It reflects a modern concern to establish a more systematic understanding of the process of creative destruction

Figure 1a

18The carrying capacity K is determined in familiar fashion by the long-run co-ordination of supply and demand (equations (1) and (4)) but this is only the asymptotic outcome. The normal price output combination coincides in general neither with the long-run cost curve nor with the long-run demand curve but follows a trajectory such as that indicated by the locus a ? a in Figure 1a. In fact, the greater is ? relative to ?, the closer will this locus lie to the demand curve D, rather than the supply curve H, and conversely. In the limit, if ? is infinite, instantaneous consumer learning, the trajectory coincides with D while if ? is zero, neither learning nor financial constraints on capacity expansion, the trajectory coincides with H. As the reader can readily establish, a higher value of the demand elasticity is associated with a lower value of K and a greater value of B. For completeness, Figure 1b plots the growth rate of output g _Y(t) against the logarithm of output to indicate the pattern of retardation, as output expands to fill the long-run niche. Thus, output, capacity, demand, price and unit costs develop jointly to define the normal expansion for the industry. Following Hicks (1977), we can say that the establishment of the new industry has provided an impulse to growth, a potential that is capitalised upon by investment and producer and consumer learning.
Figure 1b

19I need scarcely stress the very limited nature of this exercise. At most, it provides a first cut at a complex problem, a basis for separating out the different contributions of the dynamic elements and the long-run supply and demand elasticities. Much is missing. There is no explicit treatment of entry and exit as influences on capacity expansion, despite the evidence pointing to their importance in the process of secular growth (Klepper and Simon, 1994; Mazzucato, 2002). Nor can there be, unless we allow firms with different costs and/or product variations to co-exist and compete within the process of secular expansion. With different firms, the coefficients B and K become averages, dependent on the composition of the industry and these averages evolve over time as competition concentrates output on lower cost firms. Nor do we allow for competitive and complementary interactions between this and other industries. [16][16]A point emphasised by Kuznets and Burns. See Metcalfe and… Finally, foreign trade has escaped our net entirely. Nonetheless, it is perhaps not too much to claim to have a good starting point for such developments, and before we turn to one such extension, some remarks on departures from normal expansion are in order.
20Normal expansion is clearly a strong requirement, if entrepreneurs are to keep capacity growth in exact step with demand growth this would require an ability to react instantaneously to discrepancies between demand growth and capacity growth and a tranquil environment. Like Harrod’s famous warranted growth rate, the normal rate of secular expansion is the rate consistent with the decision rules of firms and consumers and, therefore, provides the consistency requirement from which further analysis can be developed. We can interpret his balanced path as equivalent to Kuznets’ primary trend of production. Now while the rules adopted in relation to pricing and investment behaviour can well tolerate small departures or self-correcting cyclical departures from balanced expansion, the secondary trend, they are not likely to cope with major shocks, which are bound to lead to a fractured process of secular change. Figure 2 illustrates what might occur in the face of an unforeseen reduction in demand or an unforeseen increase in costs. The immediate consequence of which is to create excess capacity in the industry and to reduce the long-run niche to K?. Up to time t ₁ expansion is normal but the shock drives output, log Y₂, below capacity, log Y₁, and destroys the basis for ongoing investment until demand has grown again to fully absorb capacity. From then on balanced expansion can resume but directed towards a new niche that reflects the changes in long-run fundamentals. Thus, the path a ? a is fractured and ultimately resumes as the path b ? b. Similarly, an unforeseen increase in demand will generate a capacity shortage and a price above its balance value. Growth is fractured again until the capital stock has caught up with market demand.