A Model of the Trade Cycle Author(s): Nicholas Kaldor Source: The ...

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86 THE ECONOMIC JOURNAL [MARCHof unstable; equilibrium would tend to get established there, and,once established, the shifts in the I and S curves, due to capitaIaccumulation or decumulation, would merely lead to graduaIchanges in the level of activity unti! a position of stationarinessis reached; they would not generate cyclical movements. Ifcondition (2) was not satisfied (at any rate as regards low levels ofactivity) 1 the system, as we have seen, would be so unstable thatcapitalism could not function at alI. Finally, if condition (3) didnot obtain, the cyclical movements would come to a halt at somestage, owing to a cessation of the movements of the S(x) andI(x) functions.This is not to suggest that in the absence of these three conditionscyclical phenomena would be aItogether impossibIe.Only they would have to be explained with the aid of differentprinciples; they could not be accounted for by the savings andinvestment functions alone.8. In fact, conditions (1) and (2) are almost certain to besatisfied in the real world; doubt could only arise in connectionwith condition (3). It can be taken for granted, of course, thatnet investment will be positive while equilibrium is at position B;but it is by no means so certain that net investment will benegative while equilibr:ium is at position A.2 It is quite possible,for example, that savings should fall rapidly at a relatively earlystage of the downward movement, so that position A is reachedwhile net investment is stilI positive. In that case the Sand Icurves will stilI move in the same direction as at B, with the resultthat the position A is gradually shifted to the left, until netinvestment becomes zero. At that point the moven'lents of theI and S curves will cease; the forces making for expansion orcontractiQn come to a standstill. Alternatively, we might assumethat net investment at A is initially negative, but in the course ofthe graduaI improvement, the position of zero net investment isreached before the forces of cumulative expansion couId come intooperation-i.e., somewhere during Stages IV and V, and beforethe cycle r:eaches Stage VI. In this case, too, the cyclical movementwill get into a deadlock.1 It is possible that the point B should be situated beyond the position of fullemployment-i.e., that in the course of the upward movement the state of fullemployment should be reached befolfe ex-ante Savings and Investment reachequality. In that case the upward movement would end in a state of cumulativeinflation, which in turn would, sooner or later, be brought to a halt by a rise ininterest rates sufficient to push the point B inside the full-employment barrier.From then onwards the cyclical movement would proceed in exactly the samemanner as described.2 The term " net investment " here is used in the sense defined in § 6 (ii).
1940] A MODEL OF THE TRADE CYCLE 87Hence the forces making for expansion when we start from astate of depression are not so certam in their operation as theforces making for a down-turn when we start from prosperity;the danger of chronic stagnation is greater than the danger of achronic boom. A boom, if left to itself, is certain to come to anend; but the depression might get into a position of stationariness,and remain there until external changes (the discovery of newinventions or the opening up of new markets) come to the rescue.9. The preceding analysis offers also certain indicationsregarding the determination of t~e period and the amplitude ofthe Cycle. The period of the Oycle seems to depend on two timelags,or rather time-rates of movement: (i) on the rate at whichthe Sand Icurves shift at any particular level of investment(this, of course, will vary with the level of investment, and willbe faster when investment is high or low, than in the middle);(ii) on the time taken to complete a ,t' cumulative movement "i.e., the time required for the system to travel from B + O to Aor from A + O to B (Stages III and VI).The second of these factors obviously depends on the velocitywith which entrepreneurs and consumers adjust their expectationsand thus their buying-plans to unexpected changes in the situation.The first factor, on the other hand, seems to depend on technicaldata, on the construction period and durability of capitaI goods.The shorter the construction period, the greater will be the outputof capitaI goods, per unit' period, at a given rat~ of investment;the shorter the life-tjme of capitaI goods, the larger willbe the percentage addition to total equipment represented by agiven output of capitaI goods. Hence the shorter the construction-period,and the lower the durability, the faster will be therate of Sllift of the Sand I curves at any given rate of investment;the shorter the length of the Trade Cycle. 1As regards the amplitude, this depends on the shapes of theI and S curves, which determine the distance between A and B,at their "normal" position (i.e., at Stages I and IV). Theamplitude will be alI the smaller the shorter the range of activityover which the "normal values" of ~~ and ~~ are operative.1 If the " capitaI intensity " of investments varies in the different phases ofthe CycIe in an inverse relation to the rate of investment (i.e., is less in boomperiods than in depression periods), this will tend to reduce the period of theCycIe, as compared with a situation where the capitaI intensity is constant, sinceit will increase the rate of shift of the Sand I curves. ConverseIy, if capitaIintensity varied in direct relation with the rate of investment, this wouId Iengthenthe periodo Finally, if capitaI intensity showed a steady increase throughout theCycIe, this wouId Iengthen the boom periods and shorten the depression periods.
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A Model of the Trade Cycle Author(s): Nicholas Kaldor Source: The ...

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