Prosperity and Depression.pdf

Chap. 10Thl ExpalUion Processimportance of the ,machine services relative to other input items(working capital and labour) in the production process-which isas much.as to say, roughly speaking, by the degree ofmechanisation.Here an important.qualification is called for. This relationshipis not rigid for various reasons. In the first place, surplus'capacitymay-and at the beginning' of the' expansion after a more or lesssevere depression usually .does~xist. If there is unused orunder-employed machinery' or equipment, production can beincreased by simply applying lIlore labour and raw material tothe existing eqUipment. The acceleration principle will then comeinto play only after production has been increased by so.·muchthat new machinery is thought to be desirable. But the pointwhere it become~ desirable is not determined exactly by purelytechnological considerations. .Usually the existing plant can' beworked more or less intensively:. 'although at rising cost. Thedecision to increase the plant is influenced~apart from the anticipationsabout future de~and-bythe rate of interest and certainother factors which will be discussed presently.Supposing, now, it has been decided in principleImportance to extend· the fixed equipment, it is then necessaryof rate of to determine how it should be done. As a ruleinfer,st. there is· a choice between different methods ofproduction. More or less durable equipment canbe installed, the more durable varieties involving as a. t;U1e highercost. In other words, methods of varying degrees of " roundaboutness", involving investments of different magnitude, areusually available. The magriification of derived demand-that is,the increase in investment' induced by a given increase in·thedemand for, .and production of, a finished product-dependsaccordingly on the choice' between these available methods,on the durability of the instruments (or, in other words, the"roundaboutness" of the process chosen). And this. choice,in tum, .depends : (a) on the ·rate of interest, that is the termson which the necessary funds can be ra.ised, (b) on the estimationof the risk 1· involved and on the general outlook. The1 Ct. M. Kalecki : " The Principle of Increasing Risk ", in Economica,1937, page440, reprinted in Essays in the Theo'YY of Economic Fluctuations,London, 1939.