What Is the Acceleration Principle?

Mary McMahon

The acceleration principle is a concept in economics that links output to capital investment. As consumers demand more products, companies must increase capacity to make them, which requires them to invest in equipment, machines, and other capital goods. Increased output can also create more economic stability and larger reserves of assets, which encourages companies to invest in order to grow. When economies are trending upwards, capital investment increases. This also works in reverse.

When a company invests in capital goods, the investment pays off in increased output.
When a company invests in capital goods, the investment pays off in increased output.

Economists in the early 20th century began exploring the acceleration principle to explore the specific relationship between economic output, measured with means like the Gross Domestic Product (GDP), and capital investment. They found that there was a strong correlation between the two. Consumers demanding more goods need factories to meet that demand. The acceleration principle, in turn, can also connect with a multiplier effect, where increasing capacity creates more jobs, generating more income and increasing consumer demand.

In reverse, when consumer demand starts to fall, companies are less interested in making capital investments. They don’t need to increase capacity to produce enough, and may not have an interest in developing capital assets because of the economic uncertainty. This can also connect with the multiplier effect to drag the economy further down as people lose jobs or never get them in the first place since companies are not investing. Economic recovery can be hindered by the lack of capital investment as well, because firms may need to make substantial investments before they can operate again.

Research on the acceleration principle illustrates the complex interconnections in financial systems. National economies contain a number of elements which can influence the economy as a whole in ways that may be unexpected. The link between increased consumer demand and more robust economic health for manufacturers is clear, but the connection between demand and capital investment can be more subtle. Awareness of this issue can be important for people making policy decisions.

This principle can also be factored in when economists provide analysis and overviews of the economy. They may want to provide it as contextual information to explain specific phenomena, or to provide more information about recommendations in a text. These texts may briefly discuss the acceleration principle if they are aimed at people who are not familiar with economics concepts to make sure they understand. In other instances, terms may not be defined because it’s assumed the audience will know them.

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