Prosperity and Depression.pdf

Nature and CaUSdS of the CyclePart IIlower the rate of interest, the more durable the instrument,the longer the roundabout way of production, the heavier theinvestn1ent and the larger the magnification of derived demand.Furthermore, in an atmosphere of optimism and confidence inan undisturbed development 'of economic life, people will bemore inclined to undertake heavy investment by which they arecommitted for a long period than in a state of uncertainty andapprehension.Contributionof theaccelerationprinciple.We are now in a position to formulate the contributionof the acceleration principle to the explanationof the mechanism of expansion, and especiallyof its cumulative nature. The technical fact that,in order to produce certain finishedgoods or services,one must construct durable instruments, becausethe finished goods cannot be produced otherwise or only at muchhigher cost or in inferior quality, operates as a powerful intensifierof the cumulative force of the expansion. If demand for suchgoods and services rises, investment becomes profitable. Theprofit rate rises or, to formulate it corre~tlyin terms of our demandand supply schema, the demand curve for investible funds ispushed to the right. If the supply of funds is elastic, moremoney is drawn into circulation, with the result that demand forthe finished product is further augmented and the expansionproceeds with accumulated force.It should be noted that our argument applies alsoApplication to durable consumers' goods. In their case, theto durable finished product consists of the services whichCOnSllflJlrs' flow f.rom the durable goods. If the demand forgoods. apartments rises (or is expected to rise), the deman~for investible funds for the purpose of constructinghouses will rise. The construction ofthe houses is usually undertakenby entrepreneurs, not by the prospective dwellers. Thusan increase in the annual demand for apartments may give rise toinvestment many times the amount ofthe annual rent. The serviceis being provided, so to speak, en bloc for many years to come.In the case ofsemi-durable consumers' goods such as motor-cars,furniture, radio sets and the like, there is the institutional differencethat these goods are usually bought by the consumer out of his