Keynes’s basic psychological laws, equilibrium income, and employment theory

Keynes’s basic psychological laws: The first is the law of diminishing marginal propensity to consume. It is the proportion of people’s new income used for new consumption. The proportion of this item is decreasing, that is to say, as people's income increases, people's consumption will not increase faster than their income. People save a greater proportion of their income as wealth. Therefore, the wealthier people are, the smaller the share of total income consumed is. Since people's consumption cannot keep up with the growth of income, some products will not be sold and social production will not be balanced. The second is the law of diminishing marginal efficiency of capital. Refers to the new profit brought by an additional unit of investment. Therefore, at the beginning of investment, always invest in projects with relatively high return on capital. Subsequent investments will have a relatively lower return rate. From this point on, the expected return rate on investment will decrease. Moreover, investors can easily become pessimistic about the future, which will also make investors more negative and reduce the marginal efficiency of capital. As a result, investment demand is insufficient, affecting the macroeconomic balance. The third is liquidity preference. It refers to people’s interest in holding cash. People psychologically prefer cash because of three motivations: 1. Transaction motivation. In order to meet daily expenses, people need to keep some cash on hand; 2. Prudential motivation. For emergencies and to prevent accidents, people will also keep some cash; 3. Speculative motives. That is, in order to seek greater benefits, people also need to keep some cash so that they can be used at any time. General equilibrium theory is still of great significance in analyzing macroeconomic growth, and can enable us to deeply understand the internal mechanism of China's macroeconomic operation. Competitive general equilibrium will promote rapid and healthy growth of China's economy, and can effectively achieve full employment and narrow the income gap. Rapidly improve the welfare of all residents, so that the social wealth brought by economic development can "comprehensively benefit more than one billion people", thereby achieving a comprehensive well-off society and universal prosperity.