Prosperity and Depression.pdf

Chap. 13 The Multiplier, Rigidities and Public Spending 493group belong Professors WILFORD I. KING,! F. H. KNIGHT,2 L. MISES,HENRY SIMONS, 3 J. VINER4 and others; pet:haps we might count herealso Mr. G. MEANS who seems to go at least as far as Professor KNIGHTin suggesting that a flexible price system would exert a stabilising in·fluence on output. 5 .1 "Are We Suffering from Economic Maturity r' in JOII,nal of Political Economy(Vol. 48, October 1939) and "Can Production of Automobiles be Stabilizedby Making Their Prices Flexible?"' (Journal of the American StatiJti"al Association,Vol. 34, December 1939). He answers the question in the affirmativein criticism of the contributions of C. F. Roos, V. v. Szeliski and others, TheDynami" of Automobile Demand. It must be remembered, however,' that theproblem of price flexibility and employment with respect to a particular industryis very different from what it is for industry as a whole. Tn the case of a singlecommodity it may always be argued that the elasticity of demand is low andhence price cutting of no avail. Against this argument the advocate of priceflexibility will answer, that in that case consumers will save money which theywill spend on something else. It would be wrong~however, to conclude thatthe elasticity of demand for goods in general with respect to price must be unity.That would amount to the assumption that MV remains constant. (See pages396, above, et seq.)2 "The Business· Cycle, Interest and Money" in Review of Er:onomi" Statistir:s,Vol. 23, May 1941.In a free market, Professor Knight says, the dislocationscaused by cyclical changes in effective demand-he prefers to say "effective moneyin active use"- "would be temporary but even then they might be serious"; but"with important markets as unfree as they actually are-and prices as sticky. andlabor and capital as immobile-the results take on the proportions of a socialdisaster" (page 65).3 See, e.g., his review of The Structure of the American Economy, Vol. 2,especially of Professor Hansen's contribution to that volume on "Price Inflexibility"(See Review of E"onomic Statistics, November,I94I ).4 See his statement that "in the absence of price rigidities· substantial fluctuationsin this ratio [of employed to employable resources] are inconcei.vable."J. Viner, "Business Cycle Theory-Can Depressions Be Tempered or Avoided?"Lectures in Current Economic Problems, U. S. Dept. of Agriculture, GraduateSchool, November 1936, pages 31-45. Quoted by J. Mosak, "Some TheoreticalImplications of the Statistical Analysis of Demand and Cost Functions for Steel"in Journal of the American Statistical Association, Vol. XXXVI, March 1941,p. 109·1) None of these writers, however, goes so far as to "explain business fluctua·tions in terms of price movements" (Hansen, Fiscal Poli", ana Business Cycles,page 316). Professor Hansell contrasts this "explanation of the business cycle"with another one according to which business fluctuations are due to "fluctuationsin the rate of investment." It is not clear who the writers are who hold the firstview. But as far as the writers who were mentioned in the text are concerned,it is·safe to say that they do not. deny the importance of fluctuations in invest·ment, .but at the same time maintain that a given drop in the inducement to investwill have less serious consequences if prices are flexible than if they are rigid.The two explanations of the cycle which Professor Hansen distinguishes are per·fectly compatible with one another.