Prosperity and Depression.pdf

1.16 AnalYsis of Theories Part Ito undertake the construction of new capital equipment, in spiteof decreased demand for consumers' goods, is provided by afall in the rate of interest, which permits a lowering of unit costthrough the utilisation of roundabout methods of productionof superior productivity. The cruder versions of the underconsumptiontheory do not offer an adequate analysis of theseessentials of the capitalistic method of production. They thereforedo not deal with the possibility ofa smooth adjustment of theproduction process to saving. But it must be admitted that, whiletheir opponents have shown the theoretical possibility of a smoothabsorption of savings in new investments, they have not shownits necessity. Entrepreneurs may make no use of the possibilityof extending the structure of production. The consumers' goodsindustries and the immediately preceding stages will thereuponeurtailproduction; and this may lead to a destJ;uction of purchasingpower. This in turn may deter producers in the higher stagesfrom embarking on new investments, in spite of the incentiveprovided by the fall in the interest rate. All depends on theirpsychological reactions, on their anticipations. If the moneysaved is not invested, a cumulative process of deflation will startand saying may thus defeat its own end.Thus we are back at case (a) discussed above. Much willdepend on whether there is a continuous flow or a gradual increaseof savings, whether there are violent changes, and whether thereis a brisk and continuous demand for new credit (capital) so that anincreasing supply is readily absorbed at slightly falling interest rates. 1Let us now apply this analysis to the broad facts of the businesscycle. Durihg the depression, demand for new capital is at alow level and inelastic. There is therefore a great danger of newsavings running to waste instead of being invested. During theupswing, demapd is brisk and new savings easily find an outletin new investment. Can the over-saving doctrine contributeanything to the explanation of the crisis, the down-turn fromprosperity to depression?There is no evidence for the assumption that the rate of savingrises at the end of the boom and so creates serious difficulties.1 Bresciani-Turroni, loco cit.