Prosperity and Depression

ANALYTICAL TABLE OF CONTENTS

INTRODUCTION. Purpose of the book—Analysis of theories—Synthetic exposition of the nature of the cycle.

Part I
SYSTEMATIC ANALYSIS OF THE THEORIES OF THE BUSINESS CYCLE

CHAPTER I.—PRELIMINARY REMARKS

§ 1.  The Explanation of the Business Cycle: Plurality of causes—Theories differ mainly as to emphasis—Classification of causal factors—Exogenous and endogenous theories—Inherent instability in the economic system—Mechanical analogy.

§ 2.  Method of the Following Analysis: Principles of selection—Heads of analysis.

CHAPTER 2.—THE PURELY MONETARY THEORY

§ 1.  Preliminary Remarks: Cyclical fluctuations of MV.

§ 2.  The Theory of Mr. R. G. Hawtrey: General Characteristics: Importance of consumers’ outlay—Instability of money and credit.

§ 3.  The Upswing: Driving force of bank expansion—The strategic position of the merchant—Effects of rising prices—Instability of the velocity of circulation.

§ 4.  The Upper Turning-point: Credit restriction responsible—The wage-lag, the cash drain and the gold standard.

§ 5.  The Downswing: The reverse of the upswing.

§ 6.  Revival: Sufficiency of credit expansion—A credit deadlock—Wage-lag and bank policy.

§ 7.  Rhythm and Periodicity: Rigid reserve proportions—No trade cycle since the war.

§ 8.  Special Features of the Theory: Fluctuations in investment in fixed capital—Implications for policy.

§ 9.  International Complications.

§ 10.  Concluding Remarks.

CHAPTER 3.—THE OVER-INVESTMENT THEORIES

§ 1.  General Characteristics: Maladjustments, vertical and horizontal—Money and the structure of production—The schools of over-investment theorists.

A. THE MONETARY OVER-INVESTMENT THEORIES

§ 2.  General Characteristics and Theoretical Foundation: Banking system and money supply—Natural rate and money rate of interest—Two meanings of the concept “natural rate”.

§ 3.  The Upswing: Interest rates and prices—Demand and supply of loanable funds—The capitalistic structure of production—Saving and interest—“Artificial lowering of the interest rate”—Credit expansion and “forced saving”.

§ 4.  The Down-turn (Crisis): Abandonment of over-capitalistic processes—Shortage of investible funds—Hayek’s theory of capital shortage—Faulty bookkeeping practices—The onset of the depression—Tne fruits of the boom lost in the crisis—Neisser’s criticism—Why need the expansion end?—Necessity of quantitative assumptions—Incomplete assumptions.

§ 5.  The Downswing: The depression as a period of readjustment—The secondary deflation—The struggle for liquidity.

§ 6.  The Upturn (Revival): The effective quantity of money—Recovery in demand for credit—Expansion from a position of partial employment.

§ 7.  Rhythm and Periodicity: The ideological basis of inflation—What banking policy will eliminate the cycle?—Cyclical implications of seasonal variations of credit—Summary.

§ 8.  International Complications: Guiding principles—Influences through the balance of payments—The gold standard—International capital movements—The composition of exports and imports.

§ 9.  Concluding Remarks.

B. THE NON-MONETARY OVER-INVESTMENT THEORIES

§ 10.  General Characteristics: Principal authors—Stress on production of capital goods.

§ 11.  The Upswing: Cumulative expansion process.

§ 12.  The Down-turn (Crisis): Shortage of capital—Over-production of durable goods—Shortage of labour and means of subsistence—Consumers’ goods and capital-goods industries—The Cassel variant.

§ 13.  The Downswing (Depression): Psychological elements.

§ 14.  The Up-turn (Revival): Cost adjustments and new investment opportunities—Schumpeter and the rôle of the business pioneer.

§ 15.  Rhythm and Periodicity: Business mechanism likened to steam-engine—Inevitability of the cycle—Re-investment cycles.

§ 16.  International Complications.

C. OVER-INVESTMENT RESULTING FROM CHANGES IN THE DEMAND FOR FINISHED GOODS—THE PRINCIPLE OF ACCELERATION AND MAGNIFICATION OF DERIVED DEMAND

§ 17.  Introduction: Influence of consumers’ demand on investment.

§ 18.  Statement of the Principle: Demand for durable goods and commodity stocks—Monetary aspects.

§ 19.  Acceleration of Derived Demand due to the Existence of Durable Producers’ Goods: Preliminary statement of the principle—Replacement demand—Influence of degree of durability.

§ 20.  Acceleration of Derived Demand in the Case of Durable Consumption Goods: Analogy with previous case—Depreciation and running cost.

§ 21.  Acceleration of Derived Demand as a Result of the Existence of Permanent Stocks of Goods: Analogy with previous cases—Some qualifications.

§ 22.  Generalised Statement of the Principle.

§ 23.  Qualifications: Limited application in negative sense—Variable proportions of factors—Various interrelations between consumption and investment.

§ 24.  The Contribution of the Principle of Derived Demand to the Explanation of the General Business Cycle: Reciprocal action of consumers’ demand and capital production—Nature of the initial impulse—Factors affecting the outcome—Method of financing the new investment—Further considerations—Causes of the breakdown.

CHAPTER 4.—CHANGES IN COST. HORIZONTAL MALADJUSTMENTS AND OVER-INDEBTEDNESS AS CAUSES OF CRISES AND DEPRESSIONS

§ 1.  Introduction.

§ 2.  Changes in Cost of Production and Efficiency of Labour and Plant: Mitchell on the cyclical movements of production cost—Elements contained in other theories—Movements in efficiency.

§ 3.  Horizontal Maladjustments: Capable of explaining a general depression—“Error theories”—“Horizontal” and “vertical” maladjustments.

§ 4.  Over-indebtedness: Introductory—Debts intensify deflation—Over-indebtedness may cause the downturn.

§ 5.  Financial Organisation and the Severity of the Depression: Rigid money contracts intensify deflation—Bonds versus equities.

CHAPTER 5.—UNDER-CONSUMPTION THEORIES

§ 1.  Introduction: Historical background.

§ 2.  Different Types of Under-consumption Theories: Various senses of under-consumption—Under-consumption and the secular fall of prices—Over-saving theory—Saving and hoarding—Saving decreases demand for, and increases supply of, consumption goods—Criticism—The function of saving—Valuable aspects of the under-consumption theory.

§ 3.  Insufficiency of Consumers’ Demand versus Shortage of Capital as the Cause of the Collapse of the Boom: Capital shortage versus insufficiency of consumers’ demand—The structure of production and the now of money—Saving and investment ex ante and ex post—Difficulty in distinguishing vertical and horizontal maladjustments—Lederer’s theory—A monetary under-consumption theory—Importance of construction period in the upswing.

§ 4.  The Failure of Wages to rise sufficiently as the Cause of the Excesses of the Boom: Lag in wage-rise stimulates investment—Wage-lag as viewed by over-investment theorists and by under-consumptionists—Excessive profits as source of saving—“Autonomous” and “hetero-nomous” saving.

CHAPTER 6.—“PSYCHOLOGICAL THEORIES”

§ 1.  Introduction: Psychological and economic factors.

§ 2.  Analysis of the Psychological Factor in the Explanation of the Business Cycle: Stress on expectations—Expectations are uncertain—Optimism and pessimism—Entrepreneurs’ reactions are indeterminate—“Irrational” influences stressed by “psychological” theorists—Errors of optimism create errors of pessimism.

§ 3.  Summary: Compatibility with other theories.

CHAPTER 7.—HARVEST THEORIES. AGRICULTURE AND THE BUSINESS CYCLE

§ 1.  Introduction: Theories of periodic harvest variation—Other views as to the relation between agriculture and business.—Compatibility of different theories.

§ 2.  How Agricultural Fluctuations influence Industry and Trade: Assumption of a closed economy—A. “Real” elasticity theories—Elasticity of demand in terms of money and of “effort”—B. Influence on industries using agricultural raw materials—C. Influence on real wages—D. Migration of labour between town and countryside—E. Effects on non-agricultural consumers’ goods industries—P. Farmers’ purchasing power—G Effects on investment—H. Effects on saving—I. International aspects—Summary.

§ 3.  Influence of the Business Cycle on Agriculture: Inelasticity of farm output—Effect on demand—Effect on costs—Concluding remarks.

CHAPTER 8.—SOME RECENT DISCUSSIONS RELATING TO THE THEORY OF THE TRADE CYCLE

§ 1.  Introduction: General nature of the literature reviewed—Differences in terminology versus differences in substance.

§ 2.  Saving and Investment: Everyday meaning of S and I ambiguous—Neo-Wicksellian usage of S and I—Mr. Keynes’ equality of S and I—Controversial issues—How S and I are equated in the case of inflation—How S and I are equated in the case of deflation—Alternative definitions—The terminology of Mr. Keynes’ Treatise on Money—Professor Robertson’s definition of saving—Money income versus money value of output—The Swedish ex ante and ex post analysis—How equality of S and I is brought about ex post—The ex ante concepts as schedules—Demand and supply of credit determine the rate of interest—Diagrammatic exposition—Relation between the ex ante and the period analysis—How can alternative purchase and sale plans be disappointed?—Mr. Hawtrey’s designed and undesigned investment—Saving and investment in Mr. Keynes’ system.

§ 3.  Hoarding, Liquidity Preference and the Rate of Interest: The “pure” theory of interest—The “loanable-fund” theory of interest—Mr. Keynes’ criticism of the “classical” theory of interest—The propensity to consume in the short run—Interdependence of demand for and supply of saving—Criticism of the monetary theory of interest—The concept of “hoarding”—The concept of “idle balances”—Hoarding and the velocity of circulation of money—Definition of hoarding by an individual—The definition of the rate of interest—Liquidity preference demand for money—Three motives for holding money—Hoarding and the rate of interest—How a rise in investment demand influences the interest rate—Planned investment and interest rates—The influence of saving on the rate of interest—Changes in M and the rate of interest—Infinite elasticity of demand for idle balances—A limit to the fall in interest rates—Summary.

§ 4.  The “Multiplier” and the “Marginal Propensity to consume”: The “psychological” determinants of Mr. Keynes’ system—The problem of the “multiplier”—The pure theory of the “multiplier “—The practical problems behind the multiplier—The problem of determining “net investment”—Secondary investment—The propensity to consume for society as a whole—Changes in income distribution—Government consumption and investment—The multiplier and income velocity of money—Conclusions.

§ 5.  The Theory of Underemployment: Application to the business cycle of Mr. Keynes’ system—An over-saving theory of depression—Other theories in Mr. Keynes’ terms—Voluntary and involuntary unemployment—Free competition in the labour market and unemployment—Money-wages and real wages—Reduction in money-wages and aggregate demand—Wage reductions increase liquidity—Does flexibility of wages and prices promote stability?—Chronic depressions due to under-consumption—The drying-up of investment opportunities.

§ 6.  Static versus Dynamic Theories: Some Methodological Observations: General versus partial equilibrium—Macroscopic versus microscospic analysis—Static versus dynamic theories—Are expectations a dynamic element?—Theoretical versus statistical models.

Part II
SYNTHETIC EXPOSITION RELATING TO THE NATURE AND CAUSES OF BUSINESS CYCLES

CHAPTER 9.—DEFINITION AND MEASUREMENT OF THE BUSINESS CYCLE

§ 1.  Introduction: “Crisis” and “depression”.

§ 2.  Definition of Prosperity and Depression in the General Sense: A closed economy—Alternative criteria—“Employment” criterion—“Consumption” criterion—“Production” criterion—Conclusion—Other criteria.

§ 3.  The Business Cycle in the General Sense and in the Technical Sense (264).

§ 4.  Basic Facts about the Business Cycle: Four phases of the cycle—Various indices recording the cycle.

§ 5.  The Secular Trend: Various components of time-series—The meaning of the trend in different series.

§ 6.  Business Cycles and Long Waves : Facts about the long waves—Necessity for previous analysis of short waves.

§ 7.  Is a General Theory of the Cycle possible? Each cycle an historical individual—A general theory possible—Order of the argument.

§ 8.  Two Regular Features of the Cycle: Parallelism of production and monetary demand—Specially wide fluctuations in producers’ goods.

CHAPTER 10.—THE PROCESS OF EXPANSION AND CONTRACTION

§ 1.  Introduction: The problem stated.

A. THE EXPANSION PROCESS

§ 2.  General Description of the Mechanism under the Assumption that there are Unemployed Productive Resources: Elasticity of supply—Reciprocal stimulation of investment and consumption—Rise in prices, costs and profits—Investment in fixed capital stimulated.

§ 3.  The Mechanism of Expansion under the Assumption of Full, or Almost Full, Employment: Can full employment be attained?—From rise in output to rise in prices.

§ 4.  The Monetary Analysis of the Process of Expansion: Importance of total demand—The market for investible funds—The demand curve for investible funds—“Net” investment and “gross” investment—Supply of investible funds—Savings and inflation—Supply of saving—Supply from inflationary sources—The shape of the supply curve—Movements along, and movements of, the curves—Subdivisions of the capital market—Cumulative expansion process—Repercussions on supply of funds—Time sequence—Volatility of demand for funds—Forms of monetary expansion.

§ 5  Why does the Production of Producers’ Goods and Durable Goods rise faster than the Production of Perishable Consumers’ Goods? The essence of the “acceleration principle “—Repercussions on demand for finished goods—Rôle of expectations—Ratio of capital to labour—Importance of rate of interest—Contribution of the acceleration principle—Application to durable consumers’ goods—Inelastic supply—Methods of financing.

§ 6.  Saving and the Expansion Process: Importance of savings—Income not at once disposable—Expansion with zero saving—Income velocity of money—Immediate effect of saving—Saving and hoarding—Consequences of continued saving—Qualifications—Institutional complications—Saving during the early expansion—Saving during the later expansion—Saving at the peak.

B. THE CONTRACTION PROCESS

§ 7.  General Description of the Mechanism: Role of deflation—Spread of deflation—Intensifying factors.

§ 8.  Monetary Analysis of the Contraction Process: Fall in total demand—Cumulative fall in investment—Drying-up of supply of funds—Forms of deflationary pressure—Outright deflation by the central bank—Hoarding of gold and bank notes by private individuals—Contraction of credit by the commercial banks—Hoarding by industrial and commercial firms—Liquidation of non-bank debts—Forced sales of assets to repay debts—Sales of securities, etc., to cover losses—Sales of securities, etc., for fear of a fall in their price—Scales of liquidity.

§ 9.  Why does the Production of Producers’ Goods and Durable Goods fall faster than the Production of Consumers’ Goods and Perishable Goods? The operation of the acceleration principle in the contraction—The possibility of postponing the acquisition of durable goods—The role of expectations.

CHAPTER 11.—THE TURNING-POINTS. CRISIS AND REVIVAL

§ 1.  Introduction: The problem—“Accidental” and “organic” restraining forces.

A. THE DOWN-TURN: CRISIS

§ 2.  The Method of Procedure: Three stages of the argument.

§ 3.  The Proximate Causes of Contraction: Contraction in aggregate demand versus sectional disturbances—Deflation by Government or banks—Consequences of a partial breakdown—Possible counter-tendencies—Delayed reaction of investment—Rise in cost as cause of a partial breakdown—Conclusion—Static theory and the cumulative process.

§ 4.  Why the Economic System becomes less and less capable of withstanding Deflationary Shocks after an Expansion has progressed beyond a Certain Point: Why the expansion tails off—Inelasticity of money supply—Inelasticity of supply of means of production—Shift in demand with rigid factor supply—Sectional inelasticity of supply of labour—The appearance of “bottle-necks “—Conclusion.

§ 5.  Disturbances created by the Process of Expansion itself: Organic maladjustment—Monetary versus non-monetary disturbances—The purely monetary explanation of the down-turn—Structural maladjustments likely—Operation of the acceleration principle—Effect of credit shortage on derived demand—Effect of shortage of factors on derived demand—Shift in production inevitable—Where will “bottle-necks “arise?—Monopolistic restrictions on supply of factors—Decline in efficiency—Drop in investment because of insufficient demand—Repercussions not foreseen by producers—This type of maladjustment inevitable?.

B. THE UP-TURN: REVIVAL

§ 6.  Introduction: The order of the argument.

§ 7.  The Proximate Causes of Revival: Asymmetry between turning-points—Producers’ spending—Factors increasing supply of investible funds—Increase in demand for investible funds—Discussion of particular stimuli to investment—Increased consumers’ spending—Summary.

§ 8.  Why the Economic System becomes more and more responsive to Expansionary Stimuli after the Contraction has progressed beyond a Certain Point: The contraction loses momentum—Restored elasticity in supply ot factors—Restored elasticity of credit supply—Limits to the fall of MV—Accumulation of money hoards.

§ 9.  Expansionary Tendencies which are likely to arise during the Contraction: The “natural” forces of readjustment—Return of confidence—Revival of investment—Replacement demand—Fall in in wages—Monetary implications—Effect of wage reductions in a particular industry—Will pay-rolls rise or fall?—Influence of cost reduction on sales receipts under competition or monopoly—Repercussions on other industries—Wage reductions in many industries—Wage reductions increase liquidity—Conclusions—Some problems of policy.

CHAPTER 12.—INTERNATIONAL ASPECTS OF BUSINESS CYCLES

§ 1.  Introduction: Previous treatment of international aspects—Methods of exposition.

§ 2.  Influence of Transport Costs: Imperfect Mobility of Goods: Localisation of expansion and contraction—Counter-influence of uneven distribution of resources—Tendency of local expansions to overflow—Coexistence of prosperity and depression facilitated—Influence of existing tariffs—Influence of changes in tariffs.

§ 3.  Influence of the Localisation of Investment, Credit and Banking: Imperfect Mobility of Capital: Equalisation of interest rates—Mobility of capital versus mobility of goods—The reasons for differences in interest rates—Changes in mobility of capital—Tendency to damp down local booms and depressions—Reservations—Effects on “spreading” of cyclical movements—International transfers of demand—Sectional mobility of capital—Mobility of short-term and long-term capital—Cyclical changes in the mobility of capital—Summary.

§ 4.  Different Degrees of National Currency Autonomy and their Influence on the Cyclical Movement: Degrees of independence—A unified money system with mobility of capital—Decentralised banking with mobility of capital—Central-bank policy with localised credit—Different national money units—Speculation on the foreign exchanges—“Exchange standards”—The exchange standard in operation—Variations in exchange rates—Currency devaluation—Effects on exchange of goods—Influence on the world as a whole—Effect on capital movements—Deflationary effects of capital flights—Free exchanges—The “impact” rate of exchange—Transfer of demand under “free exchanges”—Comparison with gold standard—Localisation of prosperity and depression complete—Capital movements under free exchanges—Contrast with gold standard—Capital movements induced by the cycle—Limitation of foregoing analysis—Possible extension of preceding analysis.

Part III
FURTHER REFLECTIONS ON RECENT DEVELOPMENTS IN TRADE CYCLE THEORY

CHAPTER 13.—THE MULTIPLIER, INSTITUTIONAL RIGIDITIES AND PUBLIC SPENDING

§ 1.  Further Observations on the Theory of the Multiplier.

§ 2.  The Foreign Trade Multiplier.

§ 3.  The Combination of the Multiplier and the Acceleration Principle in Dynamic Models.

§ 4.  The Problem of the Turning-Points.

§ 5.  Professor Hayek’s Ricarda Effect.

§ 6.  Price Inflexibility, Wage Rigidity and Unemployment.

§ 7.  On Certain Limitations to a Spending Policy.