George Lennox Sharman Shackle · 1936
Shackle’s theoretical journal article examines how the timing of large investment projects might precipitate a boom’s abrupt collapse. Its mechanism links imperfect foresight, indivisible equipment, and competition for construction resources. The explanatory target is the turning point: why entrepreneurs suddenly become unwilling or unable to continue operations. Shackle limits his claim:
The suggestion is not put forward as a rival to existing theories, but merely as an additional possibility which might perhaps usefully be borne in mind in studying actual cycles.
The argument begins with the entrepreneur’s comparison of construction costs and expected net operating returns, appropriately accumulated or discounted. In the hydro-electric enterprise used to develop this calculation, completion date, expenditure schedule, scale, and technical design are interdependent choices. Interest rates affect both construction costs and the valuation of future earnings. Investment decisions also depend on other entrepreneurs’ actions, about which reliable knowledge is unavailable:
Chief among the assumed conditions is, of course, the ignorance among entrepreneurs of each other's beliefs, resources, and intentions, which apart from anything else would make correct foresight impossible.
Individually reasonable plans can consequently generate collectively incompatible demands. Technical requirements prevent entrepreneurs from freely rearranging construction expenditure: surveys and excavation must precede later operations, while subsequent phases may absorb labour and materials much more rapidly. Large equipment complexes yield nothing until completed. Their expenditure schedules can therefore combine a prolonged, relatively inexpensive beginning with a steep increase near completion. Intensive phases may coincide accidentally or because a common stimulus—such as technical innovation or changed interest-rate expectations—initiates several projects together.
The mechanism requires a specific resource setting:
The argument which will be developed below assumes a fairly small number of very large-scale projected enterprises in a region isolated as to the supply of resources for their construction.
Near full employment, short-period supplies of construction resources are inelastic. As the earliest projects reach their intensive phases, their purchases raise input prices for every enterprise drawing on the same resources. Later entrants discover that much of their construction must now occur at unexpectedly high prices. The decision to continue depends on remaining costs and prospective returns, not on recovering expenditure already incurred.
This distinction gives advanced projects an advantage. Postponement delays their prospective earnings while preserving interest income on only a small unspent construction fund. They can therefore tolerate greater increases in resource prices than projects with most construction still ahead. Shackle’s numerical illustrations develop this asymmetry: projects closer to completion can outbid younger enterprises, which become more likely to suspend work. The critical variable is the timing of resource demand, not merely the aggregate amount invested. Postponement or a sharp reduction in expenditure can produce unemployment much as abandonment would.
Shackle extends the mechanism to equipment replacement. Existing machinery may remain usable beyond its planned replacement date, particularly when renewal aims at technical improvement rather than remedying physical exhaustion. Higher prices for generally usable inputs can postpone replacement and destroy demand for specialised resources already committed to it. Scarcity in one class of resources thus causes unemployment in another: available specialised labour or equipment cannot sustain construction when complementary inputs become prohibitively expensive. Lost purchasing power may initiate deflation, although the article does not fully develop that cumulative process.
Monetary conditions can reinforce this disturbance. Rising interest rates increase construction costs and reduce the discounted value of expected returns. Nor does a temporary peak in construction prices necessarily imply correspondingly higher selling prices throughout a plant’s much longer operating life. Breakdown can therefore arise from competition among equipment constructors themselves, rather than primarily from competition between investment and consumption-goods production.
The article offers a conditional account of how technical sequencing and decentralised expectations turn expansion into bottlenecks, suspended investment, and unemployment. Its relevant region is defined by the mobility of skilled labour and heavy materials, not necessarily by national boundaries. The argument identifies a possible source of instability within the investment process itself.
This work was divided into 2 sections when it entered the library's research corpus—an apparatus for search and citation, not necessarily the author's own table of contents. Each title opens its summary.
Put a question to this work; the Librarian answers from its 2 sections and cites the passage.
Ask the Librarian