368 THE GENERAL THEORY OF EMPLOYMENT bk. vi

evil is a propensity to save in conditions of full employ-ment more than the equivalent of the capital which isrequired, thus preventing full employment exceptwhen there is a mistake of foresight. A page or twolater, however, he puts one half of the matter, as itseems to me, with absolute precision, though still over-looking the possible role of changes in the rate of interestand in the state of business confidence, factors whichhe presumably takes as given:

We are thus brought to the conclusion that the basis onwhich all economic teaching since Adam Smith has stood,viz. that the quantity annually produced is determined by theaggregates of Natural Agents, Capital, and Labour available,is erroneous, and that, on the contrary, the quantity produced,while it can never exceed the limits imposed by these aggre-gates, may be, and actually is, reduced far below this maximumby the check that undue saving and the consequent accumula-tion of over-supply exerts on production; i.e. that in the normalstate of modern industrial Communities, consumption limitsproduction and not production consumption. 1

Finally he notices the bearing of his theory on thevalidity of the orthodox Free Trade arguments:

We also note that the charge of commercial imbecility,so freely launched by orthodox economists against ourAmerican cousins and other Protectionist Communities, canno longer be maintained by any of the Free Trade argumentshitherto adduced, since all these are based on the assumptionthat over-supply is impossible. 2

The subsequent argument is, admittedly, incom-plete. But it is the first explicit statement of the factthat capital is brought into existence not by the pro-pensity to save but in response to the demand resultingfrom actual and prospective consumption. The follow-ing portmanteau quotation indicates the line of thought:

It should be clear that the capital of a community cannotbe advantageously increased without a subsequent increase

1 Hobson and Mummery, Physiology of Industry, p. vi.

2 Op. cit. p. ix.