Prosperity and Depression.pdf

112 AnalYsis of Theories Part IClearly, mistakes which lead to a misdirection of productiveresources can be made at any time. But there are good reasonsfor the view that they are specially likely to arise during the upswing.The prosperity phase of the cycle is characterised by heavy· investmentsfor the reason that, in many lines of industry, provisionsare made for satisfying future needs of the ultimate consumer aswell as of producers .in the intermediate stages of production.Evidently, the longer ahead demand has to be estimated the greaterthe risk of serious errors. If the estimate has to be made in aperiod of rapid changes in the economic system in general, and ifnew methods of production and the production of new types ofgoods are involved, the risk becomes still greater. Indivisibilityand durability ofinstruments and the complicated relation betweenchanges in the demand for finished goods and the demandfor durable producers' goods (as postulated by the accelerationprinciple) combine to make a smooth adjustment ofcost and supplyto changes in demand extremely difficult.The border-line between horizontal and vertical" Horizontal" maladjustments is sometimes very difficult to draw.and But since the two are not mutually exclusive, since" vertical" they can, and probably frequently do, coexist andmalacfjust- reinforce one another, the fact that classification isments. sometimes difficult in concrete cases does not weightoo heavily in the balance.To illustrate the close relationship between horizontal and verticalmaladjustment, take' again the case where a demand for acapital good (say constJ:'uctional steel) drops violently as a resultof a decrease or cessation of growth of demand for the product(say houses or motor-cars). It has been argued (as already stated)lthat this is in reality the consequence of a shortage of capitalinother words, of a vertical maladjustment in the structure of production-andthat, if the. necessary capital were forthcoming, thebuilding activity and motor-car production could continue untilthe replacement demand for houses and cars was such that thesteel mills could use their whole capacity to satisfy it.This may be so : but it is just as possible, and a good deal moreprobable, that the decrease in demand for new houses and motor-1 By Professor Hayek.