Prosperity and Depression.pdf

Chap. II The Down-turn: Crisis 3'7supply of labour, at least, is presumed to remain extremely elasticin a downward direction : that is to say, a fall in demand doesnot lead to a heavy fall in wages in such a way as to stabiliseemployment. Elasticity of supply· in the downward direction,coupled with inelasticity in the upward direction, is equivalentto a downward rigidity and an· upward flexibility in wages.It .is of the very essence of. the' eJq)ansion that it leads to'fuller employment and that the supply of the means of productionbecomes less and less elastic in the upward direction. An increasein demand lea~srather to arise in wages than to an increase insupply and employment. Unfortunately, this lack of elasticity inthe labour supply, which is a desirable thing in so far as it is due toincreasing employment and to the.exhaustion of the reserve ofunemployed, has .(as will be explained presently) the same effectas an inelastic money supply in that it makes the economic systemless resistant to the i~pactof deflationary forces. The situation isthe more serious in that-unlike an inelastic money. supply-itcannot be remedied by purely institutional (i.e., monetary) reforms.Take first an extreme case. Suppose there is full employment ofall factors ,of production. The money .stream, MV, must thenremain constant in face ofthe forces making for expansion-exceptto the extent to which the natural increase in the supply of factors(population gro.wth) and in their efficiency (technological progress)permits of an increase in output-or else prices must rise and anoutright inflation develop. If the latter happens, it is easy to seewhy the position is untenable, why the rise in prices will becomeprogressive and will lead .sooner or later to a breakdown. 1If, onthe other hand, MV is kept constant, in spite of the rise in thedemand for. funds, equilibrium may be preserved; but (as has beenexplained above) the system is then very sensitive to deflationarysbpcks and may easily be plunged by some accident into a spiral ofcontraction.These considerations make it clear that, under full employment,a given deflationary shock is more likely to entail a general1 This statement might, perhaps, be somewhat modified : a slow risein prices may perhaps be maintained for a long time without degeneratinginto a headlong inflation. This qualification does not. however. substantiallyaffect the argumen.t.