Prosperity and Depression.pdf

Nature and Causes of the CyclePart IIexpansion continues and total demand increases, it is to an increasingextent prices rather than output or employment which rise.In such a situation, it is clearly misleading to speak of elasticityofsupply or output as a whole, or ofelasticity oflabour or factors,of productipn in general, and to measure it by the total figures ofunemployment or by some average over the whole industry ofthe technically possible increase of output. The elasticity ofsupply is not uniform: it depends very much on the path whichexpansion tends to follow. In other words, it depends on theincrease in total demand and the distribution of the given increasein demand among the various products. If, in the course of theexpansion, demand increases for the product of those industrieswhere a large part of unemployment and over-capacity is concentrated,the elasticity of supply and employment will be greater thanin the case when demand tends to flow into channels where thereare no unemployed factors. In the latter case, a, given increase indemand will lead to a rise in cost and prices land the favouredindustries may draw away factors of production from thoseindustries where demand has not risen.! It follows that it is quite1 A striking illustration is pr~videdby the situation in Germany duringthe years 1933-1935, which is described in Die WirtschaftskuYve, herausgegebenunter Mitwirkung derFrankfurter Zeitung (Heft III 1933/36,February 1936, pages 237.239) in a passage which may be summarised asfollows:Credit expansion in the form of notes and deposits took place inGermany in the years 1933 and 1934, thoughit was in part ofiset by thecontinuance of hoarding and debt repayment. At the time, however,the economy was just recovering from a deep 'depression; and rawmaterials" plant capacity and labour were available in abundance.Owing to the elasticity of supplyin ali branches of industrial production,the additional purchasing powerwas fully compensated bya l."-ise in productionwith scarcely any rise in prices.In 1935. on the other hand, owing to the rapid recovery-and, in partalso, to the foreign trade difficulties-shortage of raw materials developedin certain directions : stocks diminished : and here and there plantcapacity was exhausted, and even the labour supply ran short. Theelasticity of supply having thus declined, expansion became possibleonly at increasing CORt; and, the writer considers, the limits of comllensatorycredit expansion were reached.It is true that the industries producing for consumption hung behindthe investment-goods industries to a greater degree than in any previousupswings; and it was only \n the latter that there was any evidence ofapproaching exhaustion of the forces of expansion. Conceivably, the