow-ing are likely in a modern community to be the factorswhich it is most important not to overlook (though thefirst two will not be fully intelligible until after BookIV. has been reached):

(i) The method of financing the policy and theincreased working cash, required by the increasedemployment and the associated rise of prices, may havethe effect of increasing the rate of interest and so re-tarding investment in other directions, unless themonetary authority takes steps to the contrary; whilst,at the same time, the increased cost of capital goods

1 Cf. Chapter 21, p. 303, below.