Prosperity and Depression.pdf

354 Nature and Causes of the Cycle Part IIA somewhat different situation arises where die rise in cost ofindustry A is due to increased competition for the means ofproduction by other industries'. Then a compensatory change isprovided in the shape of the increased production of the otherindustries.This discussion leaves us with the conclusionConclusion. that a breakdown in an individual industry mayvery well cause at least a temporary fall in totaldemand below the level at which it would otherwise stand.Whether this will start a cumulative process of contraction or notdepends, first, on the magnitude of the disturbance and secondlyon the general situation. Ifa general expansion is going on whichhas not yet exhausted its force, such a disturbance may be overcome,provided it is not too strong. If, however, the expansion hasalready lost -its elan, the economic system "'\\Till be vulnerable andmay easily be plunged into a process ofgeneral contraction. Thispoint we propose to consider in the following section.A word may be said as to the relation of thisStatic theory analysis of the probable consequences of partialand the disturbances to the familiar .analysis qf the samecumulative events on the basis of static equilibrium theory.precess. According to the latter, a. reduction of output andemployment in a particular industry liberatesforces which tend to restore equilibrium.: wages should fall, andthis should make for re-employment ofthe dismissed workers. Ofcourse, wages may be kept up and the mobility ofthe workers maybe defective-in which case unemployment may persist for a longtime. But this need not cause a general contraction. On theother hand, if the process of investment in a particular industry isinterrupted or scaled down, because expectations about the futuredemand have been revised in a downward direction (for any reasonwhatever), funds which otherwise would have been invested in theindustry in question are set free: the rate of interest should fall,and this should induce investment somewhere else.The tacit assumption underlying this reasoning, in so far as itapplies to a monetary economy at all, is that the total flow ofmortey) MV, is not reduced-so that on this assumption it isimpossible to explain why such a partial disturbance should lead to