Prosperity and Depression.pdf

Chap. 13 The I Multiplier, Rigidities and Public Spending 473changes induce import changes depends on many other factors; amongthem the degree of employment prevailing in a country; and hence thephase of the cycle is certainly a very important one: If a high degree ofemployment has been reached (near the cyclical peak) a rise in incomewill lead to a sharper increase in imports than in the case where thereis much slack and unemployment.If we want to formulate the difference of the two approaches in .onesentence we could say this: These new theories try to analyse sequences,transitions from one equilibrium to another in ~concrete terms, while thetraditional theories were more interested in the description of equilibriumpositions and have a tendency to minimise transitional processes.But it is a difference in degree rather than in kind.§ 3. THE COMBINATION OF THE ·MULTIPLIER AND THEACCELERATION PRINCIPLE IN DYNAMIC MODELSIn many places of this book 1 it was stressed that the reciprocal stimulationof consumption and investment is an integral part of many cycletheories. The cumulative nature of expansion and contraction processesis explained largely by the interplay of producers' spending (investment)and consumers' spending. The two-way relationship betweenconsumption and investment has been discussed by economists under theheading "multiplier" (influence of investment on consumption) and"acceleration principle" (influence or consumption, or rather changesin consumption or income on investment). The technique of the theoreticalanalysis of these relationships has been greatly improved inrecent years. The analysis has become more explicitly dynamic, 2 thatis to say the relationships in question are all interpreted so as to implytime lags; the magnitudes are being carefully "dated" (HICKS). Moreover,a number of writers have constructed complete models showingthat cyclical fluctuations can be obtained with the help of these tworelationships without having recourse to anything else. These simplec10dels are, of course, purely theoretical. A system which runs in terms1 See, e.g., page 344.2 Mr. Keynes' system is still completely static. Mr. Harrod's system is in~completely dynamized; he introduces the dynamic acceleration principle but hestill interprets the multiplier as. an instantaneous relationship.