By: Laurence Krause

Laurence Krause — Mon, 22 Oct 2018 16:23:25 +0000

You have an interesting fact, but no theory to explain why it might be interesting. The theory you mention–the Post Keynesian view that firms may have a desired capital stock and if they have too much capacity this would adversely impact capital formation and the multiplier accelerator–would serve to explain a short-term imbalance between investment and capacity utilization. The question then is: why would there be a long-term relationship between declining capacity utilization and declining capital formation? After all, if firms experience excess capacity they should reduce their investment spending until excess capacity is eliminated. So, if your fact is correct, why does it exist over the long term? I have been scratching my head trying to come up a possible scenario. First, I thought of Harrod’s famous knife edge. In his growth model, he said that if the desired growth rate is less than the actual growth rate, then a vicious cycle of decline would set in. Capitalists would lower investment spending, sending output lower, leading to another decline in desired investment. However, the theory behind this is weak. Second, I thought of the possibility it had to do with increasing globalization and convergence. Suppose a new technique is developed in the US, capitalist invest in new capacity and, after a lag, the industry migrates abroad to a developing country and the good is imported into the US, leaving excess capacity and declining investment spending in the US.

That is what I came up with.

Comments on: The impact of excess capacity over the investment falloff

By: Laurence Krause