Prosperity and Depression.pdf

Chap. IIThe Down-turn : Crisisa general contraction. Our analysis has shown that the statictheory is inadequate. It describes (as it were) an ideal case whichmay occur, but only under particular favourable circumstances.In the probable event ofa hold-up--even a temporary hold-up-inthe total stream ofpurchasing power, the forces ofcontraction maydrive the economy farther away from equilibril1m; and the equilibratingtendencies may not have time to come into play or, if theydo come intoplay, may not be strong enoughto restore equilibrium~since the disturbance of the latter will have been still furtherincreased in the meantime. What is treated in the static theoryas an instantaneous adjustment may be a long-drawn-out andpainful process of contraction. It may occupy the whole periodof the downswing of a business cycle) during which the wholesituation may undergo far-r~aching changes, so that the equilibriumeventually attained will in all probability differ considerably fromthe equilibrium which in more favourable circumstances mighthave been reached, ifnot at once, at any rate sodn after the occurrenceof the disturbance.§ 4. WHY THE ECONOMIC SYSTEM BECOMES LESS AND LESSCAPABLE OF WITHSTANDING DEFLATIONARY SHOCKS AFTERAN EXPANSION HAS PROGRESSED BEYOND A CERTAIN POINTWe have seen that an expansion is in its fir§tW~ the phase of a somewhat precarious nature, so that it isexpansion liable to be reversed. by an accidental disturb~ce.tails off. Ifit has a chance to develop undisturbed for a while,it is likely to gather momO(ltum and then becomes,to a certain· extent, immune against disturbances, such as thoseanalysed in the preceding section, which tend to reduce totaldemand and bring about a general contraction. This immunity isthe result of the fact that total demand is increasing so fast thatan adverse influence, which in other circumstances would haveinitiated a contraction process, does not lead to an absolute fall oftqtaldemand, but only to a slowing-down ofthe upward movement.Expectations are not yet excessively optimjstic and are again andagain surpa&sed by results. We must now enquire why themovement should necessarily slow down after a while and