Prosperity and Depression.pdf

Chap. 10 The Contraction Process 343experienced .fa/l) of demand (and for prices) may be extrapolatedin different ways into the future. We may arrange a whole scaleof possible expectations, ranging from the more "optimistic"down to more and more "pessimistic" varieties. It may beassumed that the recent fall in demand is only temporary and willbe followed by a rise, or that the new low level will persist or thatthe downward movement will continue at the same, or at anaccelerated, rate. If we say, for instance, that a gloomy outlookis bound to be created by a prolonged contraction, what we meanis that people become more and more inclined to expect that'a fallin demand which .they have experienced in the recent past willcontinue (at the same or at an accelerated rate).1.Thus, logically speaking, the door is open for all kinds ofreactions; and it is only a question of fact which one is the mostfrequent and typical. The supposition which underlies the rigidapplication of the acceleration principle is that the present levelof demand is assumed to rule in the future also. Now, it is verydoubtful whether itis possible to generalise as to the exactbehaviourof producers in this respect. Fortunately for the broad ,result,however, it is sufficient to indicate a certain range of expectationsas probable and to eliminate others as highly unlikely.Obviously, the cumulative process ofcontraction will go' on-notnecessarily indefinitely, butfor a while-if the low level of demandreached at any point of time during the downswing is expected topersist, or if more pessimistic expectations prevail, the moreoptimistic ones being regarded as on the whole unlikely.:I This1 Professor J.. R. Hicks has tried to systematise the various possiblereactions. He introduced the concept "elasticity ofexpectations" whichhe defines IIas the ratio of the proportional rise in expected future prices• . .to the proportional rise in (the) current price". Tllus theelasticity of expectations is unity, if a change in current prices will changeexpected prices in the same direction and proportion. (Cf. Value andCapital, Oxford, 1939, page 205.) He also expresses the cumulative.nature of processes of change in terms of elasticities of expectations. Aswas also shown at various points earlier in this chapter, changes give riseto cumulative processes, if expectations move in the same direction asthe current price-that is to say, if the elasticity of expectation is at leastunity. (Ct. Hicks, Zoe. cit., pages 251-252).I It is sufficient if this is the case in the majority of industries. Occasionalexceptions would not alter the result.