Prosperity and Depression.pdf

Chap. ; The Over-:-im;estment Theories 51the proposition holds good, only if all factors of production arereasonably well employed or ifat least some of the factors attractedto consumers' goods trades would otherwise have been employedelsewhere. In other words, under full employment, the productionof consumers' good or that of producers' goods are alternatives. l 2At the end ofthe boom, the condition ofreasonably full employmentcan as a rule be assumed to be true. Secondly, it is assumed thatthe demand for consumers' goods' rises relativelY to· the demand forproducers' goods. This second assumption excludes the possibilityof a compensatory expansion of credit, since, if credit for thepurpose of acquiring producers' goods could be expanded paripassu with the increased demand for consumers' goods, it wouldno longer be true that the proportion between demand for consumers'goods and producers' goods has changed. 8 The changeinvolves a rise in interest rates; for prosperity in consumers' goodsindustries holds out good prospects of profits in the higher stagesof production. Producers in the higher stages of production willbe eager to'continue lengthening the productive structure and willtry to raise the necessary funds by borrowing from the banks.Demand for credit rises; but supply is unchanged, or not sufficientlychanged-for it is assunled tha.t credit ceases to expand, ordoes not expand sufficiently. This entails a rise in interest rates;,and such a rise, as Professor HAYEK has shown, falls more heavilyon production costs in the htgher than in the lower stages of production.The situation is now, therefore, that money cost has1 If competition in the labour market and the mobility of labour areimperfect, the condition of full employment can, of course, be relaxed.• The fact that the production of consumers' goods can be expandedonly at the expense of a reduction in the production of producers'goods and vice versa does not, of course, hold if there are idle factors ofprodl.\ction available. Furthermore, it does not preclude the possibilitythat, besides this physical connection between the production of the twocategories of goods, there may be connections of another nature-e.g.,an increase in the production of consumers' goods may tend to stimulatethe production of producers' goods, as postulated by the" accelerationprinciple" (see below, § 17 et seq. of this chapter), or there may be acausal connection in the opposite direction as postulated by the so-called" multiplier It (see below, passim).3 The proposition therefore does not apply during depression whenthere are unemployment, unused plant in almost all branches of industry,and a plentiful supply of credit.