Under competitive pressure, the value of the capital goods of an industry with excess capacity fall. The company may exit, but another firm can pick up the capital good and a low price and then feed back into the supply stream. Since the new owner has a lower cost basis, the old good can remain competitive.
Similarly, a widespread bankruptcy can lead to a general revaluation of capital goods, which can reinforce the initial shock. However, depressed conditions do, in fact, lead to more pressure to innovate and improve the capital stock. During booms, there is a tendency to just add more of the same plant and equipment, what economists call capital widening.
I suspect that I have had just enough time to create confusion and not enough to throw any light on Rakesh's comments.
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Michael Perelman Economics Department California State University michael at ecst.csuchico.edu Chico, CA 95929 530-898-5321 fax 530-898-5901