EVSEY D. DOMAR omy may increase by a smaller amount, because the operation of these ew projects may involve a transfer of labor(and other factors) from ther plants, whose productive capacity is therefore reduced. We shall define o, the potential social average investment productivity as (1) The following characteristics of o should be noted 1. Its use does not imply that other factors of production and tech nology remain constant. On the contrary, its magnitude depends to a very great extent on technological progress. It would be more correct to say that o refers to crease in capacity which accompanies rather than one which is caused by investment 2. o refers to the increase in potential capacity. Whether or not this potential increase results in a larger income depends on the behavior of money expenditures 3. o is concerned with the increase in productive capacity of the whole society, and not with the rate of return derived or expected from investment. Therefore o is not affected directly by changes in distribu tion of income 4. 8 is the maximum that g can attain. The difference between them will depend on the magnitude of the rate of investment on the one hand, and the growth of other factors, such as labor, natural resources, and technological progress on the other. A misdirection of investment will also produce a difference between and o We shall make the heroic assumption that s and o are constant. From(1)it follows that dP dt It is important to note that, with a given o, dP/dt is a function of I, and not of dI/dt. Whether di/dt is positive or negative, dP/dt is always positive so long as o and I are positive. Expression (2)showing the increase in productive capacity is tially the supply side of our system. On the demand side we hav multiplier theory, too familiar to need any comment, except for an emphasis on the obvious but often forgotten fact that with any given marginal propensity to save, dY/dt is a function not of I, but of di/dt Indicating the marginal propensity to save by a, and assuming it to be constant, 'we have the simple relationship that I am disregarding the external economies and diseconomies of the older plants due to the operation of the new projects Over the period 1879-1941 the average propensity to save(ratio of net capital