Ribert Skidelsky muses:
Keynes, Hobson, Marx: In chapter 23 of the GT, Keynes quoted the following passage from Hobson's The Physiology of Industry (1889), which Hobson had co-authored with a businessman A.F.Mummery:
Now saving, while it increases the existing aggregate of Capital, simultaneously reduces the quantity of utilities and conveniences consumed; any undue exercise of this habit must, therefore, cause an accumulation of capital in excess of that which is required for use, and this excess will exist in the form of general over-production. In this passage, Keynes wrote, can be found the 'root of Hobson's mistake', namely:
his supposing that it is a case of excessive saving causing the actual accumulation of capital in excess of what is required which is, in fact, a secondary evil which only occurs through mistakes of foresight; whereas the primary evil is a propensity to save in conditions of full employment more than the equivalent of the capital which is required, thus preventing full employment except when there is a mistake in foresight.
Their theory was incomplete, Keynes suggested, because they had no 'independent theory of the rate of interest'. This led Hobson to put too much stress on underconsumption leading to over-investment whereas the real problem was underinvestment relative to saving caused by 'the rate of profit falling below the standard set by the rate of interest’. (GT, 366-8) Keynes's explanation of ‘under-investment’ was that people had the option of holding their savings in money rather than investing it and therefore there was no connection between the rate at which they wanted to save and the rate at which they wanted to invest. 'Why', Keynes asked in 1937, 'should anyone outside a lunatic asylum wish to use money as a store of wealth?' The answer he gave was that ''our desire to hold money is a barometer of our distrust of our own calculations and conventions concerning the future….The possession of actual money lulls our disquietude; and the premium which we require to make us part with money is the measure of our disquietude' (CW, xiv, 115-6). That premium is the rate of interest. It is set by our 'disquietude', not by our saving. It cannot therefore be the mechanism which balances saving and investment, as classical economists said…. While Keynes rejected the view that over-saving could be a cause of slump, he recognized that it was more difficult to maintain continuous full employment in an economy in which wealth and income are highly unequal…. So what should governments do? Keynes suggested three expedients: they could either increase their own spending out of loans, or they could use monetary policy to force down the long-run rate of interest, thus ridding capital of its 'usurious' aspects (‘euthanasia of the rentier’) or it could redistribute wealth and income in favour of those with the highest propensity to consume. In the 'Concluding Notes' to the GT, he wrote, only experience would show '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'. (GT,377)
