9 Reasons for Reduction in Acceleration Value

Read this article to learn about the nine reasons for reduction in acceleration value.

(i) No Excess Capacity:

If there is already excess capacity in the consumer goods sector, a rise in demand for consumer goods will not lead to any induced investment or acceleration effects, because the increased demand may be met from the existing capital and machinery without producing additional capital goods.

This will be a case of zero gross investment and is the typical case during the initial period of recovery phase of the trade cycle.

When there is idle equipment of excess capacity, it is only after this excess capacity has been used that the principle of acceleration will start operating.

This is what happened in India in Paper, Textile, Sugar and other industries during the Second World War.

(ii) Surplus Capacity:

On the other hand, the operation of the principle depends upon the presumption that there is surplus capacity in the investment goods industries. If it were not so and no excess capacity existed in machine-making industries, an increase in the derived demand for machines could not result in an increased supply of machines. The operation of the accelerator is conditioned by the ability of the machine-making industry to produce increased number of machines with their existing equipment, if need be; in other words, there must be surplus capacity in investment industries.

Failing this, that is, if there is no excess capacity the delivery data shall have to be postponed and the working of accelerator to that extent will be impaired. Hence, the principle of acceleration depends upon a very tough condition that there shall be excess capacity in one industry (investment industry) but no excess capacity in the other (industries producing consumer goods).

(iii) Nature of Demand:

An increase in the demand for consumption goods must be more or less permanent in nature to have acceleration effects. A purely temporary increase in the demand for consumer goods will not lead to any addition in the capital goods.

Durable capital goods are expensive and no producer will order capital goods if he believes that the increase in demand is short-lived. This also shows that the acceleration principle is not based on merely technological factors but also on profit expectation (a point which has been overlooked by the exponents of this principle).

(iv) Capital-output Ratio:

The principle of acceleration is based on the assumption that there is a constant ratio of the output of consumer goods and capital equipment needed for their production (i.e., there is constant capital output ratio). In reality this ratio is not constant. Apart from the inventions and improvements in the technique of production (which allow for an increase in output of unit of capital equipment), existing capital equipment may be worked more intensively.

Moreover, with the changes in the expectations of businessmen regarding future trends in wages, interest and demand, the proportions in which the factors are combined may vary. Hence, the capital-output ratio also varies in different phases of the business cycle and does not remain constant.

(v) Availability of Resources:

The working of acceleration principle is further impaired by the availability of resources and the ability of the machine-making industry to produce more machines. In order that the increased demand for capital goods be followed by an increase in the production, there must be enough unemployed factors available for employment in the capital goods industries i.e., these industries should be able to expand: This is possible only when there is widespread unemployment in the economy. But once the level of full employment has been attained, the industrial sector finds it difficult to expand the production of capital goods. Such a state of affairs limits the working of the acceleration principle.

(vi) Elastic Credit Supply:

The elastic supply of money and credit is another factor which helps in the smooth working of the acceleration principle. Whenever there is induced investment as a result of induced consumption, enough money and credit should be forthcoming for investment in investment goods industries. A scarcity of money and credit will raise the rate of interest and will make investment financed by borrowed funds costlier. It is therefore, essential that the rate of interest not be allowed to rise and that there is enough credit to allow for the acceleration effects to follow.

(vii) Fluidity:

The operation of the accelerator is based on the assumption that industry is in fluid condition. It assumes that “…finished goods are turned out as fast as wanted and materials and means of production are instantly supplied as fast as the process of finishing requires them.”

(viii) Meaningful Averages not Possible:

These limitations of the acceleration principle become more glaring when accelerator is used to explain cyclical nature of the whole economy rather than the behaviour of a particular firm or industry. Not all types of business firms or industries have the same capital-output ratio—this means that the economy as a whole may have a high accelerator at one time and low accelerator at another, preventing any meaningful average.

(ix) Absence of Time Lags:

Finally, the acceleration principle assumes that increased output and the rise in investment occur simultaneously, when in fact a sudden rise in demand may long precede a respond in investment levels. In order to compensate for this or cope with this, more sophisticated models of the accelerator incorporate the influence of time lags.