H. Gordon Hayes,

Spending, Saving and Employment

Knopf, 1947


            The inducement to invest is the locus of recent economic analysis.  Irregularity of capital investment is generally held to be the real cause of unemployment.  As a consequence of this approach, and there is sufficient unemployment to maintain remedial action, proposals usually take the form of direct efforts to induce new capital investment.

            Professor Hayes challenges this thesis and its concomitant policy.  He does not challenge the thesis that employment can be and is increased through new investment; what he does challenge is the dictum that failure or irregularity of new capital investment is the real cause of unemployment.

            But, within the market process, the inducement to extend investment involves the expectation of selling the consumers’ goods that eventuate from the new capital equipment.  And it is at this point that insufficiency first makes its appearance.  The very thing that induces new investment seems to be the thing that is lacking when new investment is “necessary.” 

An impasse is apparent.  In this situation investment can occur in the market process only when investors act otherwise than as “economic men,” either through ignorance of the deficiency of effective consumer demand or through determination to invest even though investment cannot be recovered in the market.  Neither case is characteristic of investors.  Thus incentives to increase investments cannot arise with the market process.  In that process the thing that necessitates new investment is the thing that disinclines the investor toward the purchase of new capital equipment.  Dr. Hayes point out that government or “social” investment cannot circumvent the impasse if investment involves self-liquidation in the market.  It is not who does the investing that creates the difficulty; it is rather the impossibility of recovering aggregate investment through the market process.  Investment cannot create the required inducement for its own continuance.  To maintain a given level of employment, if outright and permanent goals are to be avoided, there must be production of goods that do not enter the market.  And creation of these goods must cause, during any time period, as much as the amount of money income persons and firms seek to accumulate out of the aggregate money income realized from the given level of employment.,

            The aspect of investment-goods production that maintains or expands employment is the fact that such goods seldom are purchased initially out of money income.  Most usually they are purchased with bank credit.  And the fact that money income is paid out in the production of capital equipment without the current appearance of equivalent price tags does help temporarily to fill the gap in purchasing power created by the effort to accumulate funds.

            Expenditure without the creation of equivalent price tags is what is necessary.  Consumer-goods purchases satisfy this necessity; capital-goods purchases do not.  That is why Professor Hayes centers his attention on the propensity to consume.  Social investments of the character of roads, parks, schools, hospitals, et cetera, likewise satisfy this necessity, and that is why considerable attention is paid them.  Investment-goods production impacts on the market during its creation, as increased purchasing power; but its appearance and use intensify the difficulty from which its creation allows temporary relief.  And that is why attempt to break into the “vicious circle” at the point of investment is not a resolution of the difficulty.  Reducing the rate of interest cannot induce increased investment unless there are “fortuitous circumstances” outside the market process that introduce consumer purchasing power without introducing equivalent price tags.  To induce investment by reducing the rate of interest, it must be brought below the marginal efficiency of capital.  Professor Hayes’ whole demonstration shows that, and this is the crux of the matter, the marginal efficiency of aggregate capital must be a negative quantity.

            To maintain--much less increase--employment, the constricting circle must be broken.  But where?  At the investment point, the introduction of new purchasing power nullifies itself because it, during its life, introduces price tags exceeding the effective purchasing power introduced by its own creation.  On the other hand, the introduction of new purchasing power at the consumption point does not nullify itself in this respect; no price tags are created by an act of purchasing for consumption.  Then it is here that the constricting circle can be broken, and it is here, therefore, that analysis of the problem of unemployment should center.

            But to find the point of entry into the problem does not solve the problem.  The question of how to break in at this point still remains.

            Private banks can and have created the required purchasing power.  But this source has two fatal defects.  First, private banks must expect to be repaid.  Not only this but they must expect to be repaid more than their creation.  Secondly, private banks can hardly afford to create directly consumer purchasing power (make loans to consumers).  The first defect results in the banks setting in motion a series of catastrophic events called panic.  The second defect forbids the private banking system to introduce new purchasing power at the only point where the exercise of that power does not further intensify the impasse on the market.

            The only other funds-creating agency is government.  The simple fact is that government is the only agency that can operate continuously at a “loss.”  As the the character of the purchases that government may make, the question must be settled by deliberate planning and must be corroborated at the ballot box.  Professor Hayes makes much of this last point, and thus connects his theory of the level of employment with the theory of democratic efficiency.  That government must play an increasing role directly in the economic life of a community is no longer a question.  The only argument on this point is in respect to the specific character that role shall take.

            In support of the major thesis presented here, and for many of its corollaries, Professor Hayes displays much corroborative evidence and great analytical insight.  Objection may be taken to the choice of illustrative material or to the manner of presentation and organization, but the real substance of the argument cannot be avoided.  Particularly great is his demonstration of the inefficacy of analysis restricted to the inducement to invest.  But no less could be said of his positive analysis of the tendency toward depression and of the direction institutional adjustments must take.  And much more can well be said of his rich insight into the overall problem and of his warm and sincere concern of a people sorely troubled.