Prosperity and Depression.pdf

Chap. II The Up-turn: Revival 379of the upswing, each type of expenditure stimulates the other:but here we are concerned with the initiating forces. First wepropose to discuss the possibilities of an increase in producers'spending-that is, of a revival in investment as the starter of anexpansion.A stimulus to investment can come either from a change on thedemand side or, if there is still a latent demand fo~ investiblefunds-latent, i.e. 'not effective, because the ruling rate of interestis too high-from a change on the supply side. Anything thathas the effect (other things, including the demand for consumptiongoods, being equal) of shifting the demand curve or the supplycurve to· the right tends to bring about an expansion. 1Let us now discuss in turn those factors which.· affect supplyand those which affect· demand. 2If the demand for investible funds is really soFactors inelastic over a certain range that a change in theincreasing interest rate ha.s no influence at all on the amountsupPlY of of money invested (that is to say, if the demandinvestible curve is a vertical straight line), a change on thefunds. supply side will make no difference to investmentor to the .effective quantity of money. This is,however, not the rule, even at the bottom of a depression. Itmay be the case for certain types of credit-e.g., short-termI In the Wicksellian terminology, anything that tends to raise theequilibrium or natural rate andjorto depressthe money or market rate ofinterest has an expansionary inftuence. In Mr. Keynes' terminologywe have to express the expansionary factors as an increase of the propensityto consume ; or as a shift to the right of the schedule of marginalefficiency ofcapital, both associated with an elastic schedule of liquiditypreference proper (elasticity greater than zero) ; or as a downward shiftofthe liquidity-preference schedule. (See Chapter 8, §§ 3, 4. 5, above.)I The distinction between factors affecting the demand for, and factorsaffecting the supply of, investible funds, although useful,· should notblind us to the·. fact that there 'are many measures and: events whichobviously affect both demand and supply--.e.g., the imposition of a tariff.(Compare, onthisparticular case, Chapter 12.) Certainforces and motives,which we describe as general optimism or pessimism, work on the mindof both the borrower and lender, and thus. in1iuence both supply anddemand. If a firm has idle funds at its disposal--e.g., in the shape ofdemand deposits-and the question is whether it should use them forexpanding production or not, it is borrower and lender at the same time,so that demand and supply are in the same hands.