Prosperity and Depression.pdf

Na/Nrc and Causes of the CyclePart IIstarted with, or has advanced to the attainment of, a state of fullemployment is more difficult: it will be attempted in § 3. 1If there is much unemployment, the supply of labour is completelyor almost completely elastic in the upward direction-thatis to say, an increasing demand can be satisfied at the same oronly a slightly higher wage. The supply of other means ofproduction is also elastic, since there are stocks of raw materials,under-employed capital equipment, etc. In such a situation, thereare no technical reasons why production should not be increasedat short notice all along the line in almost all stages and branchesof industry.Suppose, now, expansion has been started for any reasonwhatsoever-e.g., because new investment opportunities havebeen opened up and large sums are being invested over aconsiderable period of time. at some point in the economicsystem (to build, say, a new railway line).1 It has often been argued-e.g", by Professor Hayek-that an analysisof the cycle must start from an equilibrium with full employment. Onecannot assume unemployment from the beginning, it is said;, because itis the thing which has to be explained. But ~urely it must be possibleand legitimate to investigate what happens when business has begun toexpand after a depression which has created much unemployment andover-capacity, without first explaining how the depression has beenbrought about. This latter question we shall take up later. The orderin which the various problems connected with the cycle are considered isa matter of exposition rather than of logical necessity. Furthermore,the question whether an expansion can start from a sit1,1ation of fullemployment, and what it looks like and how it develops when it does,is not neglected, but only postponed.It should be noted that the equilibrium concept of theoretical economicsby no means implies fun employment of all the factors of production.There are, first,. apparent exceptions which really turn on the properdefinition of unemployment. (C/. A. C. Pigou, The Theory 0/ Unemployment,London, 1933. Part I, Chapter I.) In any economy, there aremeans of production which could be used but are not used because itdoes not pay-submarginal land, unemployable workers, etc. Secondly,voluntary unemployment does not count. If, at the prevailing wage-rate,certain people do not care to work, they are not to be counted as unemployed.Thirdly, if the pricesof some factors ofproduction (e.g., wages) arekept too high by a trade union, by·State intervention, by tradition or forany other reason,there maybesome unemployment (unused factors) consistentlywith perfect equilibrium. In a sense, this kind of unemployment,too, may be called " voluntary ". (On this concept of " involuntaryunemployment" compare Chapter 8, § 5.)