Prosperity and Depression.pdf

Chap. 8Recent Discussions on the Trade Cyclethe interest rate falls, and equilibrium can ,be reached at a higherlevel than ifinterest rates had not fallen.The three schedules, together with the quantity of money andsome other data such as the available factors ofproduction (labour,equipment, etc.) and the wage-unit,! determine the level ofemployment and unemployment. Hence it is impossible to blameanyone of the three " psychological factors " (schedules) abovefor the absence offull employment. Or, if one chooses, one mayattribute the existing unemployment to either one alternatively, ifall the other data are given: other things being given, employmentwould be greater (smaller), if the propensity to consume wasgreater (smaller) than it actually is. Or: other things being given,employment would rise, if the liquidity-preference were to fall;or if the marginal efficiency of capital were greater, etc.It is now easy to see that anyone of the variousOther theories hypotheses concerning the causes of the downinMr. K~'Ynes' turn or the upturn of the business cycle whichterms.we have reviewed in the earlier chapters is compatiblewith, and can be expressed in terms of,Mr. KEYNES' theoretical apparatus. Employment may start to fall,(a) because the propensity to save has become stronger without anoffsetting weakening of the liquidity-preference; (b) because, forone reason or the other, the.marginal efficiency of capital collapses(that is Mr. KEYNES' own tentative hypothesis for the crisis inthe typical trade cycle) ; (c) because the liquidity-preference properbecomes stronger (i.e., because M 2increases-i.e., people hoard) orthe banks contract the quantity ofmoney. 2Similarly, the various hypotheses concerning the forces whichmay bring about an upturn in employment can be classifiedaccording to the Keynesian categories. Employment and incomemay start to rise (a) becaus~ ofa shift to the right ofthe schedule ofthe marginal efficiency of capital: this may be due to inventions,1 See Gene'Yal Theo'Y'Y1 pages 4Iand 247. That the wage-unit-that is,"the money-wage of a labour unit "-must be given, is a highly importantfact which is frequently overlooked and will come up for discussion below(page 238). It implies that an equilibrium with less than full employmentcan exist only if money wages are rigid.2 For further details and hypotheses, see Chapter II, section B. below.