Journal Article A View of the Aggregation Problem Get access M. H. Peston M. H. Peston London Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 27, Issue 1, October 1959, Pages 58–64, https://doi.org/10.2307/2296051 Published: 01 October 1959

PpTHE effect on national income of a change in government expenditure exactly matched by a change in tax revenue has recently been the subject of discussion in several articles.' Much of this discussion has been prompted by a desire to generalize the result obtained in the paper by Baumol and Peston and to remove certain loose ends which were left hanging in their analysis. That there were such loose ends is beyond doubt. Baumol and Peston did not fully distinguish direct from indirect taxes in their model; they considered only one marginal propensity to consume; and they did not take into account the possible effect on the level of investment of a balanced budget change. The reason for these omissions is, of course, clear. A number of economists had analyzed the balanced budget problem and produced models in which the value of the balanced budget multiplier was unity.2 It was obvious, however, that the number of assumptions which had to be made in order to obtain this conclusion rendered it of little practical value. A need seemed to exist, therefore, for modifying the model in the direction of realism without at the same time making it intractable. This was done by the very simple device of introducing the idea of the marginal propensity of the public sector to spend on currently domestically produced goods and services. Calling this k (o < k < i), and the marginal propensity of the private sector to consume currently domestically produced goods and services c, a balanced budget change equal to A T would cause

I. Introduction, 603. — II. Variations in factor inputs that are less than proportionate to changes in output, 604. — III. The influence of risk on the scale of operations, 607. — IV. More fundamental difficulties with constant factor proportions, 608. — V. The management factor and economies of scale, 611. — VI. Conclusion, 612.