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

More documents

Recommendations

Info

A MODEL OF TRE TRADE CYCLEl. TRE following pages do not attempt to put forward any" new " theory of the Trade Cycle. The theory here presentedis essentially similar to alI those theories which explain the TradeCycle as a result of the combined operation of the so-called" multiplier " and the investment demand function as, e.g., thetheories put forward in recent years by Mr. Harrod and Mr.Kalecki. 1 The purpose of the present paper is to show, bymeans of a simple diagrammatic,apparatus, what are the necessaryand sufficient assumptions under which the combined operationof these two forces inevitably gives rise to a cycle.2. The baslc principle underlying alI these theories may besought in the proposition-a proposition that is really derivedfrom Mr. Keynes' General Theory, although not stated there inthis form-that economic activity always tends towards a levelwhere Savings and Investment are equa!. Here the termsSavings and Investment are used, of course, in a sense differentfrom the one according to which they are always and necessarilyequal-in the ex-ante, and not the ex-post sense. Investmentex-ante is the value of the designed increments of stocks of alIkinds (i.e., the value of the net addition to stocks plus the valueof the aggregate output of fixed equipment), which differs fromInvestment ex-post by the value of the undesigned accretion (ordecumulation) of stocks. Savings ex-ante is the amount peopleintend to save-i.e., the amount they actually would save if theycorrectly forecast their incomes. Hence ex-ante and ex-postSaving can differ only in so far as there is an unexpected changein the amount of incorne earned.If ex-ante Investment exceeds ex-ante Saving, either ex-postInvestment will fall short of ex-ante Investment, or ex-post Savingwill exceed ex-ante Saving; and both these discrepancies willinduce an expansion in the level of activity. If ex-ante Investmentfalls short of ex-ante Saving either ex-post Investment willexceed ex-ante Investment, or ex-post Saving will fall short ofex-ante Saving, and both these discrepancies will induce a contraction.This must be so, because a reduction in ex-post Savingas compared with ex-ante Saving will make consumers spend lesson consumers' goods, an excess of ex-post Investment over ex-ante~1 Harrod, The Trade Oycle,. Kalecki, "A Theory of the Business Cycle,"Review oJ Economie Studies, February 1937, reprinted in Essays in Theory oJEconomic Fluctuations.
MAROH 1940] A MODEL OF TRE TRADE OYOLE 79Investment (implying as it does the accretion of unwanted stocks)will cause entrepreneurs to spend less on entrepreneurial goods;while the total of activity is always determined by the sum ofconsumers' expenditures and entrepreneurs' expenditures. Thusa discrepancy between ex-ante Saving and ex-ante Investmentmust induce a change in the level of activity which proceeds untilthe discrepancy is removed.3. The magnitudes df both ex-ante Saving and ex-ante Investmentare themselves functions of the level of activity, and bothvary positively with the level of activity. Thus if we denote thelevel of activity (measured in terms of employment) by x, bothSand I (ex-ante Savings and Investment) will be single-valuedfunctions of x 1 and both ~~ and ~~ will be positive.The firstof these expresses the basic principle of the "multiplier" (thatthe marginal/propensity to consume is less than unity),2 and thesecond denotes the assumption that the demand for capitaI goodswill be greater the greater the level of production. 3If we regard the S(x) and I(x) functions as linear, as in theabsence of further information one is inclined to do, we have twopossibilities :-(i) ~~ exceeds ~~, in which case, as shown by Fig. 1,4 therecan be only a single position of unstable equilibrium, since above1 Sand I are, of course, both functions of the rate of interest in addition tothe level of activity. But the rate of interest, at any rate in the first approximation,could itself be regarded as a single valued function of the level of activity,and thus its infiuence incorporated in the S(x) and I(x) functions. (It is notnecessary to assume, in order that:; should be positive, that the rates of interest-short and long term-are constant. We can aHow for some variation as theratés' of interest, to be associated with a change in investment and incomes, providedthis variation is not large enough to prevent the change in incomes altogether.AH that we are excluding here is a banking policy which so regulatesinterest rates as to keep the level of incomes constant.)2 :~ is, of course, the reciprocal of Mr. Keynes' investment multiplier, which. l dO dS18 defined as l _ dC' where dX = l - dX'dx3 This assumption should not be confused with the " acceleration principle "(of Prof. J. M. Clark and others), which asserts that the demand for capitaI goodsis a function of the rate oj change of the level of activity, and not of the level ofactivity itself. The theory put forward below is thus not based on this " accelera·tion principle" (the generaI validity of which is questionable), but on a muchsirnpler assumption-i.e., that an increase in the current level of profits increasesinvestment demando4 In Fig. l, as in aH subsequent diagrams, the level of activity is measuredalong Ox and the corresponding value of ex-ante Investment and Saving along Oy.
Page 1: A Model of the Trade CycleAuthor(s)
Page 5 and 6: 1940] A MODEL OF THE TRADE OYOLE 81
Page 7 and 8: 1940] A MODEL OF TRE TRADE CYCLE 83
Page 9 and 10: 1940] A MODEL OF THE TRADE CYCLE 85
Page 15 and 16: 1940] A MODEL OF TRE TRADE CYCLE 91

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

Create successful ePaper yourself

Delete template?

Save as template?