Prosperity and Depression.pdf

49° Recent Developments in Trade Cycle Theory Part III(0.1 to 0.3 per cent~ are quite negligible. 1 It would seem that factorsother than change~ in the profit rate are much more important indetermining the volume of investment.Experience suggests that when demand for a product increases andits price goes up the short run reaction of producers will be to producemore, using the available methods of production which are actually inusc or ready for application. If there is excess capacity of fixed equipment,there will be little investment. If there is flo excess capacity,investment will be larger. How much will be invested, to what extentthe producer will try to do without investment in plant and will insteadwork overtime or introduce double shifts" will depend primarilyon his expectations:! with respect to the duration of the higher prices (orstronger demand), availability of equipment, perhaps to some extent onthe rate of interest. But it sounds rather fantastic that, given all thesefactors, if the price of his product rises he should be induced to investless than he would have invested if the price had not gone up.(4) The last point which we have to make concerns the alleged factthat "sor.oewhere half-way through a cyclical upswing" real wages alwaysfall. H It is interesting to note that Mr. KEYNES in his GeneralTheory made a similar or even bolder generalisation. "It will befound," he says, "that the change in real wages associated with achange in money wages, so far from being usually in the same direction,is almost always in the opposite direction. When money wages arerising, that is to say, it will be found that real wages are falling; andwhen money wages are falling real wages are rising."" Since moneywages rise in upswings and fall in downswings of the cycle, it wouldfollow that real wages move against the cycle.These wideIy accepted generalisations have not been supported by1 It is true that price changes can be assumed to be of a much higher orderof magnitude. It must, however, be remembered that it is the excess of the pricerise over the rise in money wages which matters. See point (4) below.2 Professor Hayek tries to dispose of the objection that the influence on expectationsof a price rise i-s more important that the Ricardo effect. But what hesays is not convincing because it is based on the extreme assumptions of hisnumerical example, loco cit., pages 16-18, esp. footnote, page 18.3 Loc. cit., page I!.4 General Theory, page 10. It goes without saying that Mr. Keynes does notdraw the same conclusions as Professor Hayek.