INTRODUCTION

Production decisions that determine the current level of employment and output are based on short-term expectations of proceeds in the near future. These expectations can never stray very far from actual conditions because they are soon subject to verification by realised results. Keynes thus felt justified, as noted in the preceding chapter, in using realised results to represent short-term expectations. Total receipts are made up of consumption and investment expenditures in a model of a closed economy in which government expenditures are excluded. Keynes used such a model to develop his theory. His usual procedure was to treat these expenditures as though they satisfied the requirements for short-period equilibrium. Current consumption expenditures were implicitly assumed to be in the desired relation to current income, and actual investment expenditures were assumed equal to those intended for this period.

Keynes did not always make clear the special assumptions that he was using in working with consumption and investment expenditures, and some of his statements are at variance with the ‘historical time’ setting of his analysis. Keynes sometimes treats the definitional equality between saving and investment as though this saving also satisfies the equilibrium requirement that saving be in the desired relation to income. The marginal propensity to consume that he uses in presenting the logical theory of the multiplier is not related to the consumption function that he developed to justify the relation between consumption expenditures and employment that is an important element in the aggregate demand function.