Prosperity and Depression.pdf

Chap. 13 The Multiplier, Rigidities and Public Spending 483is: less capital will be used per unit of output 1 and investment may decrease.In a slightly different form the proposition will i sound morefamiliar: an increase in prices of fin.ished goods-money wages remainingconstant-is equivalent to a decrease in real wages; and with therate of interest unchanged, aFall in real wages will induce asobstitutionof labor for capital.We may now summarise Professor HAYEK'S theory as far as it concernsthe upswing and the upper turning point as follows: in the laterstages of an expansion real wage rates fall. This brings about a shiftto less capitalistic methods of production, reduces demand for loanablefunds and spells depression.A similar development in the opposite direction is sketched for thedepression: real wages rise and this rise eventually, by inducing a substitutionof capital (or labour, that is the adoption of more capitalisticmethods of production, stimulates investment demand and brings abouta general revival. Whilst, however, for the upswing and the upperturning point the sketched theory is put forward as an exclusive explanation2 (apart, probably, from the possibility that external disturbancesmay interrupt an expansion), it is not clear whether the sameprinciple is meant to apply to all contractions and revivals to the exclusionof other explanations.. At any rate the theory is not a fullfledgedcycle theory. It is not worked out as a complete sequence model; henceit is difficult to decide whether the elements presented are formallysufficient to explain cyclical oscillations or whether it is necessary tosupplement them by other factors such as "secondary deflation", "speculativeexaggerations" and the like in order to obtain oscillations.We shall therefore confine our critical examination of this interestingtheory to the following points: (I) The validity of the Ricardo effectas an abstract proposition. Is it true that there is a tendency to shift to1 On the question of the precise definition and measurement of "capital intensity"of production see N. Kaldor, "The Recent Controversy on the Theoryof Capita!"', Econometrica, July 1937; "On the Theory of Capital: A Rejoinderto Professor Knight", ibid., April 1938; "Capital Intensity and the Trade Cycle",Economics, February 1939 and his controversy on ~his subject with Dr. Hawtrey~n Economica, February 1940. Professor Hayek states that he uses these conceptsin "very much the same sense" as Mr. Kaldor (loc. cit., page 17).2 "Once the cumulative process has been entered upon the end must alwayscome through a rise in profits in the late stages [that is, at the consumption end]and can never come from a fall in profits or an exhaustion of investment opportunities."(Loc. cit., page 56.)