Prosperity and Depression.pdf

Chap. 13 The ~ultiplier, Rigidities and Public Spending 501All that will strike the reaqer as abstract and superficial; and it isso in fact. The problem is much too complex to be solved by themanipulation of a very few broad aggregate quantities. 1 -But it servesto direct the discussion into more fruitful channels. Futhermore, whathas been said should not be interpreted as a plea for laissez jaire jfora policy of inaction relying entirely on price and wage flexibility andperfect competition for the cure of slulnp conditions. That this implicationis not intended has been made clear in Chapter I I, but deservesto be stressed once more. There are many aspects of the matter whichhave not been touched upon. One is the influence of a sharp fall inprices on outstanding contracts. The creditor class would be favored atthe expense of debtors, entailing wholesale bankruptcies and/or a redistributionof income, which would be a very serious matter, reactingprobably unfavorably upon the propensity to consume and the marginalefficiency of capitaI.2The real difficulty which a regime of perfectly flexible prices wouldhave to face·is that it may make the price level very unstable and therebyaffect unfavorably the marginal efficiency of capital. If prices were sub- .ject to much greater and more frequent changes than they actually are,people might becofile so uncertain about the future that they would bereluctant to invest. Especially a protracted fall of the price level wouldprobably create expectations for a further fall which is bound to discourageinvestment (and reinvestment!). If the marginal efficiency ofcapital (including reinvestment) falls sharply, the level of real wagesat which full employment could be reached would also fall possibly toa very low level.The possibility of an unstable general price level resulting from toomuch flexibility has been stressed by Professor HICKS, Mr. T. DE SCI­TOVSZKY (loc. cit.) and others. They emphasize the likelihood of pricerises engendering expectations of further price rises and of price fallsmaking people believe that prkes will fall further. However, on thelevel of abstraction on which their-and our-discussion has been car-1 This is not to say that what Professor Schumpeter calls the "aggregativemethod" and what we called the "macroscopic approach" (page 248) is notpermissible. Any manageable theory must utilise aggregates. But their numbermust not be too small and correspondingly their content too large.2 But" it could conceivably be overcome by adjusting debts fOf price changes,that is, by the introduction of a .. tabular standard for long contracts" (seePigou, Industrial FJuctuatioJlJ. Part II, Chapter IV).