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The effect of technical progress upon distribution along Kaldor-Kennedy line

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The effect of technical progress upon distribution along Kaldor-Kennedy line

  1. 1. The effect of technical progress upon distribution along Kaldor-Kennedy line
  2. 2. The effect of technical progress upon distribution along Kaldor-Kennedy line  Up Sira Nukulkit  Email: sira.nukulkit@economics.utah.edu  Ph.D. student, University of Utah  M.A. in economics, University of Denver  B.S. in civil engineering, Chulalongkorn University, Bangkok  I am Thai, a Bangkokian.  "Up" is my "given" name.
  3. 3. The effect of technical progress upon distribution along Kaldor-Kennedy line  The classic question of "the effect of progress upon distribution"  Hicks, Harrod, Robinson, Kaldor, Samuelson and Kennedy.  A post-Keynesian history of thought behind the analysis  Focuses on Kennedy's writings and his suggestion along Kaldor- Kennedy line.  inquiries on  elasticity of substitution between capital and labor  the equivalency of Hicks and Harrod neutral technical change  concerns over value and stylized facts.  A synthesis model constructed from intuitions behind the debate.  JEL Classification: B22, O31, E12
  4. 4. Introduction: effect of progress upon distribution  Charles Kennedy's paper "Induced Biased in Innovation and the Theory of Distribution" (1964)  Paul Samuelson (1965) adopted the theory to comply with economic stylized facts  Neoclassical method  Kennedy disapproved Samuelson's approach.  He had "hoped that the innovation-possibility frontier might be able, so to speak, to swallow up the traditional production function and replace it altogether" (1966, p.442)  There were histories behind this concept more profound than Samuelson's adaptation.
  5. 5. Introduction: effect of progress upon distribution  J. R. Hicks introduced "the effect of progress upon distribution" to modern economics.  The Theory of Wage (1932, p.112)  New terminologies on invention and distribution  labor-saving, capital-saving, neutral inventions  Elasticity of substitution!!! Most importantly  Price substitution between capital and labor  The price of capital is its value or interest rate?  Hicks seemed to suggest it is interest rate.  Tendency of elasticity of substitution less than unity!!  Falling profit (interest) rate
  6. 6. Introduction: effect of progress upon distribution  Joan Robinson followed through  Essays on the Theory of Employment (1937)  Harrod did not like her analysis on long run equilibrium  Robinson used Hicks' neoclassical terminologies  Harrod proposed an alternative definition  To categorize invention  Bypass difficulties on theory of value  Development of the concept of "neutral technical progress"
  7. 7. Introduction: effect of progress upon distribution  After twenty years  Kaldor introduced stylized facts (1957)  constancy on capital/output ratio, rate of profit, and distributive share.  Neoclassical production function failed to produce these results.  Kennedy's "innovation possibility frontier" (1964) follow by Samuelson's adaptation (1965)  We have two concerns!!  Value…...Harrod neutral == Hicks neutral  Stylized facts……constant interest rate?
  8. 8. Technical progress and the value of factors of production  Hicks coined the term "elasticity of substitution"  An increase one factor of production (i.e capital accumulation, surplus labor )  increase the overall output  increase the absolute share of the factor and all other factors.  However, there was no criterion to look at relative share  "Elasticity of substitution" addressed the change in relative share.  Neutral distribution  Elasticity of substitution is unity (equal to 1)  "the increase in one factor will raise the marginal product of all other factors taken together in the same proportion as the total product is raised" (p. 117).  But, marginal product is capital value or interest rate.
  9. 9. Technical progress and the value of factors of production  Invention changes relative distribution share too.  More confusing because a labor, capital, or neutral saving invention  saves the amount of input factor used in production.  increases in unequal amount of factors marginal product  Saving factor input≠ increase in marginal product  In contrast to each other  Furthermore, Hicks mentioned labor-saving invention as dominance in the system.  Robinson and Harrod would argue on the same issue.
  10. 10. Technical progress and the value of factors of production  Joan Robinson debate dwith Harrod on the definition of neutral invention.  Hicks' neutral technical change  "thus if a neutral invention occurs in conjunction with an elasticity of substitution equal to unity, the relative share of labour is unchanged" (1937, p.133)  Harrod criticized her on the measurement of capital.  He suggested instead an alternative definition to characterize invention that was more general.  "divide inventions into those at a given interest rate, and an infinitely elastic supply of capital at that rate, increase, leave unchanged or diminish the length of productive process" (p.329).  Bypassed difficulties on value, and used length of productive process as measurement for capital.
  11. 11. Technical progress and the value of factors of production  Joan Robinson defended her position in a famous paper "Classification of Invention"(1938).  She insisted on using Hicks' conceptual framework  indicated the compatibility of Hicks and Harrod's frameworks  Kennedy came into the same conclusion as Robinson's 13 years later  Harrod neutral technical change was equivalent to Hicks neutral technical change.
  12. 12. Technical progress and the value of factors of production  Kennedy (1961) asked a question whether an investment was needed for technical progress.  His first paper on technical progress  If investment was not needed, the volume of capital can be exactly determined a priori before the effect of invention.  Adopted Robinson's classification and her concept of "real capital"  A neutral invention implied a constant capital/output ratio.  Wage will increase, if relative share of distribution was unchanged.  Furthermore, higher wage will increase the value of real capital when multiply to wage unit.  We have a rise in the value of capital with a rise in wage that leave interest rate constant, which was a definition of neutral technical change
  13. 13. Technical progress and the value of factors of production  Kennedy's multi sectors model(1962).  clarified the dichotomy on Hicks' characteristic of specific kind of invention  the contrast between saving efficiency and an increase in marginal product  specified invention to the investment sector.  An invention in capital producing sector will lower the cost of machine leading to an increase on the number of machine per man.  more volume of capital will be used in the production, but aggregate real capital was unchanged.  This will affect production in the economy as a whole triggering technical progress that raised wage from labor productivity.  It went back to an increase in value of aggregate real capital when multiply to wage.  Neutral technical progress  An increase in value applied to the whole economic system, while it was specific in investment sector that had capital saving invention bias
  14. 14. Technical progress and the value of factors of production  Kennedy proposed in his rejoinder (1962) to Harrod's extended paper on neutral technical progress (1962)  Hicks neutral technical change and Harrod neutral technical change were actually equivalent.  The issue is really complex on value and the characters of invention.  Harrod denied to use labor as measure for capital  "to have labour measure. It implies that the average of money rewards paid to workers never rises…Is it not a little sadistic to seek to deprive men of this increment of pleasure, for the sake of –what?—a mere academic preference. (Harrod 1948, p.29)"
  15. 15. Technical progress and stylized facts  Harrod did not consider  that neutral technical progress explained a rise of labor productivity and wage.  the empirical outcomes of this mechanism were implicit in the analysis of Hicks, Harrod, and Robinson.  Kaldor (1957, 1961 Corfu) was explicit  attracted a bigger audience  constancies in distributive share, capital/output ratio, and the rate of profit.  "technical progress function"
  16. 16. Technical progress and stylized facts  Kaldor (1957, 1961 Corfu)'s "technical progress function"  neoclassical production function "assumed to be a unique relationship between capital and output, which conforms to the general hypothesis of diminishing productivity, but this relationship is constantly shifting with the passage of time" (1961, p. 204).  the tangent of the production function to be maintained on the same slope for every upward shift on production function by technical progress  a circular determination of profit rate from the shift and the move along production function.  "any sharp or clear-cut distinction between the movement along a "production function" with a given state of knowledge, and a shift in the "production function" caused by a change in the state of knowledge is arbitrary and artificial" (1957, p. 959).
  17. 17. Technical progress and stylized facts  Kaldor (1957, 1961 Corfu)'s "technical progress function"  'technical progress function' which postulates a relationship between the rate of increase of capital and the rate of increase in output and which embodies the effect of constantly improving knowledge and know-how, as well as the effect of increasing capital per man, without any attempt to isolate the one from the other." (1961, p. 207)  cut through the 45 degree line pinpointed the stable long run equilibrium of the system, where the rate of accumulation equal to rate of increase in output.  Integrated both a shift in the production function and a movement along the production function into one postulate.  Kennedy criticized Kaldor's formulation
  18. 18. Technical progress and stylized facts  Kennedy criticized Kaldor's formulation  the capital/output ratio was assumed constant a prior.  Kaldor relied on adjustment assumptions of entrepreneur investment behavior  Capital/output ratio adjusts through prospective on profit rate  Kennedy pointed out to many weaknesses  should not use profit rate which supposed to be a long run solution of the model.  an expectation behavior scheme was insufficient  behavior did not guarantee that invention will be labor-saving.  "Mr. Kaldor had already assumed what he was trying to prove" (1962, p.910) constant capital/output ratio
  19. 19. Technical progress and stylized facts  Kennedy was hoping to retain some of Hicks' neoclassical assumptions.  Kennedy chose not to use neoclassical factor price.  "changes in relative factor price are not essential for a theory of induced biased in innovation" (1964, p. 542).  consider both factor price and volume of input factor as one component of share on cost of production.  Economic system will choose bias in innovation that affected the share specific to capital cost and labor cost separately.  However, "innovation possibility" frontier between labor-saving innovation and capital-saving innovation was concave. Tradeoff  Adjustment to equilibrium depended on the choice between labor and capital saving inventions that sustained the optimization on unit cost.  "in the long run the equilibrium values of the distributive shares will be determined by the characteristics of the purely technological innovation possibility function" (1964, p.545).  With Hicks neutral technical change
  20. 20. Technical progress and stylized facts  Kennedy expanded his model to a multi-sectors model of invention.  implicitly addressed complications on accumulation of capital and factor price of capital.  If invention occurred in capital sector, there was an exogenous shock that disturbed innovation possibility frontier of the consumption sector on the increased volume of capital.  The system will adjust to optimize the reduction in unit cost on labor and capital by focusing on endogenous labor-saving invention  adjusted to Harrod neutral technical change with labor-saving invention bias.  Kennedy made use of the equivalency of Hicks and Harrod neutral technical change.
  21. 21. Technical progress and stylized facts  Samuelson (1965, 1966) adopted Kennedy's innovation possibility frontier.  Samuelson insisted on using factor price derived from production function.  neglected the complex structure of value from capital to labor and did not consider the equivalency of Hicks and Harrod neutral  Samuelson's factor share was determined in competitive market outside of the model.  sharp contrast to Kennedy's endogenous determination of factor share on innovation possibility frontier.  Factor price VS factor share
  22. 22. Technical progress and stylized facts  Samuelson still reached similar results to Kennedy.  If innovation possibility frontier was symmetric and factor input ratio did not change (no accumulation)  Hicks neutral technical change and a strange equal dividend of factor share (Kindleberger).  Samuelson would dropped this assumption on fixed factor ratio and "replacing it by the more realistic recognition that capital is 'deepening relative to labor'" (1965, p. 348).
  23. 23. Technical progress and stylized facts  Capital deepening  If elasticity of substitution was less than unity, there was a tendency for labor relative share to rise more than capital.  There had to be a bias on invention that offset diminishing marginal productivity from accumulated capital.  only under Harrod neutral technical change with labor-saving invention.  impossible to retain Hicks neutral technical change.  Interest rate had to rise to counter balance a fall in price of capital to attain constant relative factor share.  interest rate became an endogenous variable.  "fail to account for one of the stylized facts of modern development, namely that the interest or profit rates show no clear trend upward or downward" (Samuelson 1965, p. 348)
  24. 24. Technical progress and stylized facts  Kennedy (1966) objected to Samuelson's used of production function.  inter-correlations that would alter innovation possibility frontier  Samuelson's capital accumulation was not superior to his contingent to constant interest rate.  reconcile Samuelson's capital accumulation Kenndy previous results  same mechanism of his two sectors one product model  the equality of capital deepening and labor augmentation  Capital deepening was already an endogenous result of Kennedy multi sectors one product model.  Harrod neutral technical change was an endogenous result of his model.  "in Kennedy's case, the Harrod-neutral result is not "supposed to come about," it does come about" (1966, p.442).
  25. 25. A synthesis model along Kaldor-Kennedy  Concerns over value and stylized facts  This paper describes a theoretical puzzle of value and stylized facts engaged by our Keynesian predecessor.  There were clues in those writings.  There are gaps in growth and distribution theory on technical progress and stylized facts??  I would like to build a model based on this puzzle and theoretical debates  How to get a 45 degree constant capital/output ratio?  What a synthesis model should be like?  Kennedy's optimization of concave invention possibility frontier  Kaldor's prospective profit behavior on technical progress function
  26. 26. A synthesis model along Kaldor-Kennedy  How to get a 45 degree constant capital/output ratio?  Kennedy's optimization of concave invention possibility frontier  Kaldor's prospective profit behavior on technical progress function  What a synthesis model should be like?  My very loose idea is on  Adjustment through value  Maintain full employment in parody of Jean Baptist Kaldor  Elasticity of substitution between capital and labor  Price of capital is interest(profit) rate  Invention this time did not save factor input. Invention can be assumed implicit as increasing returns function?  Increasing returns  Sum up the movement and the shift of production function in one postulate
  27. 27. A synthesis model along Kaldor-Kennedy  How to get a 45 degree constant capital/output ratio?  Elasticity of substitution between capital and labor  Invention can be assumed implicit as increasing returns function?
  28. 28. A synthesis model along Kaldor-Kennedy  How to get a 45 degree constant capital/output ratio?  I still have to come up with a story…

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