Prosperity and Depression.pdf

Chap. II The Up-tllrn : Revival 395Another factor closely connected with, or evenReplacement indistinguishable from, the revival of new investdemand.ment (probably in new and untried combinations)is the increase in replacement demand. Duringthe contraction, not only new investment, but also reinvestmenthas been curtailed. On the other hand, the capital equipment ofindustry deteriorates by wear and tear and obsolescence. Therefore,even with the reduced volume of output, it is very probable thatsooner or later the need for replacement will make itselffelt in oneindustry or another, which leads to dishoarding or new borrowingand an increase in MV.There is a further point. Producers know from experience thatprices will not fall for ever. When prices have fallen for a time,they will probably become more and more inclined to anticipatea reverse in the price movement. Accordingly, they will not putoff imp.rovements and replacements for so long as is possible fromthe technological point of view without impairing the process ofproduction: they will rather seize the opportunity of having theimprovements and replacements made when prices are stilllow. 1Fall in We must now discuss one very important type ofadjustment which under a competitive price systemwages. would appear to be the natural cure for unemployment-namely,the reduction ofmoney wages and other cost items. 2We are not here concerned with the social and moral aspectsof the problem. Nor do we focus attention on the problem ofwhether a reduction in wages is the best method of bringing adepression to an end (assuming that it is a possible method andthat there ate alternative methods). The problem with which we1 The problem of " replacement waves n has been discussed in thefirst part of the book (see page 84). Mr. Keynes, 'too, has availed himselfof this standard tool of cycle analysis (General Thecwy, page 253)• An analysis in many respects similar to the following one was givenby Professor S. Slichter in his book Towards Stability, New York, 1935,and in his paper" The Adjustment to Instability" in the AmericanEconomic Review, Vol. 26 J 1936 (Supplement), pages 196-213 passim.As- was pointed out in Chapter 8, § 5, above, the following analysis hasalso many points in common with Mr. Keynes' treatment.