In addition to expenditures on consumer goods and capital goods two sources of aggregate demand are important: government expenditures and net foreign balances. That the demand for capital goods and consumer goods will grow was pointed out in Chapters 5 and 7. A considerable growth can be expected in the demand for both existing and new types of capital goods to support the expected expansion of output and growth of population, to increase the productivity of workers, to modernize in order to meet new technological demands, and to produce new products.
The exact amount of this demand for capital goods is unknown but it is expected to be large. To estimate this even roughly we would have to know the amount of future growth, the efficiency of future capital, the intensity of its utilization and the efficiency with which management will utilize it, and the speed of depreciation and obsolescence. Nevertheless, it is generally agreed that the demand will be a large and, if past practices are followed, a variable one, thus creating a problem of instability for the economy. Private investment tends to rise rapidly during an upswing of the economy, and, since it is usually accompanied by an increase in credit, tends to drive the economy further upward. In downswings investment tends to drop off rapidly, accentuating the decline in the economy. One way of offsetting this instability in private investment is to vary government spending in the opposite direction. To the extent government expenditure is able to act as a balancing factor, it will have a special importance for us.
The demand for consumer goods will grow as incomes rise. Incomes have been rising now for a long time and have reached a point where the average American has a scale of living considerably above subsistence. Relatively few Americans have so little income that there is no margin for reducing their expenditures. As a result, even consumer spending is subject to considerable variation in response to variations in the level of the economy. Government spending may have to become more important to compensate for this variability, as well as for that in investment.
It is not at all certain that increased incomes for consumers will