Prosperity and Depression.pdf

Chap. II The Up-turn: Revival 399We now ask, Is it possible to decide on generalWillpay-rolls grounds which of the two possible outcomes of arise orfa'I? wage reduction is likely to prevail during a contractionprocess? Can the fall in money wages beregarded as something which, on balance, mitigates and shortensthe contraction, or·is it an inten~ifying factor? We may certainlyassume that employment and output in the industry directlyconcerned will be influenced fav~urably.1 It is hardly conceivablethat an industry would react to a fall in money wages bygiving less employment than it would otherwise do. But it doesnot necessarily follow that employment and output must rise tosuch an extent that wage disbursements increase. For variousreasons, during a depression, especially its first phase, wage reductionsare less likely to have a strong expansionary influence thanduring the upswing ofthe cycle. There is excess capacity (surplusequipment) in many lines of industry; and there may be largestocks from which raw materials and semi-finished products canI It may be, and has been, argued that, even if in principle a reductionin wages may be expected to· exercise a favourable influence, the latterwill not materialise at once and the delay will be sufficient to stultify itsoperation altogether. If an entrepreneur is led by a reduction in wagesto increase his investment, he will need some time to put his plans intoefiect. First, he is likely to wait for a while and see how things develop.Secondly, his plans must be worked out in detail before orders can b~given and t~e money actually be spent. In the meantime, wages andpay-rolls will have been reduced, and consequently the demand for goodsin general will have fallen. This will cause the general situation to deteriorate,and may well induce the producer to drop his plan of increasinghis output. If, therefore, his investments are not made at once, they arelikely not to be made at all.There is certainly much force in this argument; and we have alreadyhad occasion in our analysis (page 353) to refer to this inevitable lagbetween the conception of investment plans (or the occurrence of achange which makes the investment in principle a profitable proposition)and the actual expenditure involved.But at this point of the argument the situation is somewhat different.In the first place, we are concerned not so much with new investment infixed capital as with.a possible increase of production within the frameworkof existing plant. In the second place, it must be rememberedthat a reduction in wages may not only stimulate an increase in output,but may also induce the employer to refra~from a curtailment of productionand employment. In this latter case. the efiect of the wage reductionmay well be quite instantaneous.