Prosperity and Depression.pdf

Chap. 3The Over-investment Theoriesof change-and not with the direction of the absolute change ofthefinal demand; it does not, in other words, depend on whether finaldemand is rising or falling in an absolute sense.The assumption that replacement demand isReplacement constantcalls for a quantitative qualification to whichdemand. Professor FRISCH l has drawn attention. If capitalequipment is being continuously increased by equalamounts per unit of time, the demand for replacement must riseafter a while to a new level. In our numerical example, this pointwould be reached after ten years, when the 50 additional machinesof the first year are worn out and must be replaced. If at thispoint the demand for the finished product ceases to rise, thedisappearance of the demand for additional machines will becompensated by the increase in replacement demand. Hence itis not quite correct to say that a decrease in the rate of increaseofdemand for the finished product must always lead to an actualdecrease in the derived demand. Itis worthy of note, however, thatin each situation (under the conditions assumed) there is one, andonly one, state of demand for finished goods-sometimes a risingor falling, sometimes a constant, demand-which will preservestability in the demand for machines. The exact relationshipbetween the various magnitudes involved could be formulatedmathematically. 2 We shall see later that a number of restrictingand modifying qualifications must be made : it seems hardlyworth while therefore at this point to attempt an absolute precisionwhich cannot in any case be maintained in applying the theorem.One point should, however, be clearly realised:Influence of and that is the circumstance that the degree ofdegree of magnification of derived demand depends ceterisdurability. paribus upon the durability of the machines. If weassume the service life of the machine to be twiceas long-viz., twenty years-the replacement demand for a stock1 "The Inter-relation between Capital Production and ConsumerTaking" in Journal of Political Economy, Vol. 39, October 1931, page 646•See also the subsequent discussion between Frisch and J. M. Clark inVols. 39 and 40 of Joufnal of Political Economy. Pigou has alreadymade sufficient allowance for this quantitative qualification in his formulationof the acceleration principle in his Industrial Fluctuations, Ch. IX.II See the above-mentioned article by Frisch.