The trade cycle under capital shortage and labour shortage

Abstract

One of the main insights one arrives at by reading Witteveen’s treatise on economic growth and the trade cycle, Structuur en conjunctuur,¹ is that the characteristics of the trade cycle in a situation of capital shortage differ fundamentally from those in a situation of labour shortage. These differences can especially be traced back to the differences in the second phase of the upswing and therefore to the causes of the upper turning point. Compared with a situation of labour shortage, the upswing under capital shortage is rather prolonged. The reason is that when capital is the scarce factor of production, the ceiling of actual production is determined by productive capacity. Thus, when the economy hits the ceiling during the upswing, entrepreneurs have an incentive to expand productive capacity further, which in turn leads to excess demand in the market of produced goods and hence to a rise in goods prices. Consequently, real profits will increase and the real wage sum will decrease, thus freeing the means of production for the production of investment goods (forced savings). When, after some time, the inflationary process leads to monetary restriction, national expenditure slows down, with the result that excess capacity appears. Then, the upper turning point has been passed and the economy enters the cyclical downswing. The downswing is a natural consequence of the upswing: it is the only way to remove the excess capacity which has been built up by overinvestment during the secondary phase of the upswing.

I am indebted to Mr A. R. M. Gigengack and Mr J. P. M. Jacobs for corrections in my use of the English language and in the mathematics, respectively.