The General Theory of Employment, Interest and Money Part 12

Chapter 24.

CONCLUDING NOTES ON THE SOCIAL PHILOSOPHY.

TOWARDS WHICH THE GENERAL THEORY MIGHT.

LEAD.

I.

The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes. The bearing of the foregoing theory on the first of these is obvious. But there are also two important respects in which it is relevant to the second.

Since the end of the nineteenth century significant progress towards the removal of very great disparities of wealth and income has been achieved through the instrument of direct taxation?income tax and surtax and death duties?especially in Great Britain. Many people would wish to see this process carried much further, but they are deterred by two considerations; partly by the fear of making skilful evasions too much worth while and also of diminis.h.i.+ng unduly the motive towards risk-taking, but mainly, I think, by the belief that the growth of capital depends upon the strength of the motive towards individual saving and that for a large proportion of this growth we are dependent on the savings of the rich out of their superfluity. Our argument does not affect the first of these considerations. But it may considerably modify our att.i.tude towards the second. For we have seen that, up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it; and only in conditions of full employment is a low propensity to consume conducive to the growth of capital. Moreover, experience suggests that in existing conditions saving by inst.i.tutions and through sinking funds is more than adequate, and that measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favourable to the growth of capital.

The existing confusion of the public mind on the matter is well ill.u.s.trated by the very common belief that the death duties are responsible for a reduction in the capital wealth of the country. a.s.suming that the State applies the proceeds of these duties to its ordinary outgoings so that taxes on incomes and consumption are correspondingly reduced or avoided, it is, of course, true that a fiscal policy of heavy death duties has the effect of increasing the community's propensity to consume. But inasmuch as an increase in the habitual propensity to consume will in general (i.e. except in conditions of full employment) serve to increase at the same time the inducement to invcst, the inference commonly drawn is the exact opposite of the truth.

Thus our argument leads towards the conclusion that in contemporary conditions the growth of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it. One of the chief social justifications of great inequality of wealth is, therefore, removed.

I am not saying that there are no other reasons, unaffected by our theory, capable of justifying some measure of inequality in some circ.u.mstances. But it does dispose of the most important of the reasons why hitherto we have thought it prudent to move carefully. This particularly affects our att.i.tude towards death duties: for there are certain justifications for inequality of incomes which do not apply equally to inequality of inheritances.

For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist to-day. There are valuable human activities which require the motive of money-making and the environment of private wealth-owners.h.i.+p for their full fruition. Moreover, dangerous human proclivities can be ca.n.a.lised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandis.e.m.e.nt. It is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative. But it is not necessary for the stimulation of these activities and the satisfaction of these proclivities that the game should be played for such high stakes as at present. Much lower stakes will serve the purpose equally well, as soon as the players are accustomed to them. The task of trans.m.u.ting human nature must not be confused with the task of managing it. Though in the ideal commonwealth men may have been taught or inspired or bred to take no interest in the stakes, it may still be wise and prudent statesmans.h.i.+p to allow the game to be played, subject to rules and limitations, so long as the average man, or even a significant section of the community, is in fact strongly addicted to the money-making pa.s.sion.

II.

There is, however, a second, much more fundamental inference from our argument which has a bearing on the future of inequalities of wealth; namely, our theory of the rate of interest. The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment. Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment.

There can be no doubt that this criterion will lead to a much lower rate of interest than has ruled hitherto; and, so far as one can guess at the schedules of the marginal efficiency of capital corresponding to increasing amounts of capital, the rate of interest is likely to fall steadily, if it should be practicable to maintain conditions of more or less continuous full employment?unless, indeed, there is an excessive change in the aggregate propensity to consume (including the State).

I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure.

This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour-costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the c.u.mulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest to-day rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea- change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward. At the same time we must recognise that only experience can show how far the common will, embodied in the policy of the State, ought to be directed to increasing and supplementing the inducement to invest; and how far it is safe to stimulate the average propensity to consume, without foregoing our aim of depriving capital of its scarcity-value within one or two generations. It may turn out that the propensity to consume will be so easily strengthened by the effects of a falling rate of interest, that full employment can be reached with a rate of acc.u.mulation little greater than at present. In this event a scheme for the higher taxation of large incomes and inheritances might be open to the objection that it would lead to full employment with a rate of acc.u.mulation which was reduced considerably below the current level. I must not be supposed to deny the possibility, or even the probability, of this outcome. For in such matters it is rash to predict how the average man will react to a changed environment. If, however, it should prove easy to secure an approximation to full employment with a rate of acc.u.mulation not much greater than at present, an outstanding problem will at least have been solved. And it would remain for separate decision on what scale and by what means it is right and reasonable to call on the living generation to restrict their consumption, so as to establish in course of time, a state of full investment for their successors.

III.

In some other respects the foregoing theory is moderately conservative in its implications. For whilst it indicates the vital importance of establis.h.i.+ng certain central controls in matters which are now left in the main to individual initiative, there are wide fields of activity which are unaffected. The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community. It is not the owners.h.i.+p of the instruments of production which it is important for the State to a.s.sume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. Moreover, the necessary measures of socialisation can be introduced gradually and without a break in the general traditions of society.

Our criticism of the accepted cla.s.sical theory of economics has consisted not so much in finding logical flaws in its a.n.a.lysis as in pointing out that its tacit a.s.sumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establis.h.i.+ng an aggregate volume of output corresponding to full employment as nearly as is practicable, the cla.s.sical theory comes into its own again from this point onwards. If we suppose the volume of output to be given, i.e. to be determined by forces outside the cla.s.sical scheme of thought, then there is no objection to be raised against the cla.s.sical a.n.a.lysis of the manner in which private self- interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them.

Again, if we have dealt otherwise with the problem of thrift, there is no objection to be raised against the modern cla.s.sical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect compet.i.tion respectively. Thus, apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialise economic life than there was before.

To put the point concretely, I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use. There are, of course, errors of foresight; but these would not be avoided by centralising decisions. When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.

Thus I agree with Gesell that the result of filling in the gaps in the cla.s.sical theory is not to dispose of the 'Manchester System', but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production. The central controls necessary to ensure full employment will, of course, involve a large extension of the traditional functions of government. Furthermore, the modern cla.s.sical theory has itself called attention to various conditions in which the free play of economic forces may need to be curbed or guided. But there will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good.

Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency?the advantages of decentralisation and of the play of self-interest. The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far. But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the h.o.m.ogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.

Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensitv to consume and the inducement to invest, would seem to a nineteenth- century publicist or to a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative.

For if effective demand is deficient, not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros, so that the players as a whole will lose if they have the energy and hope to deal all the cards. .h.i.therto the increment of the world's wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough.

The authoritarian state systems of to-day seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is a.s.sociated?and, in my opinion, inevitably a.s.sociated?with present-day capitalistic individualism. But it may be possible by a right a.n.a.lysis of the problem to cure the disease whilst preserving efficiency and freedom.

IV.

I have mentioned in pa.s.sing that the new system might be more favourable to peace than the old has been. It is worth while to repeat and emphasise that aspect. War has several causes. Dictators and others such, to whom war offers, in expectation at least, a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely, the pressure of population and the compet.i.tive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.

I have pointed out in the preceding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the compet.i.tive struggle for markets. For all measures helpful to a state of chronic or intermittent under- employment were ruled out, except measures to improve the balance of trade on income account.

Thus, whilst economists were accustomed to applaud the prevailing international system as furnis.h.i.+ng the fruits of the international division of labour and harmonising at the same time the interests of different nations, there lay concealed a less benign influence; and those statesmen were moved by common sense and a correct apprehension of the true course of events, who believed that if a rich, old country were to neglect the struggle for markets its prosperity would droop and fail. But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely s.h.i.+ft the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.

V.

Is the fulfilment of these ideas a visionary hope? Have they insufficient roots in the motives which govern the evolution of political society? Are the interests which they will thwart stronger and more obvious than those which they will serve?

I do not attempt an answer in this place. It would need a volume of a different character from this one to indicate even in outline the practical measures in which they might be gradually clothed. But if the ideas are correct?an hypothesis on which the author himself must necessarily base what he writes?it would be a mistake, I predict, to dispute their potency over a period of time. At the present moment people are unusually expectant of a more fundamental diagnosis; more particularly ready to receive it; eager to try it out, if it should be even plausible. But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Appendix I PRINTING ERRORS IN THE FIRST EDITION CORRECTED IN THE PRESENT EDITION.

Page Line Correction [ Chapter 6 ] 6 For 'possession' read 'possessions'

[ Chapter 7 ] 12 For 'has' read 'had'

[ Chapter 10 ] 13 For '23' read '19'

[ Chapter 10 ] footnote I, line 2 For 'th' read 'the'

[ Chapter 13 ] 21 For 'security' read 'precautionary'

[ Chapter 16 ] 9 For 'than' read 'that'

[ Chapter 17 ] 32 For 'output' read 'the stock of a.s.sets in general'

[ Chapter 17 ] 25 For 'their' read 'its'

[ Chapter 17 ] 31 For 'or' read 'of'

[ Chapter 19 ] 28 For 'three' read 'four'

[ Chapter 19 ] 4 For 'technique' read 'techniques'

[ Chapter 22 ] 23 For 'income' read 'incomes'

[ Chapter 23 ] 7 For 'Mercantilist' read 'Mercantilists'

These corrections come to light in preparing various foreign editions of The General Theory, in preparing the variorum version of earlier drafts which appears in volume XIV, or in setting this book for press. The corrections do not cover more substantial errors such as the unsatisfactory presentation of aggregate supply and demand on Chapter 3 or the inadequate derivation of the equations on Chapter 21.

Appendix 2 From The Economic Journal, September 1936 FLUCTUATIONS IN NET INVESTMENT IN THE UNITED STATES.

In my General Theory of Employment, Interest and Money, Chapter 8, I made a brief attempt to ill.u.s.trate the wide range of fluctuations in net investment, basing myself on certain calculations by Mr Colin Clark for Great Britain and by Mr Kuznets for the United States.

In the case of Mr Kuznets' figures I pointed out (Chapter 8) that his allowances for depreciation, etc., included 'no deduction at all in respect of houses and other durable commodities in the hands of individuals'. But the table which immediately followed this did not make it sufficiently clear to the reader that the first line relating to 'gross capital formation' comprised much wider categories of capital goods than the second line relating to entrepreneurs' depreciation, etc.'; and I was myself misled on the next page, where I expressed doubts as to the sufficiency of the latter item in relation to the former (forgetting that the latter related only to a part of the former). The result was that the table as printed considerably under-stated the force of the phenomenon which I was concerned to describe, since a complete calculation in respect of depreciation, etc., covering all the items in the first line of the table, would lead to much larger figures than those given in the second line. Some correspondence with Mr Kuznets now enables me to explain these important figures more fully and clearly, and in the light of later information.

Mr Kuznets divides his aggregate of gross capital formation (as he calls it) for the United States into a number of categories as follows: (1) Consumers' Durable Commodities These comprise motor-cars, furniture and house equipment and other more or less durable articles, apart from houses, purchased and owned by those who consume them. Whether or not these items should be included in investment depends (so far as the definition is concerned) on whether the expenditure on them when it is initially made is included in current saving or in current expenditure; and it depends (so far as the practical application is concerned) on whether in subsequent years the owners feel under a motive to make provision for current depreciation out of their incomes even when they are not replacing or renewing them. Doubtless it is not possible to draw a hard-and-fast line. But it is probable that few individuals feel it necessary in such cases to make a financial provision for depreciation apart from actual repairs and renewals. This, in combination with the difficulty of obtaining proper statistics and of drawing a clear line, makes it preferable, I think, to exclude such equipment from investment and to include it in consumption-expenditure in the year in which it is incurred. This is in accordance with the definition of consumption given in my General Theory, p. 54.

I shall, therefore, exclude this category from the final calculation; though I hope to deal with the problem more thoroughly at a later time. Nevertheless it may be interesting to quote Mr Kuznets'

estimates, which are of substantial magnitude:

(Millions of dollars.) 1925 1926 1927 1928 1929 1930 1931 1932 1933.

Consumer's durable commodities 8,664 9,316 8,887 9,175 10,058 7,892 5,885 4,022 3,737.

The above figure for 1929 includes 3,400 million dollars for motor-cars, whilst the depreciation in respect of the same item for that year is estimated at 2,500 million dollars.

(2) Residential Construction This is an important and highly fluctuating item which should undoubtedly be included in investment, and not in consumption expenditure, since houses are usually regarded as purchased out of savings and not out of income, and are often owned by others than the occupiers. In the Bulletin from which these figures are taken Mr Kuznets gives no estimate for the annual rate of depreciation, etc. More recently, however, his colleague, Mr Solomon Fabricant, has published such estimates, which I have used in the following table:

(Millions of dollars.) 1925 1926 1927 1928 1929 1930 1931 1932 1933.

Residential construction 3,050 2,965 2,856 3,095 2,127 1,222 900 311 276 Depreciation* 1,554 1,676 1,754 1,842 1,911 1,901 1,698 1,460 1,567 Net investment 1,496 1,289 1,102 1,253 216 ?679 ?798 ?1,149 ?1,291* These figures are calculated in terms of current (reproduction) costs. Mr Fabricant has also provided estimates in terms of original cost, which for the years prior to 1932 are considerably lower.

(3) Business Fixed Capital Mr Kuznets here distinguishes expenditure on new producers' durable goods and business construction from the net change in 'business inventories,' i.e. in working and liquid capital; and we shall, therefore, deal with the latter under a separate heading.

The amount of the deduction to obtain net investment in respect of parts, repairs and servicing, and repairs and maintenance of business construction as distinct from depreciation and depletion, which is not made good, depends, of course, on whether the former have been included in gross investment. Mr Kuznets gives a partial estimate for the former but the figures given below exclude these items both from gross and from net investment. But whilst the result of deducting both the repairs item and the depreciation item probably corresponds fairly closely to my net investment, the two deductions taken separately do not closely correspond to my deductions for user cost and supplementary cost; so that it is not possible to calculate from Mr Kuznets' data a figure corresponding to my (gross) investment.

The following table gives in the first line 'the formation of gross capital destined for business use, exclusive of parts, repairs and servicing, and repairs and maintenance of business construction, and excluding changes in business inventories'; and in the second line the estimated 'depreciation and depletion' on the same items:

(Millions of dollars.) 1925 1926 1927 1928 1929 1930 1931 1932 1933.

Gross business capital formation (as above) 9,070 9,815 9,555 10,019 11,396 9,336 5,933 3,205 2,894.

Depreciation and depletion* 5,685 6,269 6,312 6,447 7,039 6,712 6,154 5,092 4,971 Net investment 3,385 3,546 3,243 3,572 4,357 2,624 ?221 ?1,887 ?2,077 * These figures are not taken from Mr Kuznets' memoranda, hut from Mr Fabricant's later and revised estimates. As before they are in terms of current (replacement) cost. In terms of original cost they are appreciably lower prior to 1931 and higher subsequently.

(4) Business Inventories For the financial gains or losses arising out of this item there appear to be fairly adequate statistics in the United States, though not in this country. Mr Kuznets' figures are as follows:

(Millions of dollars.) 1925 1926 1927 1928 1929 1930 1931 1932 1933.

Net gain or loss in business inventories 916 2,664 ?176 511 1,800 100 ?500 ?2,250 ?2,250.

This table covers not only manufacturers' stocks but also stocks of farmers, mines, traders, government agencies, etc. From 1929 onwards the figures given in Mr Kuznets' memorandum of 1934 proved to require correction. Those given above are provisional and approximate estimates, pending the publication of revised figures by the National Bureau.

(5) Public Construction and Borrowing The relevant figure in this context is not so much the gross (or net) expenditure on construction, as the amount of expenditure met out of a net increase in borrowing. That is to say in the case of public authorities and the like, their net investment may be best regarded as being measured by the net increase in their borrowing. In so far as their expenditures are met by compulsory transfer from the current income of the public, they have no correlative in private saving; whilst public saving, if we were to find a satisfactory definition for this concept, would be subject to quite different psychological influences from private saving. I have touched on the problem in my General Theory, footnote. I propose, therefore, to insert in place of the figures of public construction the 'loan expenditure' of public bodies.

Mr Kuznets has very kindly supplied me with figures for the net changes in the amount of public debt (Federal, State and local) outstanding in the United States, which, except for minor changes in the Government's cash balances, represent the amount of public expenditure not covered by taxes and other revenues. This is given below in parallel with his estimates of the amount of construction by public authorities. The interesting result emerges that up to 1928 there was a net reduction in the public debt in spite of a large expenditure on public construction, and that even up to 1931 some part of public construction was met out of revenue. The excess of borrowing over construction in 1932 and 1933 represents, of course, various measures of public relief.

(Millions of dollars.) 1925 1926 1927 1928 1929 1930 1931 1932 1933 Public construction 2,717 2,612 3,045 3,023 2,776 3,300 2,906 2,097 1,659 Net change in outstanding public debt**

?43 ?280 ?244 ?50 +441 +1,712 +2,822 +2,565 +2,796.

* See Mr Kuznets' Bulletin, Table II, line 22, brought up to date on the basis of more recent data.

** See col. 9 of the table given in the appendix below.

(6) Foreign Investment Finally, we have the net change in claims countries, estimated by Mr Kuznets as follows:

(Millions of dollars.) 1925 1926 1927 1928 1929 1930 1931 1932 1933.

428 44 606 957 312 371 326 40 293.

(7) Aggregate Net Investment We are now in a position to combine the above items into a single aggregate. This total is not quite comprehensive, since it excludes construction by semi-public agencies, and a small amount unallocable construction. But Mr Kuznets is of the opinion that both omissions are quite minor in character and could not much affect the movements of net investment in the table which now follows.

(Millions of dollars.) 1925 1926 1927 1928 1929 1930 1931 1932 1933.

Residential construction 1,496 1,289 1,102 1,253 216 ?679 ?798 ?1,149 ?1,291 Business fixed capital 3,385 3,546 3,243 3,572 4,357 2,624 ?221 ?1,887 ?2,077 Business inventories 916 2,664 ?176 511 1,800 100 ?500 ?2,250 ?2,250Net loan expenditures by public authorities ?43 ?280 ?244 ?10 441 1,712 2,822 2,565 2,796.

Foreign investment 428 44 606 957 312 371 326 40 293 Aggregate net investment 6,182 7,263 4,531 6,283 7,126 4,128 1,629 ?2,681 ?2,529 It is evident that this table is of first-cla.s.s importance for the interpretation of business fluctuations in the United States. In matters of detail the following points stand out: (a) The arrears of residential construction at the end of 1933 must have been enormous. For there had been no net investment in this field since 1925. This does not mean, of course, that the actual state of housing was so bad as this. Some gross investment in housing continued throughout, and the gradual deterioration in the state of accommodation, through obsolescence and decay not made good, does not impair forthwith to an equal extent the actual accommodation available for the time being.