palumbo 2003 trezzini capacidad

Growth without normal capacity utilization*

Antonella Palumbo and Attilio Trezzini

Introduction

This paper is concerned with a methodological question internal to whatcan be described as the approach of ‘demand-led growth’. By this we meana composite set of sometimes very heterogeneous theories and models thatstems from the extension of Keynes’s and Kalecki’s theories to the analysisof growth, and whose distinctive feature is recognition of the essential roleplayed by aggregate demand in driving the growth process.

The methodological question we address is whether the trend ofproduced quantities can be effectively represented and analysed by meansof theoretical positions characterized by complete adjustment betweenoutput and productive capacity, i.e. by means of theoretical positions inwhich capacity utilization is assumed as normal.

We carry out this analysis by discussing the meaning and the relevance ofdifferent theoretical constructs in which normal capacity utilization iseither explicitly assumed or implied. The first of such analytical constructsis the steady state, a path along which all quantities grow simultaneously at aconstant rate with capacity utilization constantly kept at its normal level.This hypothesis plays a dominant role in most of the growth theories andmodels to be found in the economic literature from the 1950s onwards.Section 1 addresses the inconsistency existing between the assumption ofconstant utilization of capacity and the idea that aggregate demand plays atruly autonomous role in the process of accumulation.

A second hypothesis is considered in section 2, namely the idea that thetrend of produced quantities can be effectively analysed by means ofpositions characterized by average, rather than continuous, normal utiliza-tion. An idea of this sort underlies the analyses based on the so-called

Address for correspondenceDipartimento di Econnomia, Universita di Roma Tre;e-mail: [email protected] and [email protected]

Euro. J. History of Economic Thought 10:1 109–135 Spring 2003

The European Journal of the History of Economic Thought

ISSN 0967-2567 print/ISSN 1469-5936 online # 2003 Taylor & Francis Ltd

http://www.tandf.co.uk/journals

DOI: 10.1080/0967256032000043814

supermultiplier. A contradiction can be found also between this form of thenormal utilization hypothesis and the assumed autonomy of aggregatedemand.

Section 3 then analyses the characteristics of the process wherebycapacity adjusts to demand. Having shown that the conditions for fulladjustment are so stringent as to make it a highly unlikely occurrence, weargue that the tendency of capacity to adjust to demand – though a forcecontinuously at work and continuously influencing the process ofaccumulation – is such as to operate together with other potentiallyoffsetting forces influencing investment. There is thus the risk that anyanalysis of accumulation based on the relations that can be establishedunder the hypothesis of full adjustment will be misleading. This leads us insection 4 to assert that the normal utilization hypothesis, which is so centralin the analysis of prices, plays no analogous role in the analysis of quantitiesbecause, unlike the situation with respect to prices, no gravitation of actualquantities towards ‘normal’ quantities may be assumed.

The paper concludes by sketching, in section 5, the general lines of whatwe regard as a more fruitful method for the analysis of actual growthprocesses.

1. The hypothesis of constant normal utilization in steady-state models

One element can be said to characterize all the theories and models ofgrowth developed by authors in the Keynesian and Kaleckian tradition,where aggregate demand is seen as the driving force behind the growthprocess, namely the idea that equality of saving and investment is broughtabout in the long run not by some automatic mechanism that adjustsinvestment to full-employment saving decisions but rather by somemechanism through which it is saving that adjusts to an independentlydetermined amount of investment. Following Kaldor (1955 – 6: 95), we shallcall this principle the ‘Keynesian Hypothesis’.

This paper seeks to assess the compatibility of the Keynesian Hypothesiswith the ‘normal utilization hypothesis’, i.e. the idea that the trend ofproduced quantities can be effectively represented and analysed by meansof theoretical positions in which capacity utilization is assumed as normal.In our initial discussion of the normal utilization hypothesis as it appearsin demand-led growth models, we follow the standard practice ofconsidering closed economies with no state intervention and giventechnology. We also assume that the real wage is given and hence that thecorresponding normal rate of profit and the system of relative prices areknown.


110

Following the definitions originally put forward by Steindl (1952), themain source of the debate on capacity utilization, we take ‘full-capacityoutput’ to mean the level of output that could be obtained through fullutilization of the existing equipment with the available techniques ofproduction.1 Any degree of capacity utilization is defined as the ratiobetween actual output and full-capacity output. The normal or desiredutilization of capacity is the level that firms wish to achieve on average overa sufficiently long stretch of time. This will generally differ from fullutilization because firms usually prefer to install an amount of capacity thatexceeds both actual and expected production, a choice that stems bothfrom the technical indivisibility of fixed equipment and from the strategicdetermination of each firm to be prepared to satisfy unexpected increasesin the demand for its products without losing market shares to its rivals.2

The existence of such a desired excess of capacity means that, from thetechnical point of view, actual output can not only fall short of but alsoexceed normal capacity output.3 From these definitions, it follows that thenormal degree of capacity utilization is the one that firms have in mind intaking their investment decisions; i.e. the degree that, if attained, wouldmake them– to use Harrod’s famous expression – ‘content with what theyare doing’.

The normal utilization hypothesis can assume different forms. The firstto be found in the literature is the steady-state assumption. The ‘steady-stategrowth path’, usually shortened to ‘steady state’, is generally understood asa sequence of positions that describes a path characterized by all thequantity variables – total output, capital stock, and components of aggregatedemand – growing at the same constant rate. Much of the literature thatcan be broadly regarded as referring to the Keynesian Hypothesis has beendeveloped in terms of steady-state growth models.

We shall not address the analytical reasons for which the authors in theKeynesian –Kaleckian tradition make such massive use of the steady-statehypothesis in their growth models, given the fact that they would allprobably regard it as irrelevant for the analysis of ‘the states in which actualeconomies dwell’ (Robinson 1956: 60), seeing actual processes ofaccumulation as resulting rather from one short-period situation determin-ing another and thus probably resulting in processes of cyclical growthwhere no trend can easily be detected (Kalecki 1971). We shall focus solelyon the question of whether the assumption of such conditions of‘tranquillity’ as are necessary to define steady states can be of any help indealing with the complexity with which real growth processes actuallyunfold and in establishing relations between quantity variables that retaintheir meaning also outside the artificial conditions in which they aredefined.

Growth without normal capacity utilization

111

By definition, capital and output grow at the same rate along steady-statepaths. As a result, the degree of capacity utilization and the actual capital/output ratio must both necessarily be constant. In the demand-ledapproach, it is generally assumed that capacity is determined by theexpansion of aggregate demand through the tendency of inducedinvestment to be affected by demand expansion.4 If the steady state is tobe taken as a representation – however stylized – of actual processes ofgrowth, the only degree of capacity utilization that can plausibly be assumedas constantly prevailing is the normal or desired one. Any other constantdegree would in fact induce firms to change their investment decisions inorder to obtain the desired degree, thus causing the system to depart fromthe steady-growth path.5

Assuming a constant propensity to save in the economy as a whole, wedefine ‘capacity saving’ as the amount of saving that corresponds to theoutput produced in conditions of normal utilization of the existingcapacity.6

Investment must necessarily equal ‘capacity saving’ at each positionalong a steady-growth path with normal utilization, which means that theonly level of investment logically consistent with the steady state is thatdetermined by the given level of capacity saving over the same period. Byassuming steady growth, we therefore implicitly assume that investmentcan never deviate from that level. We simultaneously reject both the viewthat investment is independent of capacity saving and the attribution ofany autonomous role to investment in the growth process. It thus appearsby no means easy to reconcile the steady-state assumption with theKeynesian Hypothesis, i.e. with the idea that it is investment thatautonomously determines a corresponding level of saving (Garegnani1992: 58).

As regards the rate of growth of output, the assumption of steady growthwith normal utilization implies that the economy can grow at only onepossible rate, namely the rate determined by the ratio of capacity saving tothe existing stock of capital. This would necessarily be equal to Harrod’s(1939) warranted rate, which would be univocally determined – under thesimplified assumption of no autonomous component of aggregatedemand – by the propensity to save and the desired capital/output ratio.It could thus be maintained that assuming steady-growth necessarilyamounts to denying aggregate demand any autonomous role in determin-ing growth.

Two different ways have been put forward in the literature to ensurethat the autonomous role of aggregate demand in the growth processcan be represented within the analytical framework of steady-statemodels.


112

The first, which is typical of the so-called Cambridge theory ofdistribution (Kaldor 1955 – 6; Robinson 1956, 1962; Kahn 1959), is basedon the alleged dependency of distribution on accumulation throughchanges in the overall propensity to save whereby savings adjust toinvestment.

This dependency is, however, entirely due to the absolute inelasticity ofaggregate output with respect to changes in aggregate demand that theseauthors postulate in their models.7 While this is explicitly stated in Kaldor(1955 – 6; 1957) as a consequence of the full-employment hypothesis (see,for example, Kaldor 1955 – 6: 95 and 1957: 593), in the other models in thesame tradition this inelasticity is simply a consequence of the steady-statehypothesis (see, for example, Robinson 1962: 11 – 12).8

It has been proved that the assumption of such extreme inelasticity isunwarranted (see especially Garegnani 1992: 50 – 3) by showing the broadmargins of long-run output elasticity to any change in aggregate demand,be it temporary or persistent. The latter change may bring about changesboth in the degree of capacity utilization and in the capacity level, and bythese two routes output can accommodate any variations in aggregatedemand with no need to vary normal distribution. As far as the Cambridgetheory of distribution is concerned, the assumption of continuously normalutilization, i.e. the steady state, is therefore not a simplifying analyticalframework in which the theory is cast but the very foundation on which it isbuilt. This leads to a relation that would not hold outside this very stringenthypothesis but has, on the contrary, been given a much more generalmeaning.9 As soon as the existence of long-period output elasticity isrecognized, the possibility appears of extending the Keynesian Hypothesisto the analysis of the trend along a different route, with a mechanism ofadjustment of saving to investment that has nothing to do with changes indistribution but consists – in the long period as well as the Keynesian shortperiod – of changes in the level of output determined by changes both inthe degree of capacity utilization and in capacity itself.

The rejection of the close link between accumulation and distributionstated by the Cambridge theory of distribution has generated a secondway to ensure representation of the autonomous role of aggregatedemand in the growth process through steady-state models. In ‘neo-Kaleckian’ growth models, the normal utilization hypothesis is aban-doned10 and the constant degree of capacity utilization – implied by thesteady-state assumption – is seen as endogenously determined by the rateof accumulation and as generally different from normal. The assumptionof steady growth also implies, however, that once an actual capital/output ratio different from normal prevails, it will remain different fromthe desired ratio forever. The constant divergence between the actual


113

and the desired degree of capacity utilization has been seen asinconsistent with the assumption of capacity adjusting to demandexpansion (Committeri 1986, 1987; Auerbach and Skott 1988). Thepersistence of a divergence between actual and desired capacityutilization could be seen as eventually forcing firms to change theirinvestment behaviour and thus altering the economy’s rate of growth.11

As shown by Trezzini (2003), the identification of this inconsistency hasforced neo-Kaleckian authors to change their models in differentdirections, especially by assuming a tendency of the normal degree ofcapacity utilization to adjust to the actual one. None of these seems reallycapable of resolving the contradiction, which stems from the steady-stateassumption itself.12

In point of fact, the steady-state assumption proves to be inconsistent withthe autonomous role of aggregate demand for two different but connectedreasons. The first is the fact that in steady states with normal utilization,investment is constrained by capacity saving (a problem which is resolved inneo-Kaleckian models through the endogenous nature of actual steady-state utilization). The second is that the steady state imposes a constantrelationship between capacity and demand, and this constancy isinconsistent with the idea that capacity tends to adjust to demand, i.e.the idea that provides the foundation of the whole demand-led approach togrowth.13

It therefore appears that the only way to resolve this inconsistency is byscrapping the steady-state assumption and moving towards an analysis thatallows for the variability of capacity utilization as the only condition inwhich the autonomy of aggregate demand in the growth process can bestated (see Garegnani 1992: 59; Trezzini 1995: 36 – 8).

2. The hypothesis of average normal utilization in ‘supermultiplier’ models

Another way of representing the autonomous role of aggregate demand inthe growth process is to be found in the models based on the so-calledsupermultiplier. We refer in particular to authors – especially Serrano (1995)and Bortis (1997) –who have constructed models of growth based on theidea that output is the mechanism of long-period adjustment betweeninvestment and saving, and aggregate demand plays the fundamental rolein driving the process of growth.14 While they do not construct steady-statemodels, they retain the normal utilization hypothesis, albeit in a differentform.

Unlike steady-state models, there is no assumption of constant capacityutilization, as shown by the fact that the Cambridge saving-investment


114

adjustment mechanism based on distribution is rejected on the basis oflong-period output elasticity to changes in demand.

Normal capacity utilization is instead regarded –more or less implicitly –as the situation that tends to emerge on average through the actualfluctuations of output over a sufficiently long period of time. Assuminggiven distribution and the dependency of investment on expected demandthrough a rigid accelerator mechanism, Serrano (1995) and Bortis (1997)establish a constant relation between autonomous demand and output,namely the supermultiplier.15 On the basis of this relation, the rate of growthof the autonomous components of aggregate demand is assumed as theessential factor determining the rate of growth of output in conditions oflong-period normal utilization of capacity.16 In this way, the assumption ofaverage rather than continuous normal utilization appears to be consistentwith the representation of the growth process as a demand-led phenom-enon.

This consistency is, however, only apparent. As shown by Trezzini (1995),in each situation characterized by a specific level of existing productivecapacity and of normal capacity output, Y*, the level of autonomousdemand, Z, determines a specific level of investment required for normalutilization of existing capacity, i.e. the level that is capable, together withautonomous demand, of completely absorbing capacity savings. This levelof investment determines the unique rate of growth, gw, at which thateconomy can grow in conditions of normal utilization, which coincides withHarrod’s (1939) warranted rate when the autonomous components ofaggregate demand are explicitly considered.17

There is no reason in principle for the average rate of growth ofautonomous demand, ga, to be exactly equal to that value of the warrantedrate, gw. There is thus no reason for capacity utilization to be normal, noteven on average. If ga happens to be greater than gw, average utilization willbe higher than desired, while a ga lower than gw will entail average capacityutilization lower than desired.

The same thing can be seen from a different perspective by analysing theeffects of a change in the rate of growth of autonomous demand. Let usassume that the economy is initially on an average-normal-utilization pathand consider an increase in the average rate of growth of autonomousdemand, now equal to ga’4 ga.

The adjusted conditions can be defined as those in which the economy cangrow at the new rate of growth ga’ through the normal utilization ofproductive capacity, i.e. the conditions required for ga’ to become the newwarranted rate at the end of a hypothetical period of transition.18 In theseconditions, productive capacity must be considerably higher. The higherrate of growth requires a percentage growth of capacity higher than that


115

required in the old situation and thus a higher level of investment. On theother hand, autonomous demand is growing and capacity saving, whichmust equal the sum of autonomous demand and investment, musttherefore be much higher than before. So must productive capacity.

In terms of shares over output, the share of investment over income mustbe higher in the new adjusted conditions, thus providing for a higher rateof accumulation, while the share of autonomous demand, Z/Y*, mustdecrease.

Let us assume that the economy starts adjusting to the new conditionsof growth at the new ga’ as soon as the rate ga changes. Since the level ofZ has risen according to the rate of growth ga’, the necessary reductionin the fraction Z/Y* can only take place if capacity grows on averagemore quickly than autonomous demand, which means that the actualgrowth rates of capital stock and productive capacity, gk and gy*, must begreater than ga’. The latter, on its own, is already greater than the initialwarranted rate gw. Capacity is therefore over-utilized as soon as thechanges needed for full adjustment begin to come into effect. If theincrease in the growth rate of autonomous demand is correctlyanticipated, over-utilization may take place before it occurs, but isnevertheless a necessary phenomenon.

Moreover, the extent of this adjustment appears to be so great that itwould probably be spread out over many periods. This therefore constitutesan entire phase of over-utilization, which is not due, as should be clear, tomistaken expectations.19

What the above argument shows is in fact that the tendency ofcapacity to adjust to demand can only manifest itself through thevariability in the degree of capacity utilization, which implies thatutilization must necessarily be different from normal on average. Ifcapacity must be adjusted to demand both in an initial situationcharacterized by a rate of growth ga and, at the end of a hypotheticaladjustment process, in another situation characterized by growth at arate ga’ greater than ga, capacity must grow on average more thanaggregate demand. Any average degree of utilization calculated as anaverage of the actual degrees over an interval of time that includes evenjust a part of this phase of adjustment will necessarily differ from thedesired degree. This seems to be the only analytical condition in whichthe role of aggregate demand in determining the expansion ofproductive capacity can be stated.

The conclusion can therefore be drawn that if we seek to study growthstarting from the Keynesian Hypothesis and without invoking distributionas an equilibrating mechanism between investment and saving, the fullcoincidence of demand (output) and capacity cannot be assumed either as


116

a continuous condition, as argued in section 1, or as an average condition,as shown above.

3. The tendency of capacity to adjust to demand

The question now arises of what role is left in the analysis of accumulation –within the demand-led approach to growth – for theoretical positionscharacterized by complete adjustment between output and capacity.

We wonder whether ‘fully adjusted’ positions can still be effectively usedto derive relations between quantity variables that somehow represent therelations between actual variables. This would in fact be the case if we couldrealistically assume that the tendency of capacity to adjust to demandoperates so powerfully in the system that it is possible to disregard otherforces acting simultaneously on the evolution of capacity and demand overtime. Although of no use in describing the average situation of theeconomy, the theoretical positions characterized by normal utilizationwould retain their validity as ‘centres of attraction’, so to speak, of actualquantities.

By analysing the tendency of capacity to adjust to demand in greaterdetail, we can show however that this tendency, while continuously at work,is by no means the only systematic force acting on the evolution of capacityand demand over time.20 It operates together with other forces – ofanalogous nature and potentially of analogous strength – that affect thetrend of aggregate demand and thus act against the tendency itself.

An analysis of accumulation based on the relations that can beestablished under the hypothesis of full adjustment might prove thereforeseriously misleading as regards the interpretation of actual processes ofgrowth.

As seen above, in a hypothetical situation where demand and capacity arefully adjusted and autonomous demand starts growing faster than before,the system finds itself in a situation of over-utilization of capacity. Ifautonomous demand is also expected to grow at this higher rate in thefuture, firms will seek to equip themselves with greater capacity. Inprinciple, it might seem reasonable to assume that capacity and demandmust adjust to one another sooner or later, since any other situation ofdivergence between the two would make entrepreneurs uneasy with ‘whatthey have done’ and prompt them to take other investment ordisinvestment decisions.

Analysis of the actual process whereby capacity adjusts to demand shows,however, that it cannot be assumed to be sufficiently strong and systematicdue to its very nature and mode of operation. In addition to being very


117

lengthy and uncertain, the process also appears to generate potentiallyoffsetting forces.

In the first place, attention can be drawn to the fact that investmentdecisions aimed at adjusting capacity to demand are not necessarily takenquickly by firms. Since it can be safely assumed that firms aim at normalcapacity utilization as an average over expected fluctuations of demand, theneed to adjust capacity to demand can be seen as emerging only when firmsregard a divergence of the actual degree of utilization from normal assystematic rather than transitory.21 In many cases, this could mean thatentrepreneurs would only expect such a divergence to persist after it hadbeen observed on average over a certain period of time.22 This seems toprovide an initial reason for characterizing the process of adjustment as onethat usually requires time.

In the second place, it is necessary to take into account the twofoldnature of investment as a flow of expenditure that simultaneously affectsboth capacity and demand.23 This means that while adjusting capacity todemand, the induced flows of investment also determine changes indemand itself (both actual and expected), i.e. in the very magnitude towardwhich they are adjusting capacity. This may create the need, so to speak, fora series of successive ‘steps’ of adjustment, something that is likely both toslow down the completion of the whole process and to generateendogenous forces that may hamper the tendency to adjustment itself.24

These considerations are further strengthened by the fact that, as we sawin the previous section, it takes only a comparatively small change in therate of growth of autonomous demand (even if we assume no change in thetechnical conditions of production) to induce the need for a change incapacity that is likely to be of considerable size with respect to initialcapacity.25 Firms will probably find it necessary to spread this change over acertain number of periods, thus necessarily lengthening the periodrequired for adjustment. Furthermore, given the fact that adjustmentinvolves the gradual adaptation of physical capital to the required size andcomposition through investment flows and given the durability of the unitsof capacity thus installed, it is only too obvious that time will also berequired to correct any mistakes that firms might make.

While the foregoing observations show that adjustment is a lengthyprocess, we can also demonstrate the uncertain nature of its results bystating the conditions that would have to be satisfied in order to assume thefull adjustment of capacity to demand. This will make it possible to show thesystematic nature of the forces that intervene during the process and alterthe conditions for its realization.

In view of the twofold effect of investment flows on capacity and demand,if full adjustment is to be realized, entrepreneurs will have to be able to


118

distinguish between two different sorts of maladjustment between demandand capacity, namely those deriving from a persistent and autonomouschange in demand and those that can be regarded as a product of theadjustment process itself. Firms must correctly anticipate both the pace atwhich autonomous demand will grow and the effect of their owninvestment decisions and those of other firms on aggregate demand.26

The need for such perfect knowledge on the part of the firms finds itsrationale in the fact that adjustment can only take place through a numberof periods during which capacity grows faster than autonomous demand,which means that the flows of net induced investment must be higher thanthose compatible with normal utilization of the already installed capacity.But firms must not be confused by this over-utilization, and must be awarethat if aggregate demand is currently growing faster than it will in future,this is only due to the phase of adjustment.

It may be worth noting that, for all the limitations it imposes on therealism of the analysis, the assumption of perfect foresight is in any casenot sufficient by itself to guarantee the actual achievement of fulladjustment. In the first place, even if firms possessed exact knowledge ofthe rate of growth of demand representing the new trend of theeconomy, they would have to be prepared to adopt some kind ofbehaviour as regards the period-by-period determination of theirinvestment flows that implies the dependency of investment not onthe actual divergence between demand and capacity but on somecondition of compatibility. In other words, they would have to undertakethe exact amount of investment required – together with the investmentsof other entrepreneurs – to produce full adjustment. Full adjustmentwould thus be pursued for its own sake instead of being the result of thedecentralized investment decisions taken by each firm in the light of itsown interests.27

Secondly, even if perfect foresight is assumed, firms will not be able totake the ‘right’ investment decisions if the trend rate of growth ofautonomous demand is subject to changes during the adjustment period. Itseems necessary to assume that, once a change occurs, the new trendgrowth rate of demand remains constant for the whole period required foradjustment to take place. It is in fact only such a constant rate that couldguide the entrepreneurs’ decisions during the long phase of adjustment. Ifit changes, firms will have nothing certain on which to base theirexpectations and their behaviour.

This analysis does not show that the full adjustment of capacity todemand can be prevented by accidental forces operating at some specificmoment. The accidental nature of the forces would in any case make itpossible to disregard them in an analysis of the long-period tendencies of


119

the system. What it does show is that the adjustment tendencyendogenously generates other systematic forces that may affect outputand capacity in different directions, and thus does not prove strong enoughto ensure that the economy will gravitate towards situations of normalcapacity utilization.

4. ‘Normal’ quantities versus normal prices

The definition of such stringent conditions for the actual attainment of fulladjustment helps us to provide a less vague formulation as regards the‘lengthy’ adjustment process and ‘systematic’ offsetting forces mentionedabove.

The speed of the process must be defined in relation to the persistenceof the forces determining the position to which the system tends to adjust,and thus with respect to the probability that the factors determining thetrend of autonomous demand are subject to no change throughout theentire process. Given that the adjustment process usually takes some time tocome into operation, spreads over various production periods and gives riseto demand effects that necessitate further adjustment, it would, however, benecessary to assume a high degree of persistence of all the determinants ofthe trend of autonomous demand in order for its rate of growth to remainconstant over such a long period.

The arbitrary nature of such an assumption becomes clearer oncomparing the conditions on which it can be asserted with the conditionsthat make it possible in the analysis of prices to assert the relativepersistence of the magnitudes assumed as given when studying themechanism of adjustment of actual to normal prices.28 It could in fact beclaimed that there is some sort of symmetry between the concept of aconstant trend of autonomous demand – based on the idea that it somehowrepresents a ‘normal’ magnitude – and the concept of a normal wage (orany other datum) used to define the ‘normal prices’ towards which actual(market) prices gravitate. In our view, however, this analogy is quiteuntenable.29

First of all, the existence of a ‘normal value’ of the rate of growth ofautonomous demand is by no means inherently obvious. If a normal valueof a variable is to be seen as a centre of gravitation for the respective actualvalues, this can only be done on the grounds of specific theoreticalreflection. In the theory of prices, grounds for the claim that normal pricesrepresent centres of gravitation for actual prices may be said to lie in theforce of competition that causes capital to flow from one sector to anotherin pursuit of the maximum rate of return, thus bringing profit rates into


120

uniformity. Conversely, neither what we find in the literature on the subjectnor reflection induces us to believe in the possibility of postulating theexistence of a normal level that acts as a centre of gravitation for the actualgrowth rates of autonomous demand. The complexity and variety of theforces driving the evolution of any component of aggregate demandsuggest that the long-period value of its rate of growth will only emerge asan ex-post magnitude from the actual oscillations of the variable. Thisappears to be very different from a situation where precise identification ispossible of the forces driving the gravitation of actual magnitudes towardsindependently determined normal values.30

In the second place, the assumption that market prices gravitate towardsnormal prices entails the identification of some forces that are relativelymore persistent than the other, accidental ones that determine theincessant movement of the former. This property of relative persistence hasnothing to do, however, with the properties we would necessarily have toimpose on the rate of growth of autonomous demand in order for fulladjustment to be possible. In actual fact, imposing these properties wouldbe tantamount to arbitrarily stating that the value of that variable does notchange for a certain period of time. Relative persistence, on the contrary,involves an analysis of the forces influencing a variable in pursuit of thefundamental ones. No such analysis is to be found as regards the forces thatare supposed to keep the rate of growth of autonomous demand constant intime by prevailing over the more erratic ones in the long run.

The most important difference, however, appears to be the fact that,unlike the attainment of adjustment between demand and capacity, theprocess of price gravitation in no way requires the whole system to be in astate of adjustment of all its variables (Ciccone 1986: 24 – 5).

Let us assume a change in one of the circumstances – e.g. the technicalconditions of production – determining normal prices. No long process ofinvestment appears to be entailed in the gravitation of actual prices towardsthe ‘new’ normal prices. As Garegnani (1979) argues, ‘when some of theproducers have adopted the new method, the competition between themand those using the old method will generally be sufficient to make the newsystem of prices effective (i.e. to ensure that actual prices will gravitatetowards the new levels)’ (p.137, our translation).

Gravitation does not require the whole of production to take place in theconditions according to which normal prices are defined. In other words,adjustment towards normal prices does not appear to entail the adjustmentof the whole of productive capacity to demand, the adoption of thedominant techniques by all firms, or the actual payment of wages at thenormal rate by every firm in every sector. This means that there is no needto assume that the new conditions defining normal prices remain constant


121

for an indefinite period of time. It also means, however, that normalpositions retain their meaning as centres of gravitation for actual variableseven though the conditions defining them (such as the use of the dominanttechnique and the normal degree of capacity utilization) need not prevailin the economy as a whole.

On the other hand, in order for the actual utilization of capacity to‘gravitate’ towards the normal rate, it would be necessary to assume thatafter any change in the technical conditions of production or the rate ofgrowth of autonomous demand, no other change takes place (i.e. no otherforces counteracting the adjustment are set in motion) until all theproducers have had time to renew the whole of their capacity so as to useonly the dominant techniques with the normal degree of utilization in thewhole economy.31

It is due to these crucial differences between the concepts of ‘normal’positions in the analysis of prices and ‘fully adjusted’ positions in the analysisof quantities that the latter cannot play the same analytical role as theformer. The problem does not lie in the fact that some accidental forcesprevent the system from ever actually attaining a fully adjusted position, butin the fact that the forces counteracting the tendency to adjustment have thesame nature – and thus possibly the same strength – as the tendency itself.

This follows from our previous remarks about the nature of theadjustment process. Once a discrepancy between the average level ofdemand and average capacity has been observed and activated investmentflows designed to adjust capacity, there is no reason to maintain that theinitial change in autonomous demand must be perceived by entrepreneursas being of a different nature from the subsequent changes in demandinduced by the adjustment itself. Perhaps more importantly, however,investment cannot be regarded as induced exclusively by demandexpansion, as this would inevitably mean overlooking other fundamentalforces that act on accumulation and determine its level as well as its form.The most important of these forces appear to be technical change andcompetition among firms.

Competition can lead entrepreneurs to take investment decisions thatare not induced and justified by the expected expansion in demand. It isprimarily the force whereby prices tend to settle at their normal level andthe rate of profit tends to become uniform in all sectors of the economy,which comes about through the movement of capital from one sector toanother in pursuit of the maximum return.

In addition, however, competition is also the force that induces firms tochange their methods of production and their products or to enter newsectors – in other words, to innovate – in order to exploit new profitopportunities. And it is the force that obliges the non-innovative firms to


122

react and take their own investment decisions if they are to survive.32 Firmscan make innovative investments even when faced with stagnating demand.In point of fact, they could even be said to have a greater stimulus toundertake (at least some kinds of) innovative investment when the demandfor the products of their sector is growing slowly or in decline, since in thiscase the ability to take innovative action aimed at cutting costs may wellmake the difference between survival and failure.33

What matters here, however, is that innovative investment is notdetermined by demand expansion. The new capacity installed by successfulinnovators will make up for at least part of the capacity lost through thedeath of other firms, but the net effect is uncertain. It is true that if firmsinstall capacity that proves in the long run to exceed what is required andjustified by the level of demand, the tendency of capacity to adjust todemand will come into operation to correct the discrepancy. During thisslow process of adjustment, however, other forces of similar strength andnature may intervene to attenuate or even counteract the forces that shouldrealize adjustment.

We are not claiming that there is no tendency of capacity to adjust todemand in the system, but rather that a careful distinction should be drawnbetween two very different propositions.

The first is that a tendency of productive capacity to adjust to demand isalways present and at work within the system. The operation of thistendency is the very basis on which the demand-led theory of growth isbuilt, i.e. the view of demand as the autonomous force determining thegrowth of both output and capacity.

The second, which we instead regard as incorrect, is the claim that, giventhis tendency, we can represent actual processes of accumulation and therelations between actual quantity variables by means of theoretical positionscharacterized by the full adjustment of capacity to demand.

5. Studying growth without the normal utilization hypothesis

The foregoing analysis should not be taken as suggesting that normalpositions cannot be defined or that they lose all their importance as centresof gravitation for actual variables. What it does suggest is that very differentmethods of analysis must be adopted in the study of prices and quantities,and that in the latter case no relation based on normal utilization can beusefully employed, at least with respect to the analysis of investment and thelinks between accumulation and growth.

The issue addressed here can be seen as part of a more general question.According to the analytical method of Classical economists, as recon-


123

structed by Garegnani (1990, 1998), it is possible to distinguish, withineconomic theory, between a theoretical ‘core’ where it is possible toestablish and study quantitative relations of general meaning betweenvariables and another vast field of analysis where no general quantitativerelation of definite form can be asserted, since the actual interrelationsbetween variables are so complex and so dependent on specificcircumstances as to be susceptible only to a different, less general kind ofanalysis. The operation of the force of competition that moves capital inpursuit of the maximum rate of return and the necessary relation betweenthe price of a commodity and the costs of the means used directly orindirectly to produce it are such general forces as to allow for thedetermination of definite quantitative relations that must always holdbetween wages, profit rates and prices with given technical conditions andgiven output levels. No analogous system of general quantitative relationscan be established, however, outside this analytical core.34 The analysis ofthe forces that determine growth and accumulation belongs to the secondfield. The variety of influences that work to determine the trend of actualoutput in an economic system (including a whole set of historical andpolitical factors) cannot be accounted for by a general formula. What ispossible is to undertake a descriptive analysis of the forces that are likely toenter into these complex processes and build models serving to analysesome particular interrelations while overlooking others (the limitedapplicability of which must be duly taken into account).

It is for these reasons that the tendency of capacity to adjust to demandcannot be represented by means of the general and definite quantitativerelationships that could be established by making use of the normalutilization hypothesis. It may be worth taking a brief look at some of themisunderstandings that could arise from the application of this hypothesiswith respect to the relations between actual variables.

Let us first consider one consequence in the analysis of investment. Ifgrowth is analysed in terms of the movement from one fully adjustedposition to another, the conceptual difficulty arises that there seems to beno place in the analysis of growth for a kind of investment that is notdemand-induced.35

If normal utilization is to be restored after any change, all investmentdecisions must be justified by the expansion of demand. If investmentdecisions are taken by firms for any other reason, induced investment mustfill the gap between the ‘unjustified’ new capacity thus installed and thecapacity made necessary by the expansion of demand, which is another wayof saying that all investment must be regarded as induced.

Needless to say, this imposes an unnecessary constraint on the theoreticalanalysis of the factors determining investment. As pointed out above and


124

shown in much of the economic literature, examination of the behaviour offirms does not point to the building of productive capacity in order to meetexpected demand as the only reason for investment decisions.36 Invest-ments that are not justified by demand expansion are made all the time, asin the case of innovative investments, and have effects both on capacity andon demand. The stimulus that comes from competition and innovationinteracts with the entrepreneurs’ need or desire to adjust capacity todemand in determining the amount of investment firms undertake. Aftersome time has elapsed, it will always be possible for individual firms to assesswhether individual investment decisions were really justified. In themeantime, however, the sum of these individual investment decisions haschanged the very conditions on which the adequacy of each individualinvestment decision is to be gauged. We would therefore argue that thenormal utilization hypothesis imposes the adoption of a restrictivedefinition of investment, or rather an analysis of its determinants thatomits some relevant features of reality.

Another consequence of the normal utilization hypothesis is the ideathat simple definite relationships can be established (as we saw in section 2)between autonomous demand, investment and the rate of growth ofoutput. Starting from an adjusted situation and in given technicalconditions, any increase in the rate of growth of autonomous demand –e.g. a doubling – leads in the new adjusted situation to a doubling of thegrowth rate of output, a doubling of the share of net investment in output,and a decrease in the share of autonomous demand. During theadjustment process, when greater capacity is to be built, net investmentmust represent an even higher share of output (the higher the shorter theduration of the adjustment process). Due to the fact that the increase in therate of growth of demand may occur in initial conditions of under-utilization and that it induces changes in the average degree of utilization,no definite conclusion can be reached, however, as regards the intensity ofthe change in the share of investment, which might even decrease orremain constant if other contrary forces act simultaneously on investmentwith sufficient strength.37

Moreover, no actual process of growth can plausibly be described as aprocess taking place in given technical conditions and with given values ofall parameters, such as the propensity to save and the propensity to import.For example, an acceleration in the growth rate of demand linked to theintroduction of product innovations involves a change not only intechnology but also perhaps in consumption habits that affect the overallpropensity to consume and hence the intensity with which aggregatedemand reacts to an initial stimulus. To give another example, the effects ofa change in the rate of growth of exports can differ greatly depending on


125

whether it gives rise to induced expenditure on domestic products or leadsexclusively to the financing of imported technology.38

Our critique of growth theories and models based on the normalutilization hypothesis might now appear to suggest that it is impossible todevelop any theory of growth at all. By arguing that it is impossible torepresent the economic relations between quantity variables by means ofgeneral definite relations, we are not, however, denying the possibility ofeconomic theorizing but asserting the need for a theory with fewer claimsto generality.

Much of this theory is already present in a rich body of literature. Farfrom requiring any specific quantitative statement of the effect of anincrease in demand on the rate of growth of output, the essential role ofaggregate demand in the process of growth can be established as a generalprinciple as soon as it is recognized that there is no mechanism ensuringthe complete absorption of whatever output is produced in conditions offull utilization of resources. Many economic and historical analyses stressingthe role of the expansion of markets in phases of successful growth or thefailure to conquer new markets as causes of slow growth – e.g. Kalecki’s(1971) analysis of the role of internal and external markets in capitalisticgrowth, Hirschman’s (1958) discussion of the factors limiting developmentopportunities and Kaldor’s (1978) remarks about Britain’s growingdependence on imports during the post-war period – could thus beregarded as examples of this kind of theorizing or as possible sourcesthereof.39

What economic theory must offer is a flexible analytical structure wherethese different analyses can coexist and where the relations betweenautonomous demand and output and between the expansion of demandand the creation of capacity are not squeezed into the framework ofmultiplier-accelerator models but recognized as shaped by the character-istics peculiar to each phase of growth.

Universita di Roma Tre

Notes

* We wish to thank P. Garegnani, F. Vianello, H. Kurz, G. White, S. Cesaratto, theparticipants at the Pisa Conference and two anonymous referees for stimulatingdiscussions, observations and comments on an earlier version of this paper. Anyerrors and shortcomings are, of course, all our own work. Paper presented at theconference ‘Old and New Growth Theories: An Assessment’, Pisa, Italy, 5 – 7October 2001.

1 Reference is to the dominant techniques, i.e. the most efficient among thetechniques that are known and adopted to a sufficient degree and hence


126

relevant for the determination of prices (for this concept see, for example,Roncaglia 1978: 36ff.).

2 As in Ciccone (1986), the normal (desired) degree of capacity utilization is definedhere as a strategic magnitude determined by the competitive behaviour of firms inrelation to expected fluctuations in demand. A different definition, to be foundin Kurz (1986, 1990), is based on the assumption that normal utilization is to bedetermined as the cost-minimizing technique. As we endeavour to make clear inthe text, however, we regard the concept of (long-period) cost minimization asembedded in our own definition of normal utilization insofar as costs are notdefined merely from a technical point of view but also include a strategicelement due to the potential loss entailed by inability to satisfy unexpectedlyhigh levels of demand. Moreover, the costs to be minimized must be consideredas inclusive of those related to keeping inventories, as F. Vianello suggested to usduring a discussion. For a definition of normal utilisation as a range of valuesrather than a single value, see below in this section, n. 13.

3 Following the Keynesian and Kaleckian tradition (but contrary to Kaldor 1955 – 6,1957; see below), it is assumed that the stock of labour never acts as a constraint onthe expansion of output. We are also assuming that no sectorial bottlenecksconstrain the expansion of actual output with respect to normal capacity.

4 This tendency has generally been represented in Keynesian literature by means ofthe accelerator principle originally proposed by Aftalion (1909) and Clark (1917). Asis known, in its ‘rigid’ formulation, this principle lies at the basis not only ofHarrod’s (1939) ‘fundamental instability’ of market economies (see section 3below) but also, together with the Keynesian multiplier, of a variety of trade cyclemodels starting with Samuelson (1939) and Hicks (1950). Whether formulatedin rigid or ‘flexible’ terms (Duesenberry 1958), this principle remains theprimary foundation for investment functions both in cyclical growth models andin recent growth models sharing the Keynesian Hypothesis (e.g. the neo-Kaleckian models quoted below, see n. 10).

5 Later in this section we briefly discuss the neo-Kaleckian models put forward byauthors such as Rowthorn (1981) and Amadeo (1986a, 1986b), where the steady-state assumption is combined with the idea of a systematic divergence betweenactual and normal utilization.

6 We assume a constant propensity to save solely for the sake of simplicity, having nointention to deny that both the propensity to save of each income class and theeconomy’s overall propensity to save are likely to be affected by changes in thepace of accumulation or by the specific characteristics of each process of growth.We would argue, however, that these influences can be of varying intensity andmove in different directions, which makes it no easy matter to represent them bymeans of a definite relationship and prompted us to simplify the analysis byassuming them away. What should be rejected is the close and necessary linkbetween accumulation and distribution to be found in the Cambridge theory ofdistribution (see later in this section).

7 For a critique of the Cambridge theory of distribution, see Ciccone (1986), Vianello(1985, 1996), Kurz (1986, 1990), Garegnani (1992), Garegnani and Palumbo(1998).

8 Robinson (1956 and 1962) explicitly analyses steady-state models with persistentlabour unemployment. In at least one formulation of Kaldor’s model, on theother hand, full employment of labour is compatible with underutilisation ofphysical capacity (Kaldor 1961: 24 – 5).


127

9 For a different critique of the assumption of absolute output inelasticity, see alsoRowthorn (1981). Both Rowthorn (1981) and Kurz (1986) interpret the constantutilization of capacity assumed in neo-Keynesian models as full instead of normal.This would indeed be the only condition in which an increase in aggregatedemand would necessarily imply a change in distribution. As will be seen shortly,however, Rowthorn does not regard the Keynesian Hypothesis as incompatiblewith the steady-state assumption as such.

10 While the origin of this neo-Kaleckian approach can be found in Steindl (1952), themodels we refer to are essentially Rowthorn (1981), Amadeo (1986a, 1987) andLavoie (1995, 1996).

11 This would not be the case only if we assume – rather implausibly – that a capacitygrowth rate responsible for a degree of utilization differing from normal duringone period is seen in the following period as able to correct the divergencebetween expected and actual utilisation, and that the same situation, with thesame systematic prediction error, repeats itself unchanged over time.

12 For a critique of the neo-Kaleckian growth models, focusing in particular on themisleading role played by the steady-state hypothesis, see also Ciampalini andVianello (2000).

13 The neo-Kaleckian literature includes an interesting attempt to make the constantdegree of utilization compatible with the idea that capacity tends to adjust todemand. Dutt (1990: 58 – 60) and Lavoie (1992: 327 – 32; 417 – 22) argue that thenotion of ‘normal’ or ‘desired’ utilization should be defined more flexibly as arange of degrees rather than as a single value, thus enabling a steady-state modelto ensure representation of the autonomous role of aggregate demand. Thelatter would determine the actual degree of utilization endogenously and wewould not be obliged, as we are by the traditional definition, to assume thatfirms have to modify their investment decisions. The idea of a flexible definitionof desired utilization is very interesting in itself, both because it is tantamount toadmitting that the steady-state assumption is only compatible (as we contendabove) with a utilization of capacity that firms regard as normal – howeverflexibly defined – and because it implies a non-mechanical mode of reaction offirms to changes in aggregate demand (an analytical point that we stress insection 3 below). The question arises, however, of whether there is still any point,once this definition has been accepted, in sticking to the steady-state methodwith its implied characteristic of equality of all the rates of growth of the relevantvariables. This could be regarded as no more than a heroic simplification if itcould be assumed that the tendency of capacity to adjust to demand is so strongas to ensure more or less uniform growth. In actual fact, changing the definitionof normal utilization appears to be just a step towards abandoning the steady state.

14 These analyses can be regarded as part of the vast literature on multiplier-accelerator models in the Keynesian tradition. In any case, we are concernedhere solely with authors who build multiplier-accelerator models as models ofgrowth consistent with the Keynesian Hypothesis.

15 The supermultiplier concept was first introduced by Hicks (1950), who used it in adifferent context to study cyclical fluctuations of output around a long-periodnormal-utilization trend. Serrano (2001) develops a very similar model, whichhowever involves a more articulated adjustment process based on a flexiblerather than rigid accelerator (see also Cesaratto et al. 2003). The supermultiplieris also used to represent the relation between autonomous demand and outputin a number of models in the Kaldorian tradition (see Kaldor 1978; Thirlwall


128

1979; McCombie and Thirlwall 1997), focusing in particular on the role of exportsin determining output growth. For a discussion of these models, see Palumbo(2003).

16 The autonomous components of aggregate demand are those whose level can beassumed as independent of the current level or expansion of production, i.e.public expenditure, exports and autonomous investment. As in the Keynesianliterature on the subject (see for example Hicks 1950), we define all investmentthat is determined and justified by demand expansion as ‘induced’ and all otherkinds of investment as ‘autonomous’ (see sections 4 and 5 below).

17 Harrod (1939) himself gives the formula for the warranted rate of growth withautonomous components of aggregate demand. In a closed economy with nostate intervention, we assume just one type of autonomous expenditure with nocapacity creating effect, e.g. a purely technological autonomous investment –conceptually, an investment that is made only for the sake of substituting newmethods of production for the old ones but without affecting the level of outputthat can be produced through normal use of the equipment so installed (forsuch a concept see for example Serrano 1995: 71 and 77). Using Z to denote itslevel, we have:

S ¼ I þ Z ;

with the rate of growth of capital gk becoming

gk ¼ I

K¼ S � Z

K; ½10�

which, assuming a simple linear saving function, S = sY, can be written as:

gk ¼ sY � Z

K¼ s � Z

Y

8>:

9>; Y

K: ½20�

Assuming that capacity is constantly utilized at the desired degree, the ratio betweenoutput and capital will be constantly 1/a. The rate of accumulation and outputgrowth must therefore be:

gw ¼ gk ¼ s � ðZ=Y Þa

; ½30�which means that the rate of growth necessarily implied by the normal utilizationhypothesis is now determined by the average propensity to save, the desiredcapital/output ratio, and the ratio of autonomous demand to capacity output.The warranted rate of growth (the only one allowing for normal utilization) cannow assume infinite values between gw = 0 for Z/Y = s and gw = s/a for Z/Y = 0,depending on the value of the fraction Z/Y*.

18 Our argument is only partially connected to the so-called traverse analysis (Hicks1965, 1985; Lowe 1976), which is concerned with the hypothetical conditionsthat allow transition between different steady states. The Hicksian traverse, inparticular, is the transition path between two full-employment steady states whosedifferent growth rates of output are determined by different growth rates of thelabour force. As the two steady states also differ for the composition of capacitybetween the two sectors of consumption and capital goods, and thus for theoverall capital/labour ratio, the adjustment in the Hicksian traverse can beobtained through changes in the composition of output and capacity that absorbthe excess/shortage of labour created by the change in the rate of growth of the


129

labour force. Over-utilization and under-utilization of capacity may facilitate thetransition (see Hicks, 1990, p. 102). In this kind of model, it is both obvious andirrelevant that capacity utilization is on average different from normal. The issuewe are addressing is instead the analysis of an adjustment process between twopaths with different rates of growth of autonomous demand. To the extent towhich the models we are discussing assume that normal utilisation prevails onaverage, the analysis of the necessary long-run divergence between capacity anddemand during the adjustment process is relevant in showing that the saidhypothesis cannot be maintained in representing actual processes of growth.

19 Albeit under the extremely artificial and hence admittedly unrealistic hypothesesadopted here, a simple numerical example may be useful to give an idea of themagnitude of the changes required in the level of capacity in order to restoreconditions of growth with normal utilization. If we assume a change in the rateof growth ga from 0.05 to 0.06 together with a = 2 and s = 0.2, re-establishingnormal utilization would entail a rise of 32.5 percent in capacity and capitalstock, while a subsequent drop in the growth rate from 0.06 to 0.04 would meana decrease of 30.7 percent in those aggregates. Changes of this magnitude seemlikely to come about, even assuming correct anticipation on the part of the firms,only over a long period of time.

20 As we shall seek to make clear below, a sharp distinction should be drawn betweenthe way in which ‘systematic’ forces can be defined and studied in the analysis ofquantity variables and the way the same analysis can be carried out with respectto prices. A tentative analysis of this question is offered in section 4 below.

21 The theoretical analysis of this question has been dominated by the notion of theaccelerator (see note 4 above) and by Harrod’s (1939) ‘fundamental instability’ ofmarket economies. Both Harrod’s formulation and most of the various subsequentformulations of the acceleration principle are based on the idea that entrepreneursreact immediately to any change in the effective rate of growth – and thus to anyover-utilization or under-utilization of capacity – by taking investment ordisinvestment decisions that work to adjust the imbalance. As noted by Ciccone(1987) and Bonifati (1999), however, it cannot be assumed that firms react somechanically to whatever imbalance they observe in their installed capacity sincethe very definition of normal capacity utilization as being different from thetechnical maximum leaves room– as shown above – for fluctuations in demand.

22 This is not to deny that a change in the rate of growth of demand can, in particularcircumstances, be immediately perceived as persistent, though this cannot beassumed in general.

23 Widely acknowledged in the literature from Harrod (1939) on, this fact can beregarded as the very basis on which the accelerator and multiplier-acceleratormodels are built.

24 In this connection, see also Ciccone (1986: 30).25 It is plausible to suggest that changes in the growth rate taking place together with

technical change would entail higher investment flows due to the need for physicalcapital to adjust in both quantitative and qualitative terms.

26 Moreover, each firm must also correctly anticipate the share of increased demanddirected towards its own products.

27 Trezzini (1995) analyses an adjustment process from one growth path to anotherfollowing an increase in the rate of growth of autonomous demand by assumingspecific values of the parameters and specific hypotheses on the initial situation.The following conditions are required for full adjustment: a) the new rate of


130

growth of autonomous demand – as well as the old rate –must be smaller than theratio s/a between the propensity to save and the desired capital/output ratio; b)there is perfect foresight; c) firms take their investment decisions according to aparticular – and quite unusual – pattern. Once the capacity needed for growthwith normal utilization at the new rate ga’ has been created (or destroyed), firmsmust decrease or increase their investment at the individual and the aggregatelevels in order to enter the new path, where investment must grow at the samerate as autonomous demand and not at a higher (lower) one, as in theadjustment process. The voluntary reduction/increase in investment would haveto occur despite the prolongation of over/under-utilization, which would make itmore profitable for each individual firm not to reduce/increase investments atall. This supposed mode of operation does not appear to be compatible eitherwith competition among firms or with the decentralisation of investment decisions.

28 We consider the gravitation of actual towards normal prices as analysed by theClassical economists, starting with Smith, and as described by Garegnani (1976).

29 For a similar argument see Trezzini (1998).30 Denying that forces producing the gravitation of actual quantities towards normal

ones can be identified does not mean denying that it is possible to detect someforces that are more systematic than others in the theoretical analysis ofquantities. As explicitly stated in section 5, what is essential is the use of differentmethods to study systematic forces in the two different fields of analysis.

31 The question arises of an exact definition of the produced quantities that are takenas given in writing the price equations in the classical theory of value. These shouldbe defined as some sort of long-period values determined by the forces thateconomic analysis leads us to regard as most systematic. Though the degree ofcapacity utilization implicit in the price equations must be the normal one,actual productive capacity need not be exactly at the level that would allowproduction of the given quantities in conditions of normal utilization, nor mustthe techniques actually used in the production of each unit of output necessarilybe the dominant ones.

32 For the innovative activity of firms, the obligatory point of reference is Schumpeter(1934). For a penetrating analysis of the long-period determinants of investment,see Bonifati (1999).

33 On the debate on the clustering of innovations in particular phases of the cycle, seefor example Freeman (1983) and the literature cited there.

34 Garegnani also points out the radical difference between this theoretical approachto the analysis of quantities and the approach typical of neoclassical or marginalisttheories, where prices and quantities are simultaneously determined on the basis ofallegedly general quantitative relations (see especially 1998: 418 – 19).

35 Much of the stimulus for this analysis comes from Serrano (2001) and Cesaratto etal. (2003), although the conclusions they draw are very different from our own.

36 The recognition that investment is not only aimed at adapting capacity to demandbut also has different motivations is reflected in economic theory in the concept ofautonomous investment and in the practice of building models – too many to becited, but Hicks (1950) is an essential reference –where total investment is givenby the sum of two components, one induced and one autonomous. We shall notdiscuss the problematic aspects of this division of the investment function, whichregard the impossibility of conceptually and actually distinguishing between thetwo components. They should more properly be seen as different reasons for thesame investment act rather than causes of different investment decisions.


131

37 This indeterminacy is one element that may help to account for the uncertainbearing of empirical evidence on the relationship between the growth rate ofdemand and the share of investment in output. For a review of some of theempirical literature on this point, see Palumbo (1996). The issue was partlyaddressed in a longer version of the present paper and is to be the subject of alater work.

38 It may be worth noting that the examples quoted in the text include instances ofdifferent (perhaps opposite) interrelations between accumulation and thepropensity to save (with respect to our observation in section 1, n.6). Productinnovation directed towards the domestic market may be an instance ofacceleration in growth combined with a declining propensity to save, while anincrease in the rate of growth of exports aimed at financing imported technologymay – especially if accompanied by specific policies – go together with anincreasing overall propensity to save.

39 Attention can also be drawn to the analysis of the variations in the capital/outputratio and the role of intermediate goods during industrialization in Chenery et al.(1986) and some of the analyses on the role of public policies in promotingAsian growth (Johnson 1982; Amsden 1989; Wade 1990). Roncaglia (1990) notesthe general compatibility of these kinds of analysis with the modern Classicalapproach to value and distribution, which stems from its characteristic flexibilityand openness as regards the analysis of produced quantities.

References

Aftalion, A. (1909). La realite des surproduction generales. Revue d’Economique Politique;English translation: The Theory of Economic Cycles Based on the CapitalisticTechnique of Production. Review of Economic Statistics, Oct 1927.

Amadeo, E.J. (1986a). The Role of Capacity Utilisation in Long-Run Analysis. PoliticalEconomy, II, 2: 147 – 60.

Amadeo, E.J. (1986b). Notes on Capacity Utilization, Distribution and Accumulation.Contributions to Political Economy, V: 83 – 84.

Amadeo, E.J. (1987). Expectations in a Steady-State Model of Capacity Utilisation.Political Economy, III, 1: 75 – 89.

Amsden, A. (1989). Asia’s next giant: South Korea and late industrialization. New York:Oxford University Press.

Auerbach, P. and Skott, P. (1988). Concentration, competition and distribution.International Review of Applied Economics, II, 1: 42 – 61.

Bonifati, G. (1999). The capacity to generate investment, Universita degli studi diModena, Dipartimento di Economia Politica, Materiali di discussione n. 266.

Bortis, H. (1997). Institutions, Behaviour and Economic Theory – A Contribution to Classical-Keynesian Political Economy. Cambridge: Cambridge University Press.

Cesaratto, S., Stirati, A. and Serrano, F. (2003). Technical change, effective demand andemployment. Review of Political Economy, XV, 1: 33 – 52.

Chenery, H., Robinson, S. and Syrquin, M. (1986). Industrialization and Growth. AComparative Study. New York: Oxford University Press for the World Bank.

Ciampalini, A. and Vianello, F. (2000). Concorrenza, accumulazione del capitale e saggiodel profitto. Critica del moderno sottoconsumismo. In M. Pivetti (ed.) Piero Sraffa.Roma: Carocci.


132

Ciccone, R. (1986). Accumulation and Capacity Utilization: Some Critical Considerationson Joan Robinson’s Theory of Distribution. Political Economy, II, 1: 17 – 36.

Ciccone, R. (1987). Accumulation, Capacity Utilisation and Distribution: A reply. PoliticalEconomy, III, 1: 97 – 111.

Clark, J.M. (1917). Business Acceleration and the Law of Demand: a Technical Factor inEconomic Cycles. Journal of Political Economy, XXV, 3: 217 – 35.

Committeri, M. (1986). Some Comments on Recent Contributions on CapitalAccumulation, Income Distribution and Capacity Utilization. Political Economy, II, 2:161 – 86.

Committeri, M. (1987). Capacity Utilization, Distribution and Accumulation: a rejoinderto Amadeo. Political Economy, III, 1: 91 – 95.

Duesenberry, J.S. (1958). Business Cycles and Economic Growth. New York: OxfordUniversity Press.

Dutt, A.K. (1990). Growth, Distribution and Uneven Development. Cambridge: CambridgeUniversity Press.

Freeman, C.d.) (1983). Long Waves in the World Economy. London: Frances Pinter.Garegnani, P. (1976). On a change in the notion of equilibrium in recent work on value

and distribution. In M. Brown, K. Sato and P. Zarembka (eds) Essays in Modern CapitalTheory. Amsterdam: North Holland.

Garegnani, P. (1979). Cambiamenti e paragoni. In Valore e domanda effettiva. Torino:Einaudi.

Garegnani, P. (1990). Sraffa: Classical versus Marginalist Analysis. In K. Bharadwaj and B.Schefold (eds) Essays on Piero Sraffa. London: Routledge.

Garegnani, P. (1992). Some Notes for an Analysis of Accumulation. In J. Halevi, D.Laibman and E. Nell (eds) Beyond the steady-state. Basingstoke & London: Macmillan.

Garegnani, P. (1998). Sraffa: the theoretical world of the ‘old classical economists’.European Journal of the History of Economic Thought, V, 3: 415 – 29.

Garegnani, P. and Palumbo, A. (1998). Accumulation of Capital. In H.D. Kurz andN. Salvadori (eds) The Elgar Companion to Classical Economics. Aldershot: Edward Elgar.

Harrod, R. (1939). An essay on dynamic theory. Economic Journal, March.Hicks, J.R. (1950). A Contribution to the Theory of the Trade Cycle. Oxford: Clarendon Press.Hicks, J. (1965). Capital and Growth. Oxford: Claredon Press.Hicks, J. (1985). Methods of Dynamic Economics. Oxford: Claredon Press.Hicks, J. (1990). Ricardo and Sraffa. In K. Bharadwaj and B. Schefold (eds) Essays on Piero

Sraffa. London: Routledge.Hirschman, A.O. (1958). The Strategy of Economic Development. New Haven: Yale University

Press.Johnson, C. (1982). MITI and the Japanese Miracle. Stanford: Stanford University Press.Kahn, R. (1959). Exercises in the Analysis of Growth. Oxford Economic Papers, XI, 2: 143 –

56.Kaldor, N. (1955 – 6). Alternative Theories of Distribution. Review of Economic Studies,

XXIII: 83 – 100.Kaldor, N. (1957). A Model of Economic Growth. Economic Journal, LXI: 591 – 624.Kaldor, N. (1961). Capital Accumulation and Economic Growth. In F. Lutz (ed.) The

Theory of Capital. London: Macmillan; as republished in Kaldor. 1978.Kaldor, N. (1978). Further essays on economic theory. Collected economic essays, vol. 5,. London:

Duckworth.Kalecki, M. (1971). Selected Essays on the Dynamics of the Capitalist Economy 1933 – 1970.

Cambridge: Cambridge University Press.Kurz, H. (1986). Normal Positions and Capacity Utilisation. Political Economy, II, 1: 37 – 54.


133

Kurz, H. (1990). Accumulation Distribution the ‘Keynesian Hypothesis’. In K. Bharadwajand B. Schefold (eds) Essays on Piero Sraffa. London: Unwin Hyman.

Lavoie, M. (1992). Foundations of Post-Keynesian Economic Analysis. Aldershot: EdwardElgar.

Lavoie, M. (1995). The Kaleckian model of growth and distribution and its neo-Ricardianand neo-Marxian critiques. Cambridge Journal of Economics, XIX, 16: 789 – 818.

Lavoie, M. (1996). Traverse, Hysteresis and Normal Rates of Capacity Utilization inKaleckian Models of Growth and Distribution. Review of Radical Political Economics,XXVIII, 4: 113 – 47.

Lowe, A. (1976). The Path of Economic Growth. New York: Cambridge University Press.McCombie, J.S.L. and Thirlwall, A.P. (1997). The Dynamic Harrod Foreign Trade

Multiplier and the Demand-orientated Approach to Economic Growth: an evaluation.International Review of Applied Economics, XI, 1: 5 – 26.

Palumbo, A. (1996). Notes on investment, saving and growth. Contributions to PoliticalEconomy, XV: 105 – 15.

Palumbo, A. (2003). On the ‘balance-of-payments-constrained’ theory of growth. In R.Ciccone, C. Gehnke, G. Mongiovi (eds). Proceedings of the conference Sraffa and moderneconomics, London: Routledge. forthcoming.

Robinson, J. (1956). The Accumulation of Capital. London: Macmillan.Robinson, J. (1962). Essays in the Theory of Economic Growth. New York: St Martin’s Press.Roncaglia, A. (1978). Sraffa and the Theory of Prices. London and New York: Wiley.Roncaglia, A. (1990). Some Remarks on the Relevance of Sraffa’s Analysis for Economic

Policy. In K. Bharadwaj and B. Schefold (eds). Essays on Piero Sraffa. London:Routledge.

Rowthorn, R. (1981). Demand, real wages and economic growth. Thames Papers inPolitical Economy, Autumn, reprinted in Studi Economici, 18, 1982, 3 – 54 and also inM.C. Sawyer (ed.) Post-Keynesian Economics. Aldershot: Edward Elgar.

Samuelson, P.A. (1939). A Synthesis of the Principle of Acceleration and the Multiplier.Journal of Political Economy, XLVII: 786 – 97.

Schumpeter, J.A. (1934). The Theory of Economic Development. Reprinted by OxfordUniversity Press, 1961.

Serrano, F. (1995). Long period effective demand and the Sraffian supermultiplier.Contributions to Political Economy, XIV: 67 – 90.

Serrano, F. (2001). Accumulation and ‘Unproductive Consumption’ in the DevelopmentLiterature: A Classical Supermultiplier Analysis. UFRJ mimeo, published inPortuguese in Polarizacao mundial e crescimento, edited by J. Fiori and C. Medeiros.Editora Vozes, Petropolis. Brazil.

Steindl, J. (1952). Maturity and Stagnation in American Capitalism. Oxford, Basil Blackwell.Thirlwall, A.P. (1979). The balance of payments constraint as an explanation of

international growth rate differences. Banca Nazionale del Lavoro Quarterly Review, 128:45 – 53.

Trezzini, A. (1995). Capacity utilisation in the long run and the autonomous componentsof aggregate demand. Contributions to political economy, XIV: 33 – 66.

Trezzini, A. (1998). Capacity Utilisation in the Long Run: Some further considerations.Contributions to Political Economy, 17: 53 – 67.

Trezzini, A. (2003). Steady State and the Analysis of Long-Run Tendencies: the Case ofKaleckian Models. In R. Ciccone, C. Gehrke and G. Mongiovi (eds.). Proceedings of theconference Sraffa and modern economics. London: Routledge (forthcoming).

Vianello, F. (1985). The Pace of Accumulation. Political Economy, I, 1: 69 – 87.


134

Vianello, F. (1996). Joan Robinson on normal prices (and the normal rate of profits). InM.C. Marcuzzo, L.L Pasinetti and A. Roncaglia (eds) The Economics of Joan Robinson.London: Routledge.

Wade, R. (1990). Governing the market: economic theory and the role of government in East Asiaindustrialisation. Princeton: Princeton University Press.

Abstract

Within the demand-led approach to growth, the long-period tendencies ofquantities cannot be effectively studied through theoretical positionsentailing normal utilization of capacity. Whether in the form of constant orof average normal utilization, this assumption contradicts the supposedautonomy of aggregate demand. Analysis of the operation of theadjustment of capacity to demand suggests that potentially offsetting forcesmake fully adjusted positions irrelevant. As quantities cannot be assumed togravitate towards such positions, the relations between quantity variablesdetermined on the normal utilization hypothesis provide a poor guide tothe analysis of reality.

Keywords

Growth, capacity utilization, Keynesian long-period analysis, accumulation


135

palumbo 2003 trezzini capacidad

Documents