Prosperity and Depression.pdf

Chap 13 The Multiplier, Rigidities and Public Spending 477Professor SAMUELSON gives a brilliant general solution dividing allpossible combinations of c and /3 into four groups in such a way thateach group comprises all th?se combinations which give rise to a typeof behaviour which is qualitatively different from the resqits of combinationsbelonging to another group.The assumptions on which these model sequences rest are, of course,.very rigid and unrealistic. But in many respects they can be relaxedeasily without materially changing the results. Naturally what holds ofgovernmental expenditure holds also of other types of investment andconsumption expenditure. Moreover, in many cases the qualitativeresults are not changed if, instead of a continual stream of governmentalexpenditure, a finite number of expenditures is assumed; even thenoscillations damped, undamped or antidamped, follow for certain valuesof the two coefficients. What is changed by assuming a finite numberof impulses (expenditures) instead of a continual stream is, as ProfessorSAMUELSON shows, the level around which the oscillations playrather than their nature.It is, of course, impossibly unrealistic to adhere to the assumption ofa constant marginal propensity to consume and relation. In real termsthey cannot remain constant when the movement is in the upward direction;for when full employment is reached (or approached with .bottlenecks)a .further rise of consumption and investment ·in accordance witha constant multiplier and r.elation is' physically impossible. In monetaryterms the expansion could conceivably continue unchanged eventhen; but in that case prices would have to rise, and moreover a perfectlyelastic credit supply would have to be presupposed. If creditsupply is not perfectly elastic, the rate of interest (or some sort ofcredit rationing) has to be introduced as an additional factor influencinginvestment. There are a hundred other ways in which these simplesequences, would .in practice require to be elaborated and complicated.But even in their simplest forms they are useful because they revealthe implications of assumptions which are frequently made more· orless loosely in business cycle theory. And as the simplest cases dearlydemonstrate, the~e implications are such that it is absolutely impossiblefor the untutored eye to foresee them in all their complexity. This isnaturally still more true if the assumptions are made more realistic andtherefore more complicated.