Prosperity and Depression.pdf

502 Recent Developments in Trade Cycle Theory Part IIIried on, it is impossible to speak of more than possibilities and rathervague guesses about what might happen. It is quite possible that thefear of violent instability is exaggerated and that comparatively smallfluctuations in price and wage levels would be sufficient to maintainfairly full employment, especially if some time is allowed for adjustmentsin employment and output.As was indicated at the end of Chapter I I, from a practical point ofview th~ situation is. much It;ss serious than might be thought on thebasis of our theoretical analysis: By combining a policy of wage andprice flexibility with a policy of monetary expansion (including if necessary,an active spending policy), it would be possible to make absolutelysure that no runaway deflation follows from price and wage cuts.Here the question will be asked, why not rely entirely on monetaryexpansion? Why couple it with a politically and socially extremely difficultand frictional policy of making prices and wages more flexible?There is some justification in that attitude. But the problem goes beyondthe scope of the present essay. A few additional observations,however, may be made: There is universal agreement that structural,long-run flexibility of (relative) prices and wages is desirable from thepoint of view of optimum allocation of resources and material progress.There is also much agreement that some of the most powerful forceswhich make for cyclical movements in output and employment, namely,technological progress, capital accumulation, discoveries, etc., are identicalwith those factors which shape the secular trend in real income andwealth and necessitate structural changes in relative prices. It seems tofollow that complete cyclical rigidity of prices and wages would notbe compatible with structural flexibility.There is, however, an essential difference between cyclical and longrunflexibility: The latter is conceived of as requiring only changes inrelative prices, leaving the price level unchanged, while cyclical flexibilitynecessitates changes in the price level (value of money), if it isto operate through influencing the rate of interest and through providingan outlet for saving in larger cash balances. The question may beasked: is it possible to make relative prices flexible without changingthe price level? (We'· are considering, of course, a {,ree enterpriseeconomy and not a controlled war or totalitarian economy where economicallyall these problems become much easier because they are re-