The New Palgrave Dictionary of Economics

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Acceleration Principle

  • P. N. Junankar
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DOI: https://doi.org/10.1057/978-1-349-95121-5_202-2

Abstract

The acceleration principle holds that the demand for capital goods is a derived demand and that changes in the demand for output lead to changes in the demand for capital stock and, hence, lead to investment. The flexible accelerator, which includes both demand and supply elements, allows for lags in the adjustment of the actual capital stock towards the optimal level. The principle neglects technological change but has been used successfully in explaining investment behaviour and cyclical behaviour in a capitalist economy. Almost all macroeconomic models of the economy employ some variant of it to explain aggregate investment.

Keywords

Acceleration principle Aftalion, A. Aggregate demand Aggregate investment Business cycles Capital–output coefficient Chenery, H. B. Clark, J. M. Depreciation Derived demand Distributed lag accelerator Eisner, R. Expectations Haberler, G. Harrod, R. F. Harrod–Domar growth model Marx, K. H. Pigou, A.C. Technical change 

JEL Classifications

E22 

The acceleration principle has been proposed as a theory of investment demand as well as a theory determining the supply of capital goods. When combined with the multiplier, it has played a very important role in models of the business cycle as well as in growth models of the Harrod–Domar type. The acceleration principle has been used to explain investment in capital equipment, the production of durable consumer goods and investment in inventories (or stocks). In general, it has been used to explain aggregate investment, although it is sometimes used to explain investment by firms (micro-investment behaviour). The main idea underlying the acceleration principle is that the demand for capital goods is a derived demand and that changes in the demand for output lead to changes in the demand for capital stock and, hence, lead to investment. Its distinctive feature, then, is its emphasis on the role of (expected) demand and its de-emphasis on relative prices of inputs or interestrates.

The acceleration principle is a relatively new concept: it is possible to find its antecedents in Marx’s Theories of Surplus Value, Part II (1863, p. 531). Amongst the earliest exponents of the acceleration principle is Albert Aftalion in Les Crises périodiques de surproduction (1913). Later contributions by J.M. Clark (1917), A.C. Pigou (1927) and R.F. Harrod (1936) discussed the acceleration principle both as a determinant of investment and in its role in explaining business cycles. Haberler (1937) provides a fairly comprehensive account of the acceleration principle up to that date. Since then the contributions by Chenery (1952) and Koyck (1954) provide important extensions and developments of the theory. In recent years work by Eisner (1960) has employed the acceleration principle in econometric work. Almost all macroeconomic models of the economy employ some variant of the acceleration principle to explain aggregate investment.

Underlying the acceleration principle is the notion that there is some optimal relationship between output and capital stock: if output is growing, an increase in capital stock is required. In the simplest version of the acceleration principle,
$$ {K}_t^{\ast }={vY}_t $$
where \( {K}_t^{\ast } \) is planned capital stock, Y t is output and v is a positive capital–output coefficient. On the assumption that the capital stock is optimally adjusted in the initial period (that is \( {K}_t={K}_t^{\ast } \) where K t is the actual capital stock) an increase in output (or planned output) leads to an increase in planned capital stock,
$$ {K}_{t+1}^{\ast }={vY}_{t+1} $$
and again on the assumption of an optimal adjustment in the unit period
$$ {K}_{t+1}^{\ast }-{K}_t^{\ast }={K}_{t+1}-{K}_t={I}_t= v\left({Y}_{t+1}-{Y}_t\right)= v\Delta {Y}_t. $$

In other words, for net investment to be positive, output must be growing: v is called the accelerator.

The acceleration principle can be derived from a cost-minimizing model on the assumption of either fixed (technical) coefficients and exogenous output, or variable coefficients with constant relative prices of inputs and exogenous output.

Some of the shortcomings of this simple model were well known; for example, the problem of being optimally adjusted: this was discussed in the context of whether or not the economy (or the firm) was working at full capacity. If the economy was operating with surplus capacity, an increase in aggregate demand would not lead to an increase in investment. Similarly, it was well known that the accelerator may work in an asymmetric fashion because of the limitations imposed on decreasing aggregate capital stock by the rate of depreciation: the economy as a whole could only decrease its capital stock by not replacing capital goods that were depreciating. Another important qualification to the simple accelerator model was than an increase in (expected) output would lead to an increase in investment only if it was believed that, in some way, the increase was ‘permanent’ or at least of long duration.

A generalization of the simple accelerator is provided by the flexible accelerator or the capital stock adjustment principle (also known as the distributed lag accelerator). It overcomes one of the major shortcomings of the simple accelerator, namely, the assumption that the capital stock is always optimally adjusted. The flexible accelerator also assumes that there is an optimal relationship between capital stock and output but allows for lags in the adjustment of the actual capital stock towards the optimal level. This is written as
$$ {I}_t= b\left({K}_t^{\ast }-{K}_{t-1}\right) $$
where b is a positive constant between zero and one and \( {K}_t^{\ast } \) equals vY t . This equation implies that the adjustment path of actual capital stock towards the optimal level is asymptotic. In this version, the adjustment is not instantaneous either since, because of uncertainty, firms do not plan to make up the difference between \( {K}_t^{\ast } \) and K t−1 and/or because the supply of capital goods does not allow the adjustment to be instantaneous. A similar equation was derived by assuming increasing marginal costs of adjusting capital stock by Eisner and Strotz (1963).

In evaluating the acceleration principle it is worth stressing that, in some versions, it is used as an explanation of investment demand with the implicit assumption that the supply of capital goods will always satisfy that demand. In models where the acceleration principle is used to explain the supply of capital goods, it is assumed that they always satisfy the demand for them. The flexible accelerator is a hybrid version which includes both demand and supply elements. Although there is no formal treatment of replacement investment, it is usually postulated to be determined in the same way as net investment. A major shortcoming of the acceleration principle is its simplistic treatment of expectations of future demand as well as its neglect of expectations of the time paths of output and input prices. Although most of the work in this field treats the acceleration principle as applying to the aggregate economy, it has also been used to explain investment by firms. It is especially important that the supply of capital goods is formally modelled along with the acceleration principle determining investment demand. Aggregation over firms is usually assumed to be a simple exercise of ‘blowing up’ an individual firm’s investment demand. However, it should not be forgotten that in a modern capitalist economy an individual firm may invest by simply taking over an existing firm rather than by buying new capital goods. An important shortcoming of the acceleration principle is its neglect of technological change.

The acceleration principle is an important concept and has been used successfully in explaining investment behaviour as well as cyclical behaviour in a capitalist economy. It will continue to play an important role in macro econometric models as well as in models of business cycles.

See Also

Bibliography

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© The Author(s) 2008

Authors and Affiliations

  • P. N. Junankar
    • 1
  1. 1.