Psychology Dictionary of ArgumentsHome
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| Accelerator Theory: The Accelerator Theory in economics suggests that investment levels are driven by changes in output or demand. Firms increase investment when demand grows, as they need more capital to expand production. The relationship is proportional, meaning even small increases in demand can lead to significant investment changes. See also Keynes, Keynesianism._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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John Maynard Keynes on Accelerator Theory - Dictionary of Arguments
Rothbard III 868 Accelerator Theory/Keynes/Rothbard: The "acceleration principle" has been adopted by some Keynesians as their explanation of investment, then to be combined with the "multiplier" to yield various mathematical "models" of the business cycle. >Investment Multiplier/Keynes, >Investments/Keynes. Before Keynes: The acceleration principle antedates Keynesianism, however, and may be considered on its own merits. It is almost always used to explain the behavior of investment in the business cycle. Rothbard: The essence of the acceleration principle may be summed up in the following illustration: Let us take a certain firm or industry, preferably a first-rank producer of consumers' goods. Assume that the firm is producing an output of 100 units of a good during a certain period of time and that 10 machines of a certain type are needed in this production. If the period is a year, consumers demand and purchase 100 units of output per year. The firm has a stock of 10 machines. Suppose that the average life of a machine is 10 years. Equilibrium: In equilibrium, the firm buys one machine as replacement every year (assuming it had bought a new machine every year to build up to 10).(1) Rothbard III 869 Demand: Now suppose that there is a 20-percent increase in the consumer demand for the firm's output. Consumers now wish to purchase 120 units of output. Assuming a fixed ratio of capital investment to output, it is now necessary for the firm to have 12 machines (maintaining the ratio of one machine: 10 units of annual output). In order to have the 12 machines, it must buy two additional machines this year. Add this demand to its usual demand of one machine, and we see that there has been a 200-percent increase in demand for the machine. A 20-percent increase in demand for the product has caused a 200-percent increase in demand for the capital good. Capital goods/demand: Hence, say the proponents of the acceleration principle, an increase in consumption demand in general causes an enormously magnified increase in demand for capital goods. Or rather, it causes a magnified increase in demand for "fixed" capital goods, of high durability. Stagnation: Now suppose that, in the next year, consumer demand for output remains at 120 units. There has been no change in consumer demand from the second year (when it changed from 100 to 120) to the third year. And yet, the accelerationists point out, dire things are happening in the demand for fixed capital. For now there is no longer any need for firms to purchase any new machines beyond what is necessary for replacement. Needed for replacement is still only one machine per year. As a result, while there is zero change in demand for consumers' goods, there is a 200-percent decline in demand for fixed capital. Causality/Keynesianism: And the former is the cause of the latter. Business cycles/crises: To the upholders of the acceleration principle, this illustration provides the key to some of the main features of the business cycle: the greater fluctuations of fixed capital-goods industries as compared with consumers' goods, and the mass of errors revealed by the crisis in the investment goods industries. Rothbard III 870 1. VsAccelerator theory/Rothbard: The acceleration principle is rife with error. An important fallacy at the heart of the principle has been uncovered by [W.H.] Hutt.(2) We have seen that consumer demand increases by 20 percent; but why must two extra machines be purchased in a year? What does the year have to do with it? If we analyze the matter closely, we find that the year is a purely arbitrary and irrelevant unit even within the terms of the example itself. We might just as readily take a week as the period oftime. Then we would have to say that consumer demand (which, after all, goes on continuously) increases 20 percent over the first week (…). Rothbard III 871 2.Vs: Secondly, the acceleration principle makes a completely unjustified leap from the single firm or industry to the whole economy. A 20-percent increase in consumption demand at one point must signify a 20-percent drop in consumption somewhere else. Comsumption demand: For how can consumption demand in general increase? Consumption demand in general can increase only through a shift from saving. But if saving decreases, then there are less funds available for investment. If there are less funds available for investment, how can investment increase even more than consumption? In fact, there are less funds available for investment when consumption increases. Consumption and investment compete for the use of funds. Explanation/physics/economics: The acceleration principle simply glides from a demonstration in physical terms to a conclusion in monetary terms.(3) RothbardVs: Furthermore, the acceleration principle assumes a constant relationship between "fixed" capital and output, ignoring substitutability, the possibility of a range of output, the more or less intensive working of factors. It also assumes that the new machines are produced practically instantaneously, thus ignoring the requisite period of production. 1. It is usually overlooked that this replacement pattern, necessary to the acceleration principle, could apply only to those firms or industries that had been growing in size rapidly and continuously. 2. See his brilliant critique of the acceleration principle in W.H. Hutt, Co-ordination and the Price System (unpublished, but available from the Foundation for Economic Education, Irvington-on-Hudson, N.Y., 1955), pp. 73-117. 3. Neglect of prices and price relations is at the core of a great many economic fallacies._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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> Counter arguments against Keynes
> Counter arguments in relation to Accelerator Theory
