Full text: Trend and Cycle

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macroeconomic developments.lt will be determined by the trend cum 
cycle equation, in particular by the integral term which contains 
long term memory. The complement to the above mentioned potential 
will be the total capital stock built up in the course of time in 
connection with the innovation: Ro(l-e’'*). 
The influence of the long term meraoVy may involve either a 
positive or a negative feedback. In tKe first case it will 
generate a trend component which will,however, die out unless it 
is again stimulated\by outside influence^ If the long term memory 
involves a negative feedback it will create a long wave and no 
trend at all. 
We may consider an example of a positive feedback. It seems 
plausible that not only the current flow of retained profits 
(included in Kalecki’s trade cycle equation) but also the stock of 
those retained profits accumulated in the past in so far as it has 
not been invested should be relevant for the investment decisions. 
These disposable funds represent lending of the firm. At the same 
time we have also to consider the firm’s debts as relevant for 
its investment decisions. Both elements together make up the 
firm’s net indebtedness which should be seen in relation to its 
equity capital. We find that the long terra memory is here fully 
expressed in a stock figure which results from an integration of 
past flows. The present net indebtedness will be positively 
influenced by past growth rate, and in addition,of course by 
goverraent deficits and foreign balance in the past years. 
Other positive feedbacks may come from the past growth rate, from 
the long term rate of capacity utilisation, from the potential of 
innovations which is somehow existent immediately behind the 
scene. An example of a negative feedback is the stock of 
accumulated capital.We shall consider this now in detail. 
7.Excess capacity in the long run. 
"TnATEe coiirse^oF^TKe^Tiusiiress cycle the accumulation is always 
frustrated, because after a time excess capacity appears which 
depresses investment activity to negative net levels so that at 
the end of a "pure business cycle" we are back to where we started 
from: The resulting net investment is zero. How is it that the 
long run accumulation escapes this fate and succeeds in building 
up a stock of real capital? What makes the mechanism which 
frustrates the build up of a capital stock in the short run non 
operative in the long run? In my opinion this is due to a 
difference in the working of distribution in the short and in the 
long run. In the short run the distribution structure is in a 
sense fixed because of the inflexibility of the mark-up which 
throws the whole weight of adjustment on the utilisation of 
capacity which is extremely flexible. In the long run however 
reaction patterns appear which need some time to work out and 
which as they do can affect the mark-up and the competitive 
situation of the industry. The long run response to excess 
capacity^is aggressive competition either by some of the existing 
producers or by new entrants which may not be discouraged by the 
industry’s overcapacity if they have special advantages as 
compared to the old producers,such as new technical 
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