Prosperity and Depression.pdf

Chap. IIThe Down-turn: Crisispossible by population growth, inventions, etc.). If at this pointthe level of activity in a number ofindustries is still dependent onthe growth of employment and production in other industriesi.I.,ifreplacement demand has not yet picked up by so much as toabsorb the whole output of machines I--the volume of outputwill not simply stop expanding and go on at the level whichit has reached. It will actually decline in the capital-goodsindustries, which are geared to the expanding consumers' goodsindustries. 1Evidently, the situation cannot be put straight simply by tryingto continue monetary Jexpansion. The total production cannotgo on increasing at the rate so far maintained. Some capital-goodsindustries are adapted to an expansion ofthe lower stages. Hencethere must be some change in the direction of production (or elsethe production in the capital-goods industries in excess of replacementrequirements must be taken on stock-an impossible assumptionwhich we may discard a limine). Only a degree of foresighton the part ofproducers in general which it is too much to expectin the real world could obviate the appearance of such a situation.Ifit has once arisen, serious repercussions on employment could beforestalled only by a degree of adjustability of producers andmobility oflabour which does not exist in reality.1 This possibility of smooth termination of a growth process has beendiscussed in the first part of this book (see page 91).I If I understand Mr. Harrod rightly, this is also his diagnosis of thebreakdown. "In a revival, consumption grows at a rate that cannotpossibly be maintained. At the outset, the slack of human capacityavailable for work is greater than that of capital equipment, since theformer has been maintained and grown at its normal rate during theslump, while the latter has not. After the revival has proceeded. a shortdistance, therefore, the demand for capital goods arising out of the (abnormallyhigh) pro~pective increase of consumption stands at a level atwhich it cannot be maintained. The increase of consumption must slowdown, once a considerable proportion of the unemployment is taken backinto work. Consequently, a point is bound to'come at which the volumeof orders for additional capital goods which it appears profitable to giveis reduced, and this . . . spells a major depression. (The TradeCycle, Oxford, 1936, page 165). The only difference between Mr. Harrod'sposition in respect to the explanation of the crisis and the one taken inthese pages seems to be that Mr. Harrod puts forward the above as ,theexclusive explanation, whilst here it is treated as one re3$on amongmany others-although· one which it is especially difficult to avoid.