On the Desired Rate of Capacity Utilization

This paper examines the endogeneity (or lack thereof) of the rate of capacity utilization in the long run within the context of the controversy surrounding the Kaleckian model of growth and distribution. We argue that the proposed long-run dynamic adjustment, proposed by Kaleckian scholars, lacks a coherent economic rationale. We provide economic justification for the adjustment of the desired rate of utilization towards the actual rate on behalf of a cost-minimizing firm, after examining the factors that determine the utilization of resources. The cost minimizing firm has an incentive to increase the utilization of its capital if the rate of the returns to scale decreases as its production increases. We show that there are evidence in the theory and the empirical research that justify this behavior of returns to scale. In that way the desired rate of utilization becomes endogenous.