Prosperity and Depression.pdf

Chap. 13 The Multiplier, Rigidities and Public, Spending 485point-output" production, i.e., that all investment is done at one pointand all output appears at one point (no cooperating labor being requiredbetween input and output) 1 ; in that case the "total" investmentperiod is equal to the "average" investment period. Suppose we haveto compare a one-year and a half-year method. One hundred dollars'worth of input yields 106 dollars' worth of output in one year 9correspondingto a per annum rate of profit of 6 per cent. If the 6 monthsmethod is to be equally profitable, 100 dollars' worth of input mustyield 103 dollars' worth of output in 6 months. Compound interestneglected, 100 dollars invested for one year in the 6 r.:lonths method willthen also yield 6 per cent. However, the total an'nual output per 100dollars in investment will be nearly twice as large in the 6 monthsmethod than in the one year method; it is 206 dollars' worth in the 6months method compared with 106 in the one-year method. Hence, ifthe price of the product rises by 2 per cent, gross receipts rise for the6 months method by 4. 12 dollars (206 dollars, plus 2 per cent) andfor the one year method by only 2. I 2 dollars (106 dollars, plus 2 percent) . Since it was assumed that input (labour cost) has remainedunchanged, net profits rise more for the 6 months than for the oneyearmethod.~:(2) From the RICARDO effect it only follows that an increase in" consumerdemand that leads to a rise in prices and fall in real wage:> ma),bring about a decrease in investment. Professor HAYEK elucidates histheory by relating it to the acceleration principle. The acceleration1 As in the wine and forest examples in pure capital theory.2 Mr. Tom Wilson, loe. cit., page 177, draws another conclusion. He makesthe same assumption about "point-input and point-output" as we made above,and derives the formula: "net-profit = gross receipts - (initial cost + interestcharges on initial cost)" (We disregarded interest on initial cost, but that doesnot materially affect the outcome.) He concludes: "It is clear at once thatchanges in real wages will have no influence on the choice in met.hod, for netprofits will be changed by the same amount on all methods" (page 177) . Now,this is a non sequitur. Mr. Wilson overlooks the fact that for the shorter methodsgross receipts per unit of dollar invested per unit of time must be greater thanfor the longer method, if net profit per unit of time and dollar invested is to bethe same for both methods before the change in price has occurred. Hence bya given change in pr~ce, the profitability of the shorter method will be affectedmore than the profitability of the longer method.It will be observed 'that real wages must be defined in terms of the immediateproduct of the industry concerned. If it is an industry which does not producewage goods but luxuries or producers' goods, real wages in the welfare senseneed not fall.