The Instability of Commodity Production
A central implication of the commodity producing character of capitalism — namely, the size of the market determining the level of commodity production — is analytically captured by the Keynesian proposition that investment governs savings through the multiplier mechanism (see Section C, Chapter 2). Viewed as a circular flow of income, the level of expenditure or investment is the independent variable that determines the size of the market and therefore income as well as saving as its fraction as dependent variables. This theory of effective demand also captures the conditions for realisation of profit. Assuming all wages are consumed, the larger is the expenditure decision of the capitalists on their consumption and on investment, the larger becomes the size of the market for realising the surplus of consumption goods into monetary profits (see, in particular equations (2.7) to (2.9) of Chapter 2). Thus, when workers spend, by assumption, what they get as wages, the profit that the capitalists make depends on what they spend.
KeywordsBusiness Cycle Wage Rate Real Wage Investment Opportunity Full Employment
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