A New Perspective
New Directions in Modern Economics series
Chapter 2: The Microfoundations of Long-run Growth: Controversies on Capacity Utilization and Competition
INTRODUCTION 1. In the analysis of economic growth a central controversy deals with the nature of the economy’s long-run growth path and the characteristics of the forces that either make output and capacity converge or keep them persistently apart. In this chapter it will be shown how the analysis of longrun capacity utilization is shaped by theoretical controversies regarding the nature of competition. For example, in neoclassical theory perfectly competitive markets, characterized by passive price-taking firms, ensure the attainment of minimum average total costs and the elimination of excess capacity. On the other hand, in neoclassical theory price-setting behavior is considered to be a defining feature of what it calls imperfect competition, in which firms maintain persistent excess capacity. This second view of the competitive process underpins both Kaleckian growth models and neo-Schumpeterian neoclassical endogenous growth models (P. Romer, 1994). This chapter will discuss how the nexus between competition and capacity utilization is analyzed in four broad traditions: the Oxford Economists’ Research Group (OERG), classical/Marxian, Kaleckian and neoclassical. It will be demonstrated that there are significant areas of overlap between the analysis of competition in the classical/Marxian tradition and the contributions of Sir Roy Harrod, P.W.S. Andrews and Elizabeth Brunner, and others of the OERG tradition. This approach to competition, which we will call the theory of strategic competition, will be shown to be quite different from models of perfect and imperfect competition. 2. EX ANTE VERSUS EX POST IDLE CAPACITY The conventional view is that if perfect competition is...
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