accelerator

Background

The accelerator model is integral in economics for understanding and predicting firm investment behaviors relative to output changes. It offers insights into how businesses adjust their capital investments based on fluctuations in product demand and overall economic activity.

Historical Context

The accelerator principle developed in the early 20th century as economists began formalizing the relationship between investment and economic cycles. Prominent in the work of early theorists like Albert Aftalion and John Maurice Clark, the concept was an attempt to model how shifts in output and demand drive business investment decisions.

Definitions and Concepts

Accelerator: A concept that connects a firm’s level of investment with the changes in its output. It posits that investments increase when output is rising and decrease when output is falling.

Investment: The purchase of capital goods designed to yield future benefits.

Output: The amount of goods and services produced by a firm or in an economy.

Demand: The desire for particular goods or services interpolated with the willingness and ability to pay for them.

Capacity: The total level of output that a firm can sustain to produce goods or services.

Major Analytical Frameworks

Classical Economics

In classical economics, investment is often viewed through the lens of savings and capital accumulation without a direct relation to output changes. The accelerator principle adds dynamism to this viewpoint.

Neoclassical Economics

Synthesizing classical views with newer theories, neoclassical economics acknowledges the role of adjustments in output on investments. The accelerator model complements this by providing an empirical tool to measure such relationships.

Keynesian Economics

John Maynard Keynes acknowledged the importance of aggregate demand in determining investment and output levels. The accelerator model is often integrated into Keynesian theory to explain how anticipated demand fluctuations influence investment.

Marxian Economics

The focus in Marxian economics on capital accumulation and crises gives context to the accelerator model by explaining periods of overinvestment followed by sudden sharp downscaling of investments.

Institutional Economics

This approach explores how institutional changes and macroeconomic policies can impact investment behaviors magnified through the accelerator effect.

Behavioral Economics

Behavioral economics offers an understanding of how firms’ expectations about future demand and capacity utilization influence their investment decisions under the accelerator framework.

Post-Keynesian Economics

This framework emphasizes the non-linear and complex relationship between investment, demand, and output, situating the accelerator model within broader cyclical and fluctuating trends in the economy.

Austrian Economics

While skeptical of mechanistic models, Austrian theory still provides context about how entrepreneur-driven decisions, when aggregated, can reflect accelerator-type investment behavior.

Development Economics

Here, the accelerator model helps assess how investments in emergent and developing markets respond vigorously to burgeoning demand reflecting rapid output increases.

Monetarism

Monetarist perspectives consider the accelerator effect in terms of how changes in the money supply and expectations affect aggregate demand and, consequently, investment.

Comparative Analysis

Analyses comparing different economic contexts show that the accelerator model can vary significantly, reflecting unique factors such as stages of economic development, market structures, and temporal economic policies.

Case Studies

• Post-WWII Economic Boom: This period demonstrates a clear scenario where rising demand and output led to significant capital investments.
• 2008 Financial Crisis: Insights from the accelerator model help explain rapid de-investment amid plummeting demand.

Suggested Books for Further Studies

1. “The Accelerator Principle in Economic Theory” by Albert Aftalion
2. “Investment, Interest, and Capital” by John Maurice Clark
3. “The General Theory of Employment, Interest, and Money” by John Maynard Keynes

Related Terms with Definitions

• Marginal Propensity to Invest: The ratio explaining how much investment will change relative to changes in income.
• Aggregate Demand: The total demand for goods and services within an economy.
• Capacity Utilization: The extent to which a firm uses its total production capacity.

By understanding the accelerator model in the context of investment and output dynamics, economists and policymakers can better anticipate and react to shifts across economic cycles.