Prosperity and Depression.pdf

100 Ana!Jsis of Theories Part Ifor finished goods will induce a considerable increase in the demandfor capital goods.But, even if the proportion of fixed to working capital and thedurability ofthe fo.rmer is the same for A and B, it is quite possiblethat the shift in demand from A to B will create a net increase indemand for fixed capital (provided the machinery producing A issuch that itcannot be used for the production ofB). The principleof acceleration of derived demand works in both directions, as weknow. But, inthe downward direction, its operation is limited bythe fact that production cannot fall below zero. If, therefore, inthe case ofa shift ofdemand from A to B, the demand for machineryproducing A falls to zero, this loss 'may very well be more thancompensated by an increase in the demand for new equipmentproducing B.IThe net result of a shift in the demand for finished productsIon the demand for capital goods will be lessened, if machineryproducing A can be used without alteration, or with only slightalterations, for the production ofB. It is very likely that, in somehigher stage, the two streams ofproduction, traced backward fromA and B, coincide.. The steel industry, for example, is common toa number of Industries besides A and B-e.g., railway constructionand the building industry. Obviously, it makes a greatdifference whether the production processes of A and B" coincidein (say) the second,. Ot only in the fifth, stage of production.If the two commodities A, and B are far removed from oneanother in the sphere of production, only a small part of thefixed' capital devoted to the production of A can be used forthe production of B; and so in the event of a shift of demandfrom A to B, any increase in the demand for new equipmentand for the materials needed to construct it will be comparativelystrong.1 It follows that the expansionary effect of. a shift in the demand ismore likely to be great if it occurs during a period when the demand forequipment in both industries is at a relatively low level. If it takes placewhile a general expansion is in progress, the acceleration principle hasfree play to operate in both directions and the effects on industry A and Bare therefore more likely to compensate each other.