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The Capacity Concept and Induced Investment

Published online by Cambridge University Press:  07 November 2014

Raymond T. Bowman  and
Almarin Phillips
Raymond T. Bowman
Affiliation:
University of Pennsylvania
Almarin Phillips
Affiliation:
University of Pennsylvania
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Extract

According to the principle of acceleration, net induced investment is proportional to the rate of increase in national product. The principle is usually qualified by a statement to the effect that if the economy's production is at a rate lower than some previous peak, the proportionality may not hold. Once, however, capacity is reached, increases in the rate of production will induce investment.

This paper derives its relevance from the current attempts to construct a set of dynamic input-output equations which will generate demand for additional stocks of capital facilities on the basis of a set of capital coefficients and measures of capacity for the “industries” of the system. The basic arguments set forth are applicable also to tests for the feasibility of solutions of static input-output systems with respect to existing stocks of capital, but most attention will be directed to the dynamic formulation.

Professor Leontief's dynamic input-output equations are of the form:

Xi represents the rate of output of the ith industry, Yi is the amount of this output taken by the autonomous final demand sector and aik is the now familiar coefficient of production, the amount of the ith industry's product which the kth industry purchases per unit of output of the kth industry. This much of the equation set is identical to the static input-output system. The dynamic addition is in the bik capital coefficients, which measure the amount of stock of the ith industry's product held by the kth industry per unit of annual output, and in the values, which are the first derivatives of the annual rates of output of the various industries with respect to time. The capital coefficients are accelerator values for each industry with respect to all other industries. The summated value,

is the instantaneous annual rate of induced investment for the economy at any given moment of time.

Type
Research Article
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 21 , Issue 2 , May 1955 , pp. 190 - 203
Copyright
Copyright © Canadian Political Science Association 1955

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References

1 Leontief, W. W. et al., Studies in the Structure of the American Economy (New York, 1953), 57.Google Scholar

2 Ibid., 69.

3 United States Bureau of the Census, Census of Manufactures, 1947, I, 7.Google Scholar

4 This definition raises many questions. For example, the grossness of the output of the firms is ambiguous and no attention is paid to differences in the costs or prices of the products of the various firms. These problems are not discussed here.

5 We have purposely refrained from complicating these statements by introducing uncertainty. The reader may, if he prefers, consider the value of the expectations referred to as being reduced to their certain equivalents.

6 For example, if expectations are that there will be no sales at all after the current period, there may be no current output rate which would induce investment with the present relative prices. No present output rate would justify adding fixed capital unless the price of the output were increased enough to pay completely for the capital outlays in the current period.

7 This statement implicity assumes that there is a rate of output which is ideal for existing capital stocks. Such need not be the case if there are imbalances existing among the equipment of the various production processes which make up a plant. That is, different parts of the same plant may easily have different individual capacities. If so, some minor additions or subtractions would be made even if the “best” rate of output were maintained indefinitely. It is in this respect that the present definition differs from the cost function definition. In the latter, each scale of plant is assumed to be in perfect balance, since all productive agents are combined so as to result in the minimum cost for each rate of output considered. There may also be unbalances existing among the plants of the industry so that, in the case of intra-industry shipments, some whole plants might contract or expand for a “best” industry rate of output.

8 “Estimates of the Capital Structure of American Industries, 1939,” Harvard Economic Research Project, Jan., 1950, preliminary.

9 Nourse, Edwin G., America's Capacity to Produce (Washington, 1934), 23.Google Scholar

10 “Steel Capacity Statistics Based on Performance,” Steel Facts, no. 113, April, 1952.

11 E. B. Hincks, “Measuring Industrial Capacity to Produce,” a paper delivered to the American Statistical Association on December 29, 1950.

12 The question of differences between expectations and what actually happens has been raised with respect to the accelerator. See Wright, David McC., “A Neglected Aspect of the Acceleration Principle,” Review of Economic Statistics, 05, 1941.Google Scholar