Prosperity and Depression.pdf

AnalYsis OJ Theories Part Irelatively over-developed : the production of capital goods ascompared with the production of consumer's goods is pushedfarther than the underlying situation can permanently tolerate.Thus it is a real maladjustment in the structure of productionthat causes the breakdown of the boom, and not a mereshortage of money' due to an insufficiency of bank reserves.It follows that, after the boom has once been allowed to develop,the setback cannot be staved off indefinitely by monetarymeasures.The situation as it develops during the boom, according to theover-investment school, may -be described as a " vertical disequilibriumor maladjustment" in contradistinction to a "horizontaldisequilibrium-or maladjustment" in the structure of production.The distinction between vertical and horizontal maladjustmentscan be formulated as follows. Supposing that by some meansthe aggregate mor~ey flow is kept constant, equilibrium in thestructure of production will be preserved, if the allocation of thefactors of production to various employments corresponds tothe distribution of the money flow-i.e., the monetary demandfor the products of the different branches of industry~ Thisdistribution is, broadly speaking, determined by (I) the decisionsof the population as to spending ~d saving, (z) the decisions ofconsumers as to the distribution of expenditure between variouslines of consumption goods, and (3) the decisions of producersat every stage as to the distribution of their cost expenditurebetween different forms of input. If the structure of productiondoes not correspond to the first set of decisions, we have ~"".tiGal maladjustment-vertical because the industries whichare not hanDoniously developed are related to each other in a.ce vertical" order, as cost and product. One may also speakof "higher" and "lower", or "earlier" and "later" stagesof production-in which case "lower" and ",later" mean"nearer to. consumption ". If- the structure of productiondoes not correspond to the second or third set- of decisions,we have a horizontal disproportion-a disproportion betweenindustries of the same ccrank" as measured by distance fromconsumption.