Normal Rate Of Capacity Utilization Research Articles

Critical notes on some recent Neo-Kaleckian contributions on capacity utilization

Within the non-mainstream growth literature, the Neo-Kaleckian model is the only one that presents an endogenous capacity utilization in the long run. After systematizing the debate around recent contributions, presenting the baseline and extensions of the Neo-Kaleckian model and providing some notes on the normal rate of capacity utilization, I critically assess three recent alternatives that try to justify endogenous utilization in Neo-Kaleckian models. All these contributions present different theoretical and empirical shortcomings that should be addressed in order to substantiate their claims.

Is capacity utilization variable in the long run? An agent-based sectoral approach to modeling hysteresis in the normal rate of capacity utilization

Post Keynesian macrodynamic models make various assumptions about the normal rate of capacity utilization. Those rooted in the Classical and neo-Keynesian traditions assume the normal rate is fixed, whereas Kaleckian models treat it as a variable that is endogenous to the actual rate of capacity utilization. This paper contributes to the debate about the normal rate of capacity utilization by developing a model of strong or genuine hysteresis, in which firms make discrete decisions about the normal rate depending on the degree of uncertainty about demand conditions. An agent-based model based on empirical analysis of 25 sectors of the US economy is used to show that hysteresis can cause variation in the normal rate of capacity utilization within a subset of the range of observed variation in the actual capacity utilization rate. This suggests that the economy exhibits both constancy and (endogenous) variability in the normal rate of utilization over different ranges of variation in the actual rate. More broadly speaking, the genuine hysteresis model is shown to provide the basis for a synthesis of Post Keynesian macrodynamics that draws on both the Classical/neo-Keynesian and Kaleckian modeling traditions.

Multiplicity and Not Necessarily Heterogeneity: Implications for the Long-Run Degree of Capacity Utilization

The paper discusses the implications of disaggregation within the theoretical debate on the long-run convergence of the degree of capacity utilization towards the normal one. To this end, we develop an Agent Based – Stock Flow Consistent version of a demand-led growth model based on the capacity adjustment principle, fixed normal rate of capacity utilization and non-capacity creating autonomous component of demand. We show that, once the implicit assumption on the centralized control over the aggregate productive capacity characterizing aggregate models is removed, the economy displays emergent properties: the fluctuations of the business cycle endogenously arise, and the long-run aggregate degree of capacity utilization fluctuates around a level lower than the normal one. These proprieties help to explain some empirical evidence about the tendential under-utilization of productive capacity and confute both the traditional wisdom according to which there is only one degree of capacity utilization (the normal one) compatible with a stable accumulation and the neo-Kaleckian “closure”. To this extent, we point out that the long-run growth path determined within a Supermultiplier model can be somehow characterized by neo-Kaleckian features but, differently from the last one, such “undesired equilibrium” does not present Harrodian Instability: in the quasi-steady state firms keep trying to restore the exogenously given normal degree of capacity utilization without succeeding in that. The emerging phenomena derive, precisely, from considering a multiplicity of firms rather than the aggregate macro firm, and not by their heterogeneity. In particular, for any given distribution of demand across firms, the decentralized control over aggregate productive capacity produces over-investment with respect to the normal growth path.

Hysteresis in the normal rate of capacity utilization: A behavioral explanation

AbstractKaleckians describe a normal rate of capacity utilization that is subject to hysteresis effects. This means that the normal rate varies directly with the actual rate of capacity utilization, ensuring that steady‐state equilibrium conditions in the Kaleckian model are fully adjusted (the actual and normal rates of capacity utilization are equalized) but without this last condition implying that the rate of capacity utilization is constant in the long run. The relationship between distribution and growth unique to the Kaleckian model is, thus, preserved. The hysteresis mechanism has been criticized from various quarters, however, these criticisms focusing on its alleged lack of behavioral foundations. This paper shows that consistent with the stylized facts, variation in the normal rate of capacity utilization in response to variation in the actual capacity utilization rate can be derived from the links between both variables and the volatility of the macroeconomic environment—volatility, in the presence of fundamental uncertainty, being an important reason why firms deliberately under‐utilize capacity (even in the long run) in the first place. The result is an empirically grounded behavioral foundation for hysteresis in the normal rate of capacity utilization.

An Analysis of Government Spending and Government Debt Using Neo-Kaleckian Growth Model with Sraffian Supermultiplier Approach

본 논문은 외생적 증가율의 정부지출과 해로드적 투자 조정을 도입한 네오칼레츠키안 성장 모형을 통해 재정정책과 정부부채, 경제성장과 분배 사이의 관계를 고찰한다. 이를 위해 정부가 조세 없이 정부지출과 이자지급에 필요한 자금을 부채를 통해 마련한다고 가정한다. 이러한 설정 하에서 지속적 증가추세의 정부지출은 해로드적 투자 조정이 야기하는 해로드의 제1불안정성을 억제시켜서 정상 가동률로의 수렴을 가능하도록 만든다. 즉, 기존의 칼레츠키안 성장 모형과 달리 완전히 조정된 장기 상태에 대한 분석이 가능하다. 장기 모형에서 정부지출 증가율의 상승은 성장률의 증가와 부채비율의 감소를 낳는다. 후자의 변화를 자본가 계급이 수용하지 않을 경우 확장적 재정정책은 시행에 어려움을 겪을 수 있다. 이는 완전고용을 목표로 하는 재정정책의 어려움은 부채부담의 증가가 아닌 분배몫을 둘러싼 계급 간 갈등에 기반함을 의미한다. 그 밖에도 장기 모형에서 네오 칼레츠키안 성장 모형의 중요한 함의인 임금주도성장과 절약의 역설은 수준 효과라는 수정된 방식으로 여전히 성립한다.This paper examines the relationship between fiscal policy, government debt, economic growth and distribution through the neo-Kaleckian growth model, which introduces government spending whose growth rate is an exogenous variable and Harrodian investment adjustment. For this analysis, it is assumed that the government raises funds for government expenditures and interest payments through debt, without imposing taxes. Under this setting, government expenditures will suppress the first instability of Harrod caused by Harrodian investment adjustment, enabling convergence to normal rate of capacity utilization. Therefore, unlike the existing Kaleckian growth models, this model can analyze the fully adjusted long-run state. In the long-run, an increase in government spending growth leads to an increase in growth rate and a decrease in debt ratio. If the latter change is not accepted by the capitalist class, expansionary fiscal policy can be difficult to implement. This implies that the difficulty of fiscal policy aimed at achieving full employment is based on class conflicts over distribution shares, not on increasing debt burden. In addition, wage-led growth and paradox of thrift, which are important implications of the neo-Kaleckian growth model, still hold in terms of level effect.

Is Capacity Utilization Variable in the Long Run? An Agent-Based Sectoral Approach to Modeling Hysteresis in the Normal Rate of Capacity Utilization

ost Keynesian macrodynamic models make various assumptions about the normal rate of capacity utilization. Those rooted in the Classical and neo-Keynesian traditions assume the normal rate is fixed, whereas Kaleckian models treat it as a variable that is endogenous to the actual rate of capacity utilization. This paper contributes to the debate about the normal rate of capacity utilization by developing a model of strong or genuine hysteresis, in which firms make discrete decisions about the normal rate depending on the degree of uncertainty about demand conditions. An agent-based model based on empirical analysis of 25 sectors of the US economy is used to show that hysteresis can cause variation in the normal rate of capacity utilization within a subset of the range of observed variation in the actual capacity utilization rate. This suggests that the economy exhibits both constancy and (endogenous) variability in the normal rate of utilization over different ranges of variation in the actual rate. More broadly speaking, the genuine hysteresis model is shown to provide the basis for a synthesis of Post Keynesian macrodynamics that draws on both the Classical/neo-Keynesian and Kaleckian modeling traditions.

Tolerable ranges of variation in the rate of capacity utilisation and corridor instability: a reply to Florian Botte

AbstractThis reply to Botte (2019, Estimating normal rates of capacity utilization and their tolerable ranges: a comment on Mark Setterfield, Cambridge Journal of Economics, forthcoming) responds to criticisms of the methods used to estimate the normal rate of capacity utilisation and a tolerable interval of variation in the actual rate of capacity utilisation around the normal rate in Setterfield (2019a, Long-run variation in capacity utilization in the presence of a fixed normal rate, Cambridge Journal of Economics, vol. 43, no. 2, 443–63). It concludes with some further reflections on the concept of corridor instability.

Convergence in a neo-Kaleckian model with endogenous technical progress and autonomous demand growth*

This paper introduces technical progress along the lines of the Kaldor–Verdoorn law within a neo-Kaleckian model of growth and distribution that incorporates the Sraffian supermultiplier mechanism. The key features of the model include the interactive effects of endogenous technical progress, the non-capacity-creating demand component that grows at an exogenous rate and, in its long-run version, a Harrodian adjustment mechanism. It turns out that, whereas the model converges towards the normal rate of capacity utilization, the main tenets of the Keynesian model are still valid in the long run as well as in the short run in the sense that all of the average rates of accumulation, capacity utilization, and technical progress are lower during the traverse after the propensity to save or the share of profits goes up. The conditions under which the productivity regime can be wage-led are examined, and the possible effects of an exogenous technical shift are also discussed.

Tolerable Ranges of Variation in the Rate of Capacity Utilization and Corridor Instability: A Reply to Florian Botte

This reply to Botte (2019) responds to criticisms of the methods used to estimate the normal rate of capacity utilization and a tolerable interval of variation in the actual rate of capacity utilization around the normal rate in Setterfield (2019a). It concludes with some further reflections on the concept of corridor instability.

Hysteresis in the Normal Rate of Capacity Utilization: A Behavioural Explanation

Kaleckians describe a normal rate of capacity utilization that is subject to hysteresis effects. This means that the normal rate varies directly with the actual rate of capacity utilization, ensuring that steady-state equilibrium conditions in the Kaleckian model are fully adjusted (the actual and normal rates of capacity utilization are equalized) but without this last condition implying that the rate of capacity utilization is constant in the long run. The relationship between distribution and growth unique to the Kaleckian model is thus preserved. The hysteresis mechanism has been criticized from various quarters, however, these criticisms focusing on its alleged lack of behavioural foundations. This paper shows that consistent with the stylized facts, variation in the normal rate of capacity utilization in response to variation in the actual capacity utilization rate can be derived from the links between both variables and the volatility of the macroeconomic environment - volatility, in the presence of fundamental uncertainty, being an important reason why firms deliberately under-utilize capacity (even in the long run) in the first place. The result is an empirically-grounded behavioural foundation for hysteresis in the normal rate of capacity utilization.

Long-run variation in capacity utilization in the presence of a fixed normal rate

A generic Kalecki-Robinson model of growth is developed that, subject to different closures, illustrates the different channels through which the economy can adjust to a change in demand conditions in the long run. The closures are shown to have different implications for the behaviour of the rate of capacity utilization and hence whether and how the economy achieves a ‘fully-adjusted position’ (equalization of the actual and normal rates of capacity utilization). Assuming that the normal rate of capacity utilization is exogenously fixed, it is then shown that variation in the actual capacity utilization rate can nevertheless occur—at least within limits—without triggering ‘Harrodian instability’. This result emanates from a discontinuity in the investment function that is grounded in Harrod’s own macrodynamics, so that it is ultimately the combination of Harrodian and Kaleckian dynamics that gives rise to long-run variations in the actual rate of capacity utilization in the presence of a fixed normal rate. Aggregate and industry-level US capacity utilization data are then used to calculate possible bands within which the rate of capacity utilization may vary without triggering Harrodian instability. A key finding is that the conditions necessary for the latter appear to be relatively rare.

Inconsistencies in the note of Dávila‐Fernández, Oreiro and Punzo

AbstractThis rejoinder is a rebuttal of the claims made by Dávila‐Fernández, Oreiro, and Punzo (in press) in their comment on Lavoie (). All three points that they make are mistaken: I did not pretend that the introduction of autonomous noncapacity expenditures would on its own allow the neo‐Kaleckian growth model to converge toward the normal rate of capacity utilization; the ‘Keynesian’ message is not eliminated when investment expenditures are essentially induced in a neo‐Kaleckian model; and the equations that they provide to endogenize the normal rate of capacity utilization are meaningless.

Long-Run Variation in Capacity Utilization in the Presence of a Fixed Normal Rate

We develop a generic Kalecki-Robinson model of growth that, subject to different closures, illustrates the different channels through which the economy can adjust to a change in demand conditions in the long run. The closures are shown to have different implications for the behaviour of the rate of capacity utilization and hence whether and how the economy achieves a “fully-adjusted position” (equalization of the actual and normal rates of capacity utilization). Assuming that the normal rate of capacity utilization is exogenously fixed, it is then shown that variation in the actual capacity utilization rate can nevertheless occur – at least within limits – without triggering “Harrodian instability”. This result emanates from a discontinuity in the investment function that is grounded in Harrod’s own macrodynamics, so that it is ultimately the combination of Harrodian and Kaleckian dynamics that gives rise to long-run variations in the actual rate of capacity utilization in the presence of a fixed normal rate. Aggregate and industry-level US capacity utilization data are then used to calculate possible bands within which the rate of capacity utilization may vary without triggering Harrodian instability. A key finding is that the conditions necessary for the latter appear to be relatively rare.

Convergence in a Neo-Kaleckian Model with Endogenous Technical Progress and Autonomous Demand Growth

This paper introduces technical progress along the lines of the Kaldor-Verdoorn law within a neo-Kaleckian model of growth and distribution that incorporates the Sraffian supermultiplier mechanism. The key features of the model include the interactive effects of endogenous technical progress, the non-capacity creating demand component that grows at an exogenous rate, and the Harrodian investment function. It turns out that, whereas the model converges towards the normal rate of capacity utilization, the main tenets of the Keynesian model are still valid in the long run as well as in the short run in the sense that all of the average rates of accumulation, capacity utilization and technical progress are lower during the traverse after the propensity to save or the share of profits goes up. The conditions under which the productivity regime can be wage-led are examined, and the possible effects of an exogenous technical shift are also discussed.

Growth without Normal Capacity Utilization and the Meaning of the Long-Run Saving Ratio

The ratio of saving to income over a long period is analyzed here in a theoretical context that takes account of the role of aggregate demand in the growth process, and in which it is not assumed that the economy must operate at a normal rate of capacity utilization in the long run. The very notion of the long-run saving rate is therefore redefined with respect to the one found in the literature where normal utilization is assumed. We argue that the long-run saving ratio must be conceived as the result of the interaction of many different influences and can therefore be similar in radically different circumstances and different in similar circumstances with respect both to the incentive to accumulate and to the pattern of saving decisions.

Is the long-run equilibrium wage-led or profit-led? A Kaleckian approach

This paper presents a Kaleckian growth model in which (i) the rate of capacity utilization, the profit share, and the rate of employment are adjusted in the medium run, and (ii) the normal rate of capacity utilization and the expected rate of growth are adjusted in the long run. Both the Kalecki-type and the Marglin–Bhaduri-type investment functions are introduced. Using the model, we examine which regime is obtained in the long-run equilibrium, the wage-led growth regime or the profit-led growth regime.

Conflict, growth, distribution, and employment: a long-run Kaleckian model

This paper presents a Kaleckian growth model in which (i) the rate of capacity utilization, the profit share, and the rate of employment are adjusted in the medium run, and (ii) the normal rate of capacity utilization and the expected rate of capital accumulation are adjusted in the long run. The long-run equilibrium is a continuum of equilibria and is characterized by hysteresis in that the long-run position of the economy depends on where it starts. An increase in the bargaining power of workers lowers the rate of unemployment in both the medium-run and the long-run equilibrium.

Disequilibrium Pricing and the Sraffa—Keynes Synthesis

Research over the last 10 to 15 years on the possibility of a Sraffa—Keynes synthesis has, in part, been concerned with clarifying the concept of a normal rate of capacity utilization, as well as its role in price determination and its interdependence with relative prices. This paper examines some of the key implications of the interdependence between the normal rate of capacity utilization and relative prices for disequilibrium pricing, specifically, target return pricing. In particular, the question arises as to consistency between the idea of a normal rate of utilization interpreted as a profit-maximizing choice by producers and the notion of a predetermined target rate of return. Interestingly, this issue of consistency raises the possibility that far from conceiving of the Post-Keynesian and Sraffian approaches to price theory as incompatible, they may instead be seen more appropriately as representing an alternatively short-run and long-run focus on the pricing decision. This view also carries with it implications about the role for demand and supply conditions in disequilibrium pricing, where this role takes the form of movements in demand relative to capacity within and between sectors affecting relative prices.

Traverse, Hysteresis, and Normal Rates of Capacity Utilization in Kaleckian Models of Growth and Distribution

The paper deals with the main objection addressed against the Kaleckian model of growth and distribution, i.e., the endogenous rate of utilization need not be equal to its normal rate in the long run. Various mechanisms are introduced to bring the Kaleckian model to a fully adjusted position, where the realized and normal rates of capacity utilization are equated. When hysteresis effects are considered, Kaleckian results may be sustained even in fully adjusted long-run positions.

CAPACITY UTILIZATION, INVESTMENT AND NORMAL PRICES: SOME ISSUES IN THE SRAFFA‐KEYNES SYNTHESIS

ABSTRACTDrawing on recent debate over the theoretical significance of (Sraffian) normal prices this paper begins by outlining an interpretation of the relation between normal prices and administered pricing. This interpretation takes the anticipated average or normal rate of capacity utilization in each sector as data in the calculation of prices and profit rates. However, anticipated average utilization in each sector, in a cyclically disturbed system, will depend on relative prices and thus on distribution. This interdependence between prices, profit rates and utilization has an important bearing on certain issues arising out of attempts at a Sraffa‐Keynes synthesis. The paper attempts to shed light on those issues by exploring further the links between pricing, utilization and investment, using a simplified three‐sector model.