Some Theoretical Implications of the Statistical Analysis of Demand and Cost Functions for Steel
T HE FAILURE to attain full employment and to utilize the Nation's economic resources effectively during the last ten years has produced a vigorous and stimulating discussion of the obstacles to economic expansion. In this discussion one of the major questions at issue has been the role of price inflexibility in restricting production and employment. On the one hand, it has been contended that the failure to reduce prices, particularly in the durable goods industries, has been a major factor in contributing to the severity and duration of the depression. On the other hand, it has been maintained that a general reduction in prices without a corresponding reduction in wages would have been impossible without bankrupting industry generally. Some have argued instead that it is the failure to reduce wages relative to prices which has been largely responsible for unemployment. To this, Keynesians have generally replied that a reduction in wages would lead only to a corresponding decline in prices and would leave employment unchanged unless interest rates could be reduced sufficiently. Still others have argued that because the propensity to spend is different for wage earners than for non-wage earners, both with respect to magnitude and with respect to timing, wage reductions might even reduce employment. On this broad question of the relationship of general price and wage flexibility to the full utilization of economic resources, the Steel Corporation's statistical analysis of the demand for steel' is of little help. It relates only to the short-run effect of an isolated reduction in the price of steel unaccompanied by changes in prices elsewhere, or changes in national income. This analysis indicates that the demand for steel is inelastic in the short run with respect to such isolated steel price changes. Since the steel cost generally constitutes only a small fraction of the final price of products made from steel, and since the