Interest Rates and the Problem of Cost Rigidities
IN THE PAST, full employment was closely approximated in certain periods, except for brief intervals of "cyclical" depression, yet in other periods there existed a "chronic" tendency toward substantial underemployment. This, of course, means that the cost structure of capitalistic economies did not, in general, "adjust" instantaneously, in a manner which would restore a high level of employment when part of the available human resources became involuntarily unemployed; and that in certain periods the cost structure failed to "adjust" even with a considerable lag.
The failure of the cost structure to adjust is sometimes presented as a matter of price and wage rigidities. To make the rigidity of the commodity-price and of the wage-rate structure responsible for the failure of employment to return to a "full" level more or less promptly, means postulating that a downward adjustment of commodity prices and of wage rates would, in times of underutilization, increase the level of employment. The effects of price and wage changes on the level of activity, however, present a very involved problem--provided prices and wages are assumed to remain unchanged after the initial change. (Obviously, the expectation of future price and wage reductions would affect activity adversely and the expectation of future increases would have a favorable effect.)
The effects of a simultaneous proportional reduction of all commodity prices and of money wage rates are but partly distinct from those of expansionary credit policies. One of the effects of the simultaneous proportional reduction of commodity prices and of money