Multiplicity and not necessarily heterogeneity: implications for the long-run degree of capacity utilization

By Lorenzo Di Domenico

PKES Working Paper 2116

October 2021

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.

Keywords: Post-Keynesian economics; Economic growth; Agent Based – Stock Flow Consistent models

JEL classification: C63 E11 E12 O42 P16