Prosperity and Depression.pdf

Chap. II The Up-turn: Revival 397situation remains unchanged (or even deteriorates). Each ofthese extreme assumptions-or, for that matter, an' assumptionintermediate between the two-may be true under certain circumstancesand false under others. Without specifying the attendantcircumstances and distinguishing a. number of different ca.ses~nothing definite can be said.We begin by assuming an isolated country, leaving eomplicationsarising from international trade for later treatment. Wliat holdstrue of an isolated country holds true substantially also of any bigcountry which need not allow its internal policy to be influencedby considerations of international trade.If an individual firm manages to reduce wages, itEffect ofwage will usually .be able to expand production at thereductions expense of other firms in the same industry, so thata particuJar the others will be forced to follow suit. Therefore,industry. we had better start with the assumption that moneywages are reduced throughout the entire branch ofindustry concerned. What will be the possible or typical reactionof the wage-cut on this industry---Ieaving aside for the momentindirect influences on other industries and repercussions of thesesecondary effects on the industry where wages were reduced?We shall try to answer this question with special reference to theproblem ofhow MVis.likely to be affected.A priori, there is a wide range of possibilities. At the oneextreme the industry. may expect a great increase in demand froma fall in price made possible by the reduction of cost, and mayaccordingly increase production by so much that employmentincreases by more than the wage has fallen, so that the sum disbursedfor wages directly and indirectly through the purchase of rawmaterial and equipment is actually greater than it was before. (Wecharacterise this by saying. that the elasticity of the industry'sdemand for labour, including indirect demand exercised throughthe purchase ofmeans ofproduction, is greater·than unity-whichinvolves an even greater elasticity of demand for the product ofthis industry.)1 In the other extreme, there is the possibility thatI Even if the output of the industry in question does not increase asa consequence ofa wage reduction, the industry may be enabled by thereduction of its labour cost to give more employment, ifit uses the money