Investment and costs of production

Most modern business-cycle theories are couched in terms of "cumulative processes." Investment creates incomes which are spent on consumption goods, and consumption stimulates investment. The turning points of the cycle, crisis and recovery, have then to be explained by exogeneous forces. It can, however, be shown that the theory of cumulative processes is not beyond doubt. It is generally agreed that for various reasons a process of expansion will be accompanied by rising costs. In a world of immobile labor and specialized equipment, unemployment and idle resources may coexist with scarcity of factors and inelastic supply of output, and the concept of "full employment" loses much of its meaning. If this is so, increasing demand for consumption goods must, by its effects on costs, adversely affect durable investment. During the upswing, the rise in costs and prices will be accentuated by commodity speculation. The faster the rise the sooner the boom will break, because durable investment becomes unprofitable. The dilemma of a monetary policy which aims at stabilizing the rate of expansion is recognized.