[To the Editor of the SPECTATOR.] SIR,—All your correspondents on
the above question seem to be wrong one way or another. The fact that commodity prices have been rising sharply on the occasion of most crises seems to dispose of Mr. J. A. Hobson's contention that they can be due to insufficient expenditure on con- sumption goods, while Professor Robbins' plea for economy, however desirable in a boom, can only aggravate a slump. Nor is Mr. Pell correct in supposing that the relative pro- portion to be spent on capital and consumption goods can safely be left to take care of itself, for apart from deliberate deflation disequilibrium thus produced appears to be the main cause of trouble. The following paraphrase of Mr. Keynes' argument in " The Great Slump of 1930," though unduly simplified, seems unanswerable.
Total production costs, i.e., earnings, are divided in a certain proportion between consumption goods and capital, and incomes are also divided between expenditure on con- sumption and " savings " (1). But if the proportion of income saved is in excess of the cost of capital production, then that spent on consumption will be less than the costs of consumption goods, and these producers will suffer losses (2). Their earnings can be restored either by more expenditure on consumption and less saving (1), or by a greater production of capital and a smaller output of con- sumption goods (3). But more capital production will not take place unless profits can be made, and if savings are hoarded—or kept in liquid form (as is the case in times of depression)—and not used to buy capital goods, then the capital producers also will lose money, they will produce less rather than more, and this will cause further loss to the producers of consumption goods (4). By this time a vicious circle will be set up, and conditions will get worse and worse unless something intervenes to promote expansion.
Production Costs. Income.
Consumption Con- Goods. Capital. sumption. Savings.
(1) .. 85 15 85 15 (2) .. 85 15 80 20 (3) .. 80 20 80 20
90 10 80 5 (15 hoarded) —I am, Sir, &c., G. BmpuLP0.
1 Elvaston Place, Queen's Gate.
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