Abstract
This article analyzes the difference of properties of economic growth theory between perfect and monopolistic competition. Whether or not capital investment is constrained by effective demand is the crucial factor which characterizes economic growth theories in different degree of competition. Whenever each firm faces a downward sloping demand curve the location of which is determined by the strength of effective demand (i.e., the real GDP), its capital accumulation is inevitably constrained by effective demand. Thus, as far as business environment is kept unchanged, so is capital investment. However, when the good market is perfectly competitive, firms never perceive such demand constraint, thereby capital investment advancing autonomously independent of the phase of business cycle. An important macroeconomic implication of such a difference of the attitude toward capital investment is as follows. When an economy is in perfect competition, capital investment becomes an independent driving force of economic growth as Keynes considers, although it is subject to other independent expenditure (e.g., the government expenditure) and falls into a subsidiary component of effective demand otherwise.
Highlights
It is almost unknown how the market structure of goods markets affects economic growth in a monetary economy
When an economy is in perfect competition, capital investment becomes an independent driving force of economic growth as Keynes considers, it is subject to other independent expenditure and falls into a subsidiary component of effective demand otherwise
Dixit and Pindyck [1] and Smets [2] built models of investment function under uncertainty and pointed out that the function depends on the level of effective demand, it is not their concern with how such investment relating to economic growth as a whole each other
Summary
It is almost unknown how the market structure of goods markets affects economic growth in a monetary economy. Otaki [3] developed a general equilibrium growth model under monopolistic competition, and found that there exists no endogenous economic force for sustainable growth in a monetary economy In his seminal work, Uzawa [4] analyzed properties of the investment function under perfect competition in the context of general equilibrium model. Uzawa [4] analyzed properties of the investment function under perfect competition in the context of general equilibrium model His theory entirely excludes the existence of money, he found that the optimal investment ratio to capital is free from the level of effective demand. The optimal ratio is dependent on the profit rate which is endogenously determined only by relative prices Such a prominent property of the investment function implies that, differing from the monopolistic competition case analyzed by Otaki [3], capital investment enables an economy to sustain its growth.
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