Limitations, Assumption and Significance of the Acceleration Principle
Limitations, assumption and significance of the Acceleration Principle
The principle of acceleration has come in for a good deal of criticism in recent years. For example, it has been pointed out by Kaldor that we cannot assume a constant value of the accelerator throughout the trade cycle, that it is not true that an increase in demand of 100 rupees must always give rise to an increase in investment of 300 rupees (as in our example). This is because, if already some machines are lying idle, we shall try to use them before rushing in for new equipment. Also if our expectation is that the rise in demand is a temporary one, we shall try to meet it by overworking the existing machinery rather than by installing a new plant.
Further, it may be easier for a firm to take advantage of a small increase in demand than big ones—for the financial resources of a firm may not be sufficient to take immediate advantage of big increases, while small additional equipment is not likely to strain its financial resources to any great extent. Hence, its response to the latter may be quicker than to the former.
Assumptions of the Acceleration Principle
1. The basic assumption underlying the acceleration theory is that capital- output ratio remains constant throughout. In a dynamic economy, however, this is not so.
2. Resources are assumed to be elastic so that investment in new capital goods can be undertaken easily. But if the economy is operating near full employment level, there may not be sufficient factors or resources available to expand capital goods industries and to that extent the acceleration effect will be limited.
3. Money supply, especially credit, is assumed to be elastic so that funds for induced investment are easily available. But if there is a shortage of funds, the rate of interest will be very high and induced investment will be necessarily limited.
Significance of the Acceleration Theory
Since, the acceleration principle indicates how a given change in consumption results in a change in the level of investment; we can understand the process of income generation and propagation more clearly. The theory of acceleration further explains why fluctuations in income and employment occur rather violently. Thus, this doctrine also demonstrates that the capital goods industries fluctuate more, much more than consumption goods industries. Induced investment is very much useful in explaining the upper turning point of a trade cycle, for what is necessary for a fall in the volume of induced investment is not any absolute fall in demand for consumption goods but only a decline in its rate of increase.
However, the acceleration principle taken by itself is incapable of explaining the cyclical variations in income and employment. For a complete analysis of the 'process of income propagation, we must consider, as Prof. Samuelson insists, both the multiplier effect and the acceleration effect together.