Knowledge that Transforms

IT is quite common to discuss interest theory and influence of a controlled rate of interest on economy in terms of rate of interest, assuming some definite, and often fixed, relationship among various types of rates. Lord Keynes, for example, referred to the complex of rates of interest on loans of various maturities and risks. 1 Dr. J. R. Hicks, in a later work,2 also speaks of rate; thus, he states that rates will differ some sort of 'normal' risk-premium, whose size will depend upon estimate put upon gain in security (p. I50I). Yet, even most superficial inspection of interest rate data will show that various complexes do not move together. Particularly is this true of various risks within same time (or maturity) category. Moreover, there is no logical reason for concordant movement to rule all time. Borrowing from Hicks, we may say that variations in rate of interest among loans of same duration are caused by differences in risk of default by borrower, I or, rate for each loan of a given duration is pure rate of interest plus a risk-premium. To a great extent, this risk element is a subjective valuation of lender; that is, it is a measure of how certain he feels that loan will be repaid.4 Hence, if lender feels cheerful, he is likely to believe risk element less than if in a more disagreeable frame of mind. fairly well established fact is that community in general, and lenders in particular, feel more optimistic in prosperity than in a depression.5 Applying this statement to risk premium, we would expect it to decrease in prosperity and increase in a depression. In other words, spread between safest investments and riskier ones would tend to narrow as boom proceeds, and widen as times become worse. Thus, complex of interest rates is highly unstable, and we must be careful in regard to rates we are discussing. Rates on safe investments will fall in depression, particularly after passing of panic phase, but rates on risky investments may well rise. Hence, to state that rate of interest falls in this case is erroneous; some rates fall, while others rise, or fall less. Implied in preceding paragraph is difficulty of government manipulation of rate of interest, particularly current cheapmoney policy. All that may result from such interference is a low rate of return of triple A securities, but an increase in risk-premium on riskier securities, notably those representing new investment, whose revival may be chief aim of such a policy. If this interference creates fears among investing class, either as to future interest rates being higher after cheap-money policy is ended, thus depressing capital value of older securities, or simply a reluctance to invest because of political opposition to such governmental policy, then risk premium will almost certainly rise pari passu with fall in yields of safe investments.

i. in his recent book Keynesian Revolution, a significant contribution to current literature, Lawrence Klein says (p. 91 ) that there are two Keyneses in the matter of the savingsinvestment equation. This statement has frequently been made before and while much has been written about it, perhaps something useful can still be added. In Klein's exposition, savings and investment as observables are always equal, being the point of intersection of the schedules of savings and investment. There is, of course, as Klein points out, no inconsistency between (i) the definition which makes actual or observable savings and investment always equal, and (2) the concept of savings and investment as intersecting schedules. Nevertheless the question remains whether these schedules are to be regarded as (a) very short run schedules which might at times shift about violently and capriciously in response to temporary conditions, or (b) longerrun schedules determined by fairly stable factors involving the behavior pattern of a community with respect to the ratio of savings to income at different income levels. 2. A related, but distinct, terminological matter should be mentioned. While the Keynesian theory of income determination can indeed be formulated in terms of savings and investment schedules, I am increasingly convinced that the presentation as given in the General Theory is more useful. In the General Theory, Keynes, in fact, did not explicitly work with savings and investment schedules,' even though it is perfectly true that his analysis can be put in these terms. General Theory, however, makes (i) actual investment and (2) the consumption function, the determinants of income. The propensity to consume and the rate of new investment determine between them the volume of employment. . (General Theory

A T THE present time, the problem of full employment is overshadowed in the public mind by the more immediate problems of rising prices and industrial disputes. This is natural in a period in which the level of employment is fairly satisfactory and our most urgent problems are those of an inflationary rather than a deflationary character. We may be confident, however, that public concern over the danger of mass unemployment will remain dormant or inarticulate, only as long as that danger does not seem immediate and pressing. The strength of the underlying public sentiment favoring government action to assure continuing full employment is attested by the fact that the candidates of both major parties in the last presidential election found it expedient to give this objective their full and unqualified support. The nature of the public sentiment on this issue was further evidenced by the passage of the Act of I946 which retained much of the substance, though it lost some of the bold language, of the original Full Employment Bill. Full employment as an economic norm seems destined to achieve in the twentieth century an acknowledged priority comparable to the position held by the division of labor in the eighteenth century, and by the optimum allocation of resources in the nineteenth century. The Great Depression showed that the division of labor and the optimum allocation of productive factors could not suffice for the maximization of wealth, and that positive policies to sustain the over-all level of operation of the economy were equally if not more essential. A growing sensitivity to the physical and mental suffering attendant upon large scale unemployment, and to its alarming political repercussions, is also responsible for the growing sense of public responsibility in this field. A substantial number of professional economists have remained skeptical of assured full employment as a national policy. Some have felt that the methods by which sustained full employment would be sought would be either ineffective or dangerous. Others have viewed the full employment objective itself as either meaningless or undesirable. It is with this second type of question, relating to the meaningfulness or desirability of full employment as a goal, that the present paper is exclusively concerned. No attempt will be made to consider, much less evaluate, the methods which might be required for its attainment.