Monday, February 1, 2021

'Rethinking capacity utilization choice: the role of surrogate inventory and entry deterrence'

 By Thomas Palley

This paper presents a macroeconomics-friendly Post Keynesian model of the firm describing both an inventory theoretic approach and an entry deterrence approach to choice of excess capacity. The model explains why firms may rationally choose to have excess capacity. It also shows the two approaches are complementary and reinforcing of each other. Analytically, the paper makes three principal contributions. First, it provides a simple framework for understanding the microeconomics of capacity utilization choice. Second, it reframes the Post Keynesian discussion of capacity utilization by making excess capacity choice the key to understanding normal capacity utilization. Third, it implicitly challenges Neo-Kaleckian wage-led growth theory as the model shows choice of the optimal excess capacity rate is independent of the level of demand.

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Fourth Godley-Tobin Lecture: Marc Lavoie on Godley vs Tobin on Monetary Theory

Part of the Eastern Economic Association Meeting , and sponsored by the Review of Keynesian Economics .