The American Automobile Industry: Investment Demand, Capacity, and Capacity Utilization, 1921-1940

Abstract

The automobile industry is believed to have had substantial excess capacity in the years preceding the Great Depression. Previous utilization estimates based on engineering capacity support this belief. Indirect estimates of economic capacity are derived here using parameters from the industry's investment-demand function and alternative capital series. Investment demand is estimated using a general neoclassical specification modified by including cash flow. The derived annual utilization estimates indicate the existence of excess capacity in the late twenties, but much less than previously estimated. Quarterly estimates show that continuing excess capacity did not exist until after the cyclical downturn of 1929.