Prosperity and Depression.pdf

Chap. 13 The'Multiplier, Rigidities and Public Spending 489ernpirical question which can only be settled definitely by factual investigation.Such an investigation cannot be undertaken at this point. Butcertain empirical investigations into the analogous problem of the influenceof the rate of interest and of changes in real wages on investmentl suggest that in the short run the opposite assumption from theone made by Professor HAYEK comes closer to the truth; that is to say,it is more correct to assume that labour and capital are complementary(must be used in a fixed proportion), than that they can be easily substitutedfor one another.~ It is certainly misleading and unrealistic toassume that producers are able and ready to choose and shift freely andquickly between different methods of production involving such enormousdifferences in the length of the average period of production (or,to put it differently, in capital intensity) as suggested in the numericalexample (quoted above) by means of which Professor HAYEK explainsthe Ricardo effect. Mr. T. WILSON 3 has called attention to the fact thatif we assume a choice between inv:estment periods of, say, 3, 4, 5 years(which probably corresponds better to reality than a choice betweenperiods of I, 3, 6 months, etc., as assumed in Professor HAYEK'S example),a rise in product prices by 2 per cent will raise the annual rateof profit from 6 per cent to 6.8, 6.6 and 6.5 per cent respectively (andnot to 10, 14 and 30 per cent as in Professor HAYEK'S example). Theresulting differences in the relative profitability .of different methodsproportion induced by a mere change in the rate of profit (wh~ch Professor Hayekprimarily has in mind) from those changes which are induced by an acute scarcityof labour. Furthermore, it should be pointed out that large shifts in the labourcapitalproportion may result when excess capacity is taken up by increasingemployment. But what Professor Hayek and we are interested in at this pointis what might be called the normal ratio of capital and labour under full utilisationof equipment. (For a more careful discussion of this distinction, see N.Kaldor, "Capital Intensity and the Trade Cycle," Joe. cit.)1 Cf. H. D. Henderson, "The Significance of the Rate' of Interest" and ]. E.Meade and P. W. S. Andrews, "Summary of Replies to Questions on Effects ofInterest Rates" in Oxford Economic Papers, No. I, October, 1938. T.N.E.C.Monograph NO.5, Washington, D. C., 1940. See esp. Part II, Chapter IV,"Changes in Technology," pages 136-137.2 This assumption is 'made by Mr. Kaldor in his article, "StabiIityand FullEmployment" (Economic Journal, December 1938) and finds support in ProfessorW. W. Leontief's study, The Structure of American Economy, 1919-1 93 9,Cambridge, Mass., 1941, pages 39-41.3 Loc. cit., page 170.