Page:The Economics of Unemployment.djvu/54

unanswered. Now the classical economics which held over-saving, over-production, and a limited market to be mere illusions, relied upon the operation of two automatic checks, (1) Over-saving was impossible, because any tendency to it, leading to undue increase of capital, would straightway be corrected by a falling rate of interest. (2) Over-production was impossible, because any tendency to it would straightway be corrected by a fall of prices stimulating increased consumption. Now it would be possible for me to override these objections by an appeal to admitted facts, urging that, if either of these checks operated with the certainty and accuracy claimed for it, long-lasting depressions with their unemployment would be impossible. But it may be well to indicate more clearly the nature of the ineffectiveness of these checks.

Now, as regards the first check, it may be true that a fall in the price for the use of capital (the rate of interest) does reduce on balance the rate of the supply of new capital. But this check is slow in operating, as a preventive of over-production and gluts, for two reasons. First, the new capital supplied by current-saving is a small fraction of the total capital in productive use, and the efficacy of a falling rate of interest in checking a continuance of its oversupply is proportionately feeble. A striking illustration of this point is furnished by the slowness of the efficacy of the diminished output of the gold-mines, due to reduction in the purchasing power of a gold unit, to bring down the level of gold prices. Where, as with many classes of goods, the whole existent supply