Prosperity and Depression.pdf

12.8 AnaIJsjs of Theories Part Ito make the issue and the two answers quite clear. The problemis this: Is the turn from prosperity to depression brought aboutby a shortage of capital or by an insufficiency of the demand forconsumers' goods? Does the investment boom collapse becausethe supply of capital becomes too small to complete ~e newroundabout methods of production, or because consumers'demand is insufficient to sustain the increased productive capacity ?The argument of the under-consumptionists is this. Duringthe upswing ofthe cycle, society develops its productive apparatus.But it takes some time before the production of consumers' goodsbegins to increase. In the meantime, their supply is deficient;prices rise; and there is therefore a constant stimulus in the directionof further investment. :But as soon as the new roundaboutmethods of production are completed, the new investments arefinished, consumers' goods begin to be poured out; the marketsfor consumers' goods are glutted : and this reacts with increasingintensity on the higher stages ofproduction.According to the other.··view, exactly the opposite is true. Thetrouble is due, not to a deficiency of consumers' demand, but tothe contrary tendency. The demand for consumers' goods tendsto rise because the newly created purchasing power, which hasbeen placed at the dispos·al of entrepreneurs, becomes income inthe hands ofthe owners ofthe factors ofproduction and is spent onconsumers' goods before the supply of these goods can be sufficientlyincreased. The demand for consumers' goods is thus toolarge rather than too small. There is not enough " waiting", notenough" lacking" in the terminology of Professor ROBERTSON,or, in ordinary words, not enough saving to complete the investmentsinitiated. The consequence is that the rate ofinterest tendsto rise, and the banks are called upon to provide the necessaryamounts of capital. Sooner or later, however, the inflation mustbe stopped; the flow ofnew credit comes to an end; and the completionofa great number ofnew investments becomes impossible.They are consequently abandoned, and this is the break whichsets in motion the downward spiral of contraction.Both theories contemplate what we have called a. vertital maladjustmentin the structure of production; but these vertical maladjustmentsare not of the same order. As we shall see at once, the