Prosperity and Depression.pdf

Chap. 4 Changes in Cost as Cause of Crises 1°7and depression. Whether a series of crop failures,. over-investment,monetary deflation, under-consumption or anything else isultimately responsible for the breakdown of the boom and for thedepression, the proximate cause of the reduction in industrialoutput is the fact that expected prices do not cover productioncost. All these factors must finally find their expression somewherein a disappearance of the profit margin. (There are otherformula: which are as vague and unhelpful as the cost-of-productionformula--e.g., the assertion that the breakdown is due to thefact that demand has fallen short of supply, .to a disequilibriumbetween production and consumption, or to over-productionin certain lines ofindustry and so on.)lThe rise of production cost during the prosperityMitchell on phase and the reduction of production cost duringthe cyclical the depression playa prominent role in the explanamovementsof tion of the cycle by Professor W. C. MITCHELL.production The following is his description of the process :cost. "The decline in overhead cost per unit of output(which was brought about by the first increase inproduction after the trough of the depression) ceases when enterpriseshave once secured all the business they can handle withtheir standard equipment, and a slow increase of these costsbegins when the expiration of the old contracts makes necessaryrenewals at the high rates of interest, rent and salaries whichprevail in prosperity. Meanwhile, the operating costs rise ata relatively rapid rate. Equipment which is antiqua.ted andplants which a~e ill located or otherwise work at some disadvantageare again brought into operation. The price of labourrises, not only because the standard rates ofwages go up, but alsobecause of the prevalence of higher pay for overtime. Still moreserious is the fact that the efficiency of labour declines, becauseovertime brings weariness, because ofthe employment of ' undesirables',and because crews cannot be driven at top speed whenjobs are more numerous than men to fill them. The prices ofraw materials continue to rise faster, on the average, than theselling prices of products. Finally, the numerous small wastesJ. Compare L. Robbins, The G'Yeai, Depf'ession (1934), Chapter II.