Prosperity and Depression.pdf

Recent Developments in Trade Cycle TheoryPart IIIfirst, according to Professor HAYEK investment activity could continueif the propensity to save were larger than it is, because this would preventa rise of the rate of profits in the consumers· goods industry orwould even reduce it. With a sufficiently low rate of profit, deepeningof capital would be undertaken and the level of investment could bemaintained. The present writer, on the other hand, believes that asufficiently large shift to deepening cannot be expected in the shortrun. Secondly, Professor HAYEK believes that a high propensity toconsume will bring about a "shortening of capitar' (opposite of deepening),implying a drop in investment demand. Now, the present writerwould'agree that, in the particular situation described above, which ischaracterized by a cessation of capital widening, a decline in investmentactivity cannot be forestalled by a rise in the propensity to consume.But the reason is different from the one given by Professor HAYEK: Itlies in the scarcity of labour and not in the high rate of profits. Even ifdemand for consumers· goods is.high, the consumption industries wouldfind it impossible to maintain the rate of expansion which was possibleso long as there existed unemployed workers who could be drawn intoemployment. Consumption industries cannot expand any more and,therefore, do not add any more to their equipment.! The resultingdrop in demand for capital equipment is independent of whether inthe consumers' goods industries the rate of profits is low (if, e.g., tradeunions are able to exact higher wages) or high (if wages lag behindprices) .. (3) These differences seem to have their root in a different judgmentabout the possibility in actual life of rapid changes in the relativeutilisation of capital and labour. It seems to the present wdter thatProfessor HAYEK tremendously overestimates the short-run possibilityof substituting labour for capital and vice versa in response to changesin the rate of profit (or the rate of interest). 2 This is, of course, an1 It might be objected that they will try to use more labour-saving equipment,more "automatic" machines than before. But the point is that such a shift toother methods of production (implying as it does a deepening of capital) cannotbe accomplished .quickly enough to provide an offset for the drop in wideningdemand for capital.2 An entirely different matter is, of course, a change in the proportion ofutilisation of capital and labour which is brought about by changes in technologicalknowledge. It may also be advisable to distinguish changes in the above