Productive Capacity steady for past 4 years as New Investment is weak

Productive capacity is how much the economy could produce if all available labor and capital were employed. I measure productive capacity with the following equation...

Productive capacity = real GDP/(capacity utilization*(1-unemployment rate))

The equation says that the composite percentage of utilizing labor and capital determines real GDP. Here is a graph for productive capacity since 1971...

Productive capacity has increased with population, technology, increases in productivity and increased capital. I mark periods where the growth plateaus. You can see that since the crisis, it has stayed very steady... more steady than in times past.

The standard deviation during these past 4 years is just $93 billion.

The plot rises some. Productive capacity growth has been trending at just $9 billion per quarter, which is 1.66% annual growth of total productive capacity. This is slow growth.

New Investment is Weak

According to Keynes in his General Theory book, new investment is a driver of the economy. Even inflation is driven by banks injecting new loans into the economy as new investment.

"If the propensity to consume and the rate of new investment result in a deficient effective demand, the actual level of employment will fall short of the supply of labour potentially available at the existing real wage..." (Keynes, chapter 3)

Growth of productive capacity (as well as employment and wages) is weak partly because new investment is weak.

Here is my simulation based on Keynes' view of new investment over savings per quarter. The last data point at the right is what I am projecting from 3rdQ14 to 4thQ14.

Comments

[Steve Roth]

Better, to impart the key demand constraint on "capacity"?:

Productive capacity is how much the economy would produce if there were sufficient demand to employ all available labor and capital.

[Edward Lambert]

HI Steve,
Productive capacity implies no demand constraint on production. All labor and capital is employed. It's Says Law fulfilled.

[Steve Roth]

But, counterfactual: If there were more demand, both capacity utilization and the unemployment rate (*and* the employment rate) would be different.

So productive capacity is a function of demand. Which is why effective demand, not capacity, is always the limiting factor.

As we approach a post-scarcity society where producers can always deliver more on demand, it seems like the old notion of capacity -- how much factories could be producing, running full-tilt -- is increasingly anachronistic and confused.

Make sense?

[Edward Lambert]

Hi Steve,
I am with you on that one. Demand is a limiting factor for productive capacity. Moreover, when effective demand is lowering, we see its effects on productive capacity. If effective demand was to start rising, we would see productive capacity rise too. More investment...
As Keynes said, "All production is for the purpose of ultimately satisfying a consumer." Chapter 5, General Theory.
It may be that the notion of capacity is confused because it is being warped by the demand effects of lowering labor shares in many countries.