Undesired Excess Capacity and Equilibrium in an Advanced Market Economy


In this paper I attempt to give theoretical foundation to the concept of undesired excess capacity that I define as an unwilling, persistent mismatch between productive capacity and final demand. Undesired excess capacity has traditional room only in oligopolistic framework, like in Keynesian and Post-Keynesian models. Otherwise I show the possibility of its existence (and persistence) also with reference to a perfectly competitive economy where firms use massively information and communication technologies (ICT). In this stylized economy, undesired excess capacity is associated with “ex-post sunk costs, in terms of mismatch between total revenues and production costs. My approach, which draws a production theory alternative to the neoclassical one, makes it possible to account for these costs and connect them to the role of money, under the form of credit, in the continuation of the economic process. Moreover, in the conclusion of this paper, I show how the notion of equilibrium that emerges from the analysis could be useful to address the issue of dynamics.

Share and Cite:

A. Pannone, "Undesired Excess Capacity and Equilibrium in an Advanced Market Economy," Modern Economy, Vol. 4 No. 11, 2013, pp. 733-749. doi: 10.4236/me.2013.411079.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] World Bank, “Global Economic Prospects 2010: Crisis, Finance and Growth,” World Bank, Washington, DC, 2010.
[2] World Bank, “Global Economic Prospects 2011: Navigating Strong Currents,” World Bank, Washington, DC, 2011.
[3] J. Bain, “Barriers to New Competition,” Cambridge, Mass.: Harvard Univ. Press. 1956
[4] P. Sylos Labini, “Oligopolio e Progresso Tecnico,” Nuova Edizione, Einaudi, Torino, 1961.
[5] J. Steindl, “Maturity and Stagnation in American Capitalism,” Blackwell, Oxford, 1952.
[6] M. Spence, “Entry, Capacity, Investment and Oligopolistic Pricing,” Bell Journal of Economics, Vol. 8, No. 2, 1977, pp. 534-544. http://dx.doi.org/10.2307/3003302
[7] A. Dixit, “A Model of Duopoly Suggesting a Theory of Entry Barriers,” Bell Journal of Economics, Vol. 10, No. 1, 1979, pp. 20-32. http://dx.doi.org/10.2307/3003317
[8] G. Marini and A. Pannone, “Capital and Capacity Utilization Revisited. A Theory for ICT-Assisted Production System,” Structural Change and Economic Dynamics, Vol. 18, No. 2, 2007, pp. 231-248.
[9] T. Kretschmer, “Information and Communication Technologies and Productivity Growth: A Survey of the Literature,” OECD Digital Economy Papers, No. 195, OECD Publishing, 2012.
[10] T Bresnahan and M. Trajtenberg, “The Division of Inventive Labour and the Extent of the Market,” In: E. Helpman, Ed., General Purpose Technologies and Economic Growth, MIT Press, Cambridge, 1998.
[11] P. Sraffa, “Sulle Relazioni tra Costo e Quantità Prodotta,” Annali di Economia, repr. In P. Sraffa, Saggi, il Mulino, Bologna, 1986. 1925
[12] P. Sraffa, “The Law of Returns under Competitive Conditions,” The Economic Journal, Vol. 36, No. 144, 1926, pp. 535-50.
[13] M. Kalecki, “Selected Essaysin the Dynamics of the Capitalist Economy,” Cambridge University Press, 1971
[14] J. Halevi and P. Kriesler, “Kalecki, Classical Economics and the Surplus Approach,” Review of Political Economy, Vol. 3, No. 1, 1991, pp. 79-92.
[15] E. Hein, M. Lavoie and T. van Treeck, “Some Instability Puzzles in Kaleckian Models of Growth and Distribution: A Critical Survey,” Cambridge Journal of Economics, Vol. 35, No. 3, 2011, pp. 587-612.
[16] A. Turner, “The Crisis, Conventional Economic Wisdom, and Public Policy,” Industrial and Corporate Change, Vol. 19, No. 5, 2010, pp. 1317-1329.
[17] F. Donzelli, “Topics in the History of Equilibrium Analysis,” Lesson 1, Ph.D. Program in Economics University of York, 2008, p. 3.
[18] L. Walras, “Principe d’une Théorie Mathématique de l’échange,” Séances et travaux de l’Académie des sciences morales et politiques (Institut de France), Collection, 33e année, nouvelle série, 101, tome I, Paris, Alphonse Picard, Janvier, 1987, pp. 97-116.
[19] L. Walras, “Etudes d’économie Sociale: Théorie de la Répartition de la Richesse Sociale,” F. Rouge, Lausanne, 1896.
[20] V. Pareto, “Cours d’économie Politique. Tome I,” Nouvelle édition par G.-H. Bousquet et G. Busino, Librairie Droz, Genève, 1964.
[21] V. Pareto, “Cours d’économie Politique. Tome II,” Nouvelle édition par G.-H. Bousquet et G. Busino, Librairie Droz, Genève, 1964.
[22] K. Arrow and G. Debreu, “Existence of an Equilibrium for a Competitive Economy,” Econometrica, Vol. 22, No. 3, 1954, pp. 265-290. http://dx.doi.org/10.2307/1907353
[23] A. Marshall, “Principles of Economics,” Prometheus Books, Arbridged, 1890.
[24] K. Wicksell, “Interest and Prices,” M. Kelley, New York, 1898.
[25] A. Pigou, “The Economics of Stationary States,” Macmillan, London, 1935.
[26] K. Arrow and F. Hahn, “General Competitive Analysis,” Holden-Day, San Francisco, 1971.
[27] P. Tani, “Flows, Funds, and Sectoral Interdependence in the Theory of Production,” Politcal Economy-Studies in the Surplus Approach, Vol. 4, 1988, pp. 3-21.
[28] P. Wicksteed, “An Essay on the Co-ordination of the Laws of Distribution,” 1932 Edition, Reprint No. 12, London School of Economics, London, 1894.
[29] N. Georgescu-Roegen, “Man and Production,” In: M. Baranzini and R. Scazzieri, Eds., Foundations of Economics, Blackwell, Oxford, 1986.
[30] H. Kurt and N. Salvadori, “Theory of Production: A Long-Period Analysis,” Cambridge University Press, Cambridge, 1995.
[31] M. Amendola and J. L. Gaffard, “The Market Way to Riches. Beyond the Myth,” Edward Elgar, 2006.
[32] A. Blinder, E. Canetti, D. Lebow and J. Rudd, “Asking about Prices: A New Approach to Understanding Price Stickiness,” Russell Sage foundation, New York, 1998.
[33] M. Bils and P. Klenow, “Some Evidence on the Importance of Sticky Prices,” Journal of Political Economy, Vol. 112, No. 5, 2004, pp. 947-985.
[34] E. Dhyne, L. álvarez, H. Le Bihan, G. Veronese, D. Dias, J. Hoffmann, N. Jonker, P. Lünnemann, F. Rumler and J. Vilmunen, “Price Setting in the Euro Area: Some Stylized Facts From Individual Consumer Price Data,” Journal of Economic Perspectives, 2006, pp. 947-985.
[35] A. Wolman, “Managerial and Decision Economics,” Special Issue: Price Rigidity and Flexibility: Recent Theoretical Developments, Vol. 28, No. 6, 2007, pp. 531-552.
[36] E. Nakamura and J. Steinsson, “Five Facts about Prices: A Reevaluation of Menu Cost Models,” The Quarterly Journal of Economics, Vol. 123, No. 4, 2008, pp. 1415-1464. http://dx.doi.org/10.1162/qjec.2008.123.4.1415
[37] R. Kauffman and C. Wood, “Follow the Leader: Price Change Timing and Strategic Pricing in E-Commerce,” Managerial and Decision Economics, Vol. 28, No. 7, 2007, pp. 679-700. http://dx.doi.org/10.1002/mde.1375
[38] M. Bergen, S. Dutta, D. Levy, M. Ritson and M. Zbaracki, “Shattering the Myth of Costless Price Changes: A Framework for Dynamic Pricing,” European Management Journal, Vol. 21, No. 6, 2003, pp. 663-669.
[39] R. Kauffman and D. Lee, “Should We Expect Less Price Rigidity in the Digital Economy?” In: R. Sprague, Ed., Proceedings of the 37th Hawaii International Conference on System Sciences, Los Alamitos, 5-8 January 2004.
[40] M. Arbatskaya and M. Baye, “Are Prices ‘Sticky’ Online? Market Structure Effectsand Asymmetric Responses to Cost Shocks in Online Mortgage Markets,” International Journal of Industrial Organization, Vol. 22, No. 10, 2004, pp. 1443-1462.
[41] P. Milgrom and J. Rroberts, “Complementarities and Fit: Strategy, Structure, and Organizational Change in Manufacturing”, Journal of Accounting and Economics, Vol. 19, No. 2-3, 1995, pp. 179-208.
[42] M. Morroni, “Production Process and Technical Change,” Cambridge University Press, Cambridge, 1992.
[43] A. Pannone, “Production, Unemployment and Wage Flexibility in an ICT-Assisted Economy. A Model,” Structural Change and Economic Dynamics, Vol. 21, No. 3, 2010, pp. 219-230.
[44] P. Bruun and R. N. Mefford, “Lean Production and the Internet,” International Journal of Production Economics, Vol. 89, No. 3, 2004, pp. 247-260.
[45] H. Varian, “Computer Mediated Transactions,” Working Paper, Univ. of California at Berkley, 2010.
[46] N. Georgescu-Roegen, “Process in Farming versus Process in Manufacturing: A Problem of Balanced Development,” In: G. U. Papi and C. Nunn, Eds., Economic Problems of Agriculture in Industrial Societies, Macmillan, London, 1969.
[47] N. Georgescu-Roegen, “The Entropy Law and the Economic Process,” 4th Edition, Harvard University Press, Cambridge, 1981.
[48] R. Scazzieri, “A Theory of Production Tasks, Processes, and Technical Practices,” Clarendon Press, Oxford, 1993.
[49] P. Piacentini, “Time-Explicit Theory of Production: Analytical and Operational Suggestions Following a “FundFlow,” Approach, Structural Change and Economic Dynamics, Vol. 6, No. 4, 1995, pp. 461-483.
[50] G. Marini and A. Pannone, “Network Production, Efficiency and Technological Options, toward a New Dynamic Theory of Telecommunications,” Economics of Innovation and New Technology, Vol. 7, No. 1, 1998, pp. 177-201. http://dx.doi.org/10.1080/10438599800000033
[51] A. Pannone, “Accounting and Pricing for the Telecommunications Industry. An Operational Approach,” Oxford University Press, Oxford, 2001.
[52] A. Graziani, “The Theory of the Monetary Circuit,” Economies et Sociétés, Monnaie et Production, Vol. 24, No. 7, 1990, pp. 7-36.
[53] A. Graziani, “Money as Purchasing Power and Money as a Stock of Wealth in Keynesian Thought,” In: G. Deleplace and E. Nell, Eds., Money in Motion: The Post-Keynesian and Circulation Approaches, Macmillan and St. Martin’s Press, London and New York, 1996, pp. 139-154.
[54] M. Al-Shammari, “Customer Knowledge Management: People, Processess, and Technology,” 2009.
[55] J. H. Gilmore and B. J. Pine, “Four Faces of Mass Customization,” Harvard Business Review, Vol. 75, No. 1, 1997, pp. 91-101.
[56] J. M. Keynes, “The General Theory of Employment, Interests and Money,” Macmillan, London, 1936.
[57] R. Hall and C. Hitch, “Price Theory and Business Behavior,” Oxford Economic Papers, Vol. 2, No. 1, 1939, pp. 12-45.
[58] P. Sweezy, “Demand under Conditions of Oligopoly,” Journal of Political Economy, Vol. 47, No. 4, 1939, pp. 568-573. http://dx.doi.org/10.1086/255420
[59] D. Besanko, D. Dranove, M. Shanley, S. Schaefer, “Economics of Strategy,” 3rd Edition, John Wiley & Sons, Hoboken, 2004.
[60] L. Cabral and T. Ross, “Are Sunk Costs a Barrier to Entry?” Journal of Economics & Management Strategy, Vol. 17, No. 1, 2008, pp. 97-112.
[61] A. W. Phillips, “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957,” Economica, Vol. 25, No. 100, 1958, pp. 283-299.
[62] M. Ivaldi, B. Jullien, P. Rey, P. Seabright and J. Tirole, “The Economics of Tacit Collusion,” 2003.
[63] W. Baumol, J. Panzar and R. Willig, “Contestable Markets and the Theory of Industry Structure,” Harcourt Brace Jovanovich, Inc., New York, 1982.
[64] F. Hayek, “Prices and Production,” 1st Edition, Routledge and Sons, London, 1931.
[65] F. Hayek, “Monetary Theory and the Trade Cycle,” Reprinted in Economic Classic Series, Augustus M. Kelley, New York, 1933.
[66] M. Amendola and J. L. Gaffard, “The Innovative Choice,” Basil Blackwell, Oxford, 1988.
[67] H. Minsky, “Can ‘It’ Happen Again? Essays on Instability and Finance,” M. E. Sharpe, Armonk, 1982.
[68] E. Lindhal, “A Note on the Dynamic Pricing Problem,” In: J. Keynes, Ed., The General Theory and after. A Supplement. Selected Writings, Macmillan, London, 1979.
[69] F. Hahn, “On the Notion of Equilibrium in Economics, in Augural Lecture,” Cambridge University Press, Cambridge, 1974..
[70] E. Penrose, “Theory of the Growth of the Firm,” B. Blackwell, Oxford, 1959.
[71] D. Teece, “Toward an Economic Theory of the Multiproduct Firm,” Journal of Economic Behaviour and Organization, Vol. 3, No. 1, 1982, pp. 39-63.
[72] M. Weitzman, “Recombinant Growth,” Quarterly Journal of Economics, Vol. 113, No. 2, 1998, pp. 331-360.
[73] C. Antonelli, J. Krafft and F. Quatrar, “Recombinant Knowledge and Growth: The Case of ICTs’,” Structural Change and Economic Dynamics, Vol. 21, No. 1, 2010, pp. 50-69. http://dx.doi.org/10.1016/j.strueco.2009.12.001
[74] E. Brynjolfsson and A. Saunders, “Wired for Innovation: How Information Technology Is Reshaping the Economy,” The MIT Press, Cambridge, 2009.
[75] T. Espino-Rodriguez and V. Padron-Robaina, “A Review of Outsourcing from the Resource-Based View of the Firm,” International Journal of Management Reviews, Vol. 8, No. 1, 2006, pp. 49-70.
[76] D. Farrell, “Offshoring: Value Creation through Economic Change,” Journal of Management Studies, Vol. 42 No. 3, 2005, pp. 675-683.
[77] R. Lawrence, “Blue-Collar Blues: Is Trade to Blame for Rising US Income Inequality?” 2008.
[78] M. Amendola and J. L. Gaffard, “Capitalism Dynamism: Efficiency and Fairness,” 2009.
[79] M. Amendola and J. L. Gaffard, “Out of Equilibrium,” Economic Press Oxford, Oxford, 1998.
[80] F. Kydland and E. Prescott, “Time to Build and Aggregate Fluctuations,” Econometrica, Vol. 50, No. 6, 1982, pp. 1345-1370. http://dx.doi.org/10.2307/1913386
[81] J. Long and C. Plosser, “Real Business Cycle,” Journal of Political Economy, Vol. 91, No. 1, 1983, pp. 39-69.
[82] P. Romer, “Increasing Returns and Long Run Growth,” Journal of Political Economy, Vol. 94, No. 5, 1986, pp. 1002-1037. http://dx.doi.org/10.1086/261420
[83] R. Lucas, “On the Mechanics of Economic Development,” Journal of Monetary Economics, Vol. 22, No. 1, 1988, pp. 2-42. http://dx.doi.org/10.1016/0304-3932(88)90168-7
[84] S. Rebelo, “Long-Run Policy Analysis and Long-Run Growth,” Journal of Political Economy, Vol. 99, No. 3, 1991, pp. 500-521. http://dx.doi.org/10.1086/261764
[85] R. Solow, “Siena Lectures on Endogenous Growth Theory,” Collana del Dipartimento di Economia Politica, Università degli Studi di Siena, 1992.
[86] D. Cass, “Optimum Growth in an Aggregative Model of Capital Accumulation,” The Review of Economic Studies, Vol. 32, No. 3, 1965, pp. 233-240.
[87] R. Solow, “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics, Vol. 70, No. 1, 1956, pp. 65-94. http://dx.doi.org/10.2307/1884513
[88] L. Punzo, “Preface in Growth and Fluctuations: The PostWar Japanese Experience, in Cycles, Growth, and Structural Change,” 2001.

Copyright © 2023 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.