This article analyzes the difference of
properties of economic growth theory between perfect and monopolistic competition.
Whether or not capital investment is constrained by effective demand is the
crucial factor which characterizes economic growth theories in different degree
of competition. Whenever each firm faces a downward sloping demand curve the
location of which is determined by the strength of effective demand (i.e., the real GDP), its capital accumulation
is inevitably constrained by effective demand. Thus, as far as business
environment is kept unchanged, so is capital investment. However, when the good
market is perfectly competitive, firms never perceive such demand constraint,
thereby capital investment advancing autonomously independent of the phase of
business cycle. An important macroeconomic implication of such a difference of
the attitude toward capital investment is as follows. When an economy is in
perfect competition, capital investment becomes an independent driving force of
economic growth as Keynes considers, although it is subject to other
independent expenditure (e.g., the government expenditure) and falls into a subsidiary
component of effective demand otherwise.
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