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marked by malinvestment and undersaving, not underconsumption.
THE ACCELERATION PRINCIPLE
There is only one way that the underconsumptionists can try to
explain the problem of greater fluctuation in the producers than
the consumer goods industries: the acceleration principle. The
acceleration principle begins with the undeniable truth that all
production is carried on for eventual consumption. It goes on to
state that, not only does demand for producers goods depend on
consumption demand, but that this consumers demand exerts a
multiple leverage effect on investment, which it magnifies and
accelerates. The demonstration of the principle begins inevitably
with a hypothetical single firm or industry: assume, for example,
that a firm is producing 100 units of a good per year, and that 10
machines of a certain type are needed in its production. And
assume further that consumers demand and purchase these 100
units. Suppose further that the average life of the machine is 10
years. Then, in equilibrium, the firm buys one new machine each
year to replace the one worn out. Now suppose that there is a 20
percent increase in consumer demand for the firm s product. Con-
sumers now wish to purchase 120 units. If we assume a fixed ratio
of capital to output, it is now necessary for the firm to have 12
machines. It therefore buys two new machines this year, purchasing
a total of three machines instead of one. Thus, a 20 percent
increase in consumer demand has led to a 200 percent increase in
5
For a brilliant critique of underconsumptionism by an Austrian, see F.A.
Hayek,  The  Paradox of Saving, in Profits, Interest, and Investment (London:
Routledge and Kegan Paul, 1939), pp. 199 263. Hayek points out the grave and
neglected weaknesses in the capital, interest, and production structure theory of
the underconsumptionists Foster and Catchings. Also see Phillips, et al., Banking
and the Business Cycle, pp. 69 76.
6
The Keynesian approach stresses underspending rather than undercon-
sumption alone; on  hoarding, the Keynesian dichotomization of saving and
investment, and the Keynesian view of wages and unemployment, see above.
Some Alternative Explanations of Depression: A Critique 61
demand for the machine. Hence, say the accelerationists, a general
increase in consumer demand in the economy will cause a greatly
magnified increase in the demand for capital goods, a demand
intensified in proportion to the durability of the capital. Clearly, the
magnification effect is greater the more durable the capital good
and the lower the level of its annual replacement demand.
Now, suppose that consumer demand remains at 120 units in
the succeeding year. What happens now to the firm s demand for
machines? There is no longer any need for firms to purchase any
new machines beyond those necessary for replacement. Only one
machine is still needed for replacement this year; therefore, the
firm s total demand for machines will revert, from three the previous
year, to one this year. Thus, an unchanged consumer demand will gen-
erate a 200 percent decline in the demand for capital goods. Extend-
ing the principle again to the economy as a whole, a simple increase
in consumer demand has generated far more intense fluctuations in
the demand for fixed capital, first increasing it far more than propor-
tionately, and then precipitating a serious decline. In this way, say the
accelerationists, the increase of consumer demand in a boom leads to
intense demand for capital goods. Then, as the increase in consump-
tion tapers off, the lower rate of increase itself triggers a depression
in the capital goods industries. In the depression, when consumer
demand declines, the economy is left with the inevitable  excess
capacity created in the boom. The acceleration principle is rarely
used to provide a full theory of the cycle; but it is very often used as
one of the main elements in cycle theory, particularly accounting for
the severe fluctuations in the capital-goods industries.
The seemingly plausible acceleration principle is actually a tis-
sue of fallacies. We might first point out that the seemingly obvi-
ous pattern of one replacement per year assumes that one new
machine has been added in each of the ten previous years; in short,
it makes the highly dubious assumption that the firm has been
expanding rapidly and continuously over the previous decade.7
7
Either that, or such an expansion must have occurred in some previous
decade, after which the firm or whole economy lapsed into a sluggish stationary
state.
62 America s Great Depression
This is indeed a curious way of describing an equilibrium situation;
it is also highly dubious to explain a boom and depression as only
occurring after a decade of previous expansion. Certainly, it is just
as likely that the firm bought all of its ten machines at once an
assumption far more consonant with a current equilibrium situa-
tion for that firm. If that happened, then replacement demand by
the firm would occur only once every decade. At first, this seems
only to strengthen the acceleration principle. After all, the replace-
ment-denominator is now that much less, and the intensified
demand so much greater. But it is only strengthened on the sur-
face. For everyone knows that, in real life, in the  normal course
of affairs, the economy in general does not experience zero demand
for capital, punctuated by decennial bursts of investment. Overall, [ Pobierz całość w formacie PDF ]