A Synthesis of the Principle of Acceleration and the Multiplier

Abstract

T H E principle of acceleration is one of the few tools of business-cycle analysis whose importance is universally conceded. Carefully stated, it can be made to yield information concerning the movements of investment from a knowledge of the movements of consumption. In particular, cyclical fluctuations in the latter will yield intensified periodic fluctuations in investment. C. 0. Hardy, Ragnar Frisch, and other critics have rightly pointed out that it is a single relation between two series and does not constitute a self-contained, determinate businesscycle theory. Fluctuations in consumption will yield fluctuations in investment, but how do the original fluctuations in consumption arise? It can hardly be maintained that the original propounders of the principle were unaware of this fact. J. M. Clark, for example, mentions explicitly that the volume of consumption demand is itself influenced by the level of investment through income payments to the factors producing investment goods. The following quotation will illustrate the point: For a full explanation, however, one must take account of factors acting in the reverse direction, namely, the fact that actual movements of consumer demand depend on the movements of purchasing power; and these in turn are governed by the rate of production in general, including that of capital equipment, and also that of durable consumption goods, such as housing and automobiles, to which the same essential principle applies. Thus, if we take as our initial fact a moderate decrease in the rate of growth of consumer demand (such as needs no particular explanation), this may result-with a lag-in a positive decline in rate of production of durable producers' or consumers' goods. This in turn reduces purchasing power, unless offset by opposite movements elsewhere, and results in a positive decrease in consumers' demand, presumably extended to more commodities than those originally affected. And this in turn further extends and intensifies the shrinkage in production of durable goods, etc. This may serve as 786