Capacity Utilization, Obsolete Machines and Effective Demand

CSWP 9 (December 2014)

Author Sergio Parrinello

Keywords growth, Keynesian analysis, capacity utilization, obsolete capital goods, long and short period analysis

JEL B50, E22, O40

This paper is concerned with certain conditions under which an autonomous intended change in demand becomes effective. A simple model describes an economy, which initially is assumed in a steady state characterized by a given conventional wage rate, a uniform rate of profit and the existence of obsolete machines which are still used and receive quasi-rents, although not produced anymore. Small changes in effective demand, allowed by variable capacity utilization of fixed capital at given prices, are distinguished from large changes which affect the relative prices of commodities and the distribution of income. In both cases the steady state and the adjustment process towards a new steady state are compatible with unemployment; but large effective changes in demand require a higher flexibility of capacity utilization, compared with small changes. This occurs through a deviation of prices and income distribution from their normal values and a change in quasi rents, which make profitable a change in the types and the amounts of the obsolete machines in use. The distinction stressed in the paper is preliminary to the further distinction between impulse-wise and persistent changes in the rates of growth of demand, that is left as a research agenda.

Download the paper