Prosperity and Depression.pdf

AnalYsis of TheoriesPart Iprice level· of finished goods constant, prices of factors of productionwill rise continuously. Hence, successive additions to themoney stock will only be able to buy successively diminishingamounts of the factors of production. But, to render the completionof the newly initiated processes of production possible, theentrepreneurs in the upper stages must be enabled to absorbfactors ofproduction at a constant rate ;, and, as the prices offactorsof production rise, a credit expansion at an increasing rate will benecessary to enable them to do so. The conclusion is that arelative inflation, such as can be made within the limits ofa constantprice level, is not sufficient to allow of the completion of the newroundabout methods of production which have been initiatedunder the stimulus of the expansion. Either the rate of expansionof credit will be sufficiently increased and prices will be driven upand the inevitable breakdown will be postponed, or the boomwill collapse at once owing to an insufficiency in the capitalsupply.1 J.J..L~ ... ""~soning is, however, not convincing.Incomplete The result will depend on a complicated quantitaassumptions.dve relationship between certain factors-namely:(a) the rate of progress of the economy: that is,the rate of increase in efficiency or output which determinesthe rate of credit expansion that can be made without raisingthe price level; (b) the supply of capital which is required insuccessive periods to make possible the completion of productiveprocesses which have been started in the past. In respect toboth factors, Professor HAYEK'S argument makes implicitly certainassumptions, the bearing of which is not quite clear. Theproblem has not been either clearly visualised or explicitly stated.The concrete circumstances by which the magnitude of the twofactors is determined are left vague. It is open to grave doubtwhether generalisations can be made on this point without extensivefactual investigations.In any case, the theory in its fuUy developed form seems tomake the emergence of a serious disequilibrium dependent uponrelatively small,fluctuations in the rate of forced saving. Thisbeing so, the question arises whether fluctuations of this order ofmagnitude are not equally likely to occur in the flow of voluntary