CH. 21

THE THEORY OF PRICES

299

fluenced by the way in which the new income resultingfrom the increased effective demand is distributedbetween different classes of consumers. Nor, of course,is this list of possible interactions complete. Neverthe-less, if we have all the facts before us, we shall haveenough simultaneous equations to give us a determinateresult. There will be a determinate amount of increasein the quantity of effective demand which, after takingeverything into account, will correspond to, and be inequilibrium with, the increase in the quantity of money.Moreover, it is only in highly exceptional circumstancesthat an increase in the quantity of money will beassociated with a decrease in the quantity of effectivedemand.

The ratio between the quantity of effective demandand the quantity of money closely corresponds to whatis often called the “income-velocity of money”;—except that effective demand corresponds to the incomethe expectation of which has set production moving,not to the actually realised income, and to gross, notnet, income. But the “income-velocity of money”is, in itself, merely a name which explains nothing.There is no reason to expect that it will be constant.For it depends, as the foregoing discussion has shown,on many complex and variable factors. The use ofthis term obscures, I think, the real character of thecausation, and has led to nothing but confusion.

(2) As we have shown above (p. 42), the distinc-tion between diminishing and constant returns partlydepends on whether workers are remunerated in strictproportion to their efficiency. If so, we shall haveconstant labour-costs (in terms of the wage-unit) whenemployment increases. But if the wage of a givengrade of labourers is uniform irrespective of theefficiency of the individuals, we shall have risinglabour-costs, irrespective of the efficiency of the equip-ment. Moreover, if equipment is non-homogeneousand some part of it involves a greater prime cost per