CH. 19

CHANGES IN MONEY-WAGES

265

of a closed system, and assume that there is nothing tobe hoped, but if anything the contrary, from the reper-cussions of the new distribution of real incomes on thecommunity’s propensity to spend, it follows that wemust base any hopes of favourable results to employ-ment from a reduction in money-wages mainly on animprovement in investment due either to an increasedmarginal efficiency of capital under (4) or a decreasedrate of interest under (5). Let us consider these twopossibilities in further detail.

The contingency, which is favourable to an increasein the marginal efficiency of capital, is that in whichmoney-wages are believed to have touched bottom, sothat further changes are expected to be in the upwarddirection. The most unfavourable contingency is thatin which money-wages are slowly sagging downwardsand each reduction in wages serves to diminish con-fidence in the prospective maintenance of wages. Whenwe enter on a period of weakening effective demand,a sudden large reduction of money-wages to a level solow that no one believes in its indefinite continuancewould be the event most favourable to a strengtheningof effective demand. But this could only be accom-plished by administrative decree and is scarcely practicalpolitics under a system of free wage-bargaining. Onthe other hand, it would be much better that wagesshould be rigidly fixed and deemed incapable of materialchanges, than that depressions should be accompaniedby a gradual downward tendency of money-wages, afurther moderate wage reduction being expected tosignalise each increase of, say, 1 per cent, in the amountof unemployment. For example, the effect of anexpectation that wages are going to sag by, say, 2 percent, in the coming year will be roughly equivalent tothe effect of a rise of 2 per cent, in the amount ofinterest payable for the same period. The same ob-servations apply mutatis mutandis to the case of a boom.

It follows that with the actual practices and in-