Prosperity and Depression.pdf

400 Nature and Causes of the Cycle Part IIbe obtained-i.e., output can be increased without heavy newinvestment. If new investment in fixed· capital were required, itwould be difficult to raise the necessary sums. Pessimism prevails,and people are reluctant to take the risk of investment for longerperiods. But, as we have seen, these conditions are likely tochange gradually when the contraction has progressed far enough.On the other hand, a reduction in wages is bound to have a favourablepsychological effect on business-men, and will make themmore inclined to invest and the banks more inclined to lend; andthis tends to mitigate deflation.There is another very important point to beInfluence mentioned. The case ,\,\There producers use partof cost of what they save through the cut in wages toreduction strengthen their liquidity or to repay bank loanson sales implies that total receipts from sales do not fall byreceipts under ~o much as pay-rolls. In other words, if prices fallcompetition so much that all that is gained by cutting wages isand monopolY. passed on to the consumer, the position of theproducer is not improved and there is no scope foradditional hoarding so far as he is conc€rned. This could onlyhappen under conditions of perfect competition and even thennot to a full extent. Even on the assumption of perfectcompetition in the strict sense of economic theory, when everyproducer regards the price at which he can sell as given independentofhis own action and expands his production accordingly up to thepoint where his marginal cost equals the price-even on thisassumption total receipts will not fall by as much as pay-rolls exceptin the improbable case ofmarginal prime cost being constant-i.e.,the marginal cost curve being horizontal. In all cases wheremarginal cost rises, only a part of the reduction in the total cost ofproduction which has been achieved by the cut in wages will bepassed on to the consumer. 1 In other words, gross profits will be] It may be added that the view which onecan frequelltlyhearexpressedthat a wage-reduction can have a stimulating effect only if prices arecorrespondingly reduced, is not generally correct. Even if prices are notreduced at all more employment may result from a reduction in moneywa~es, if entrepreneurs are· induced or enabled to resume the replacementof their equipment which they had neglected.