Transcript Manners of interpretation of capital/profit and labor/wage in NEC

NEC PRODUCTION AND
DISTRIBUTION THEORY
1.
a)
b)
c)
Three main manners of interpretation of
capital/profit and labor/wage in NCE
Psychological interpretation
Capital as effect of „waiting”, of postponing
(shifting in time) instaneous consumption of
goods/income. Profit as the reward for „waiting”
Profit as the reward resulting from the difference
between the value (utility) of current (present) and
future goods
Supply of labor (by households and individuals)
and wages as categories related to the utility and
disutility of labor
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Manners of interpretation of
capital/profit and labor/wage in NEC
Capital and profit as categories occuring in the so called
•
economic dynamics
Statics
Resources of capital and labor are given with regard to
quantity and qualitative features, production technologies and
production costs are fixed (do not change)
1.
Prices of final goods are fixed
2.
There occur no profits: zero profit hypothesis
Dynamics: all above mentioned conditions/constraints are subject
to change. In particular, there appear new technologies
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Manners of interpretation of
capital/profit and labor/wage in NEC
1.
a)
b)
c)
Capital and profit as catergories occuring in the
so called economic dynamics (cont.)
Profit (rate of interest) as the reward for economic
risk
Risk as immanent feature of physical capital
formation and modernization process
Profit as the function of time of (physical)
investment duration
Diversification of rate of profit as resulting from risk
diversification
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Manners of interpretation of capital/profit
and labor/wage in NEC
Capital and profit as categories occuring in the so
called economic dynamics – cont.
2.
Profit as the reward for innovations (J.A.Schumpeter)
a)
Equilibrium /statics: no profits, no entrepreneurs,
manufacturing based on routine methods
b)
Evolution/development: there appear innovations and
enterpreneurs (enterpreneur=innovator)
c)
Origin of profit: difference between social marginal
costs (=market price) and individual (in a given
enterprise) marginal costs (of production, distribution)
d)
Imitation (diffusion) of innovation, gradual
disappearence of profits and the return to statics
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Manners of interpretation of capital/profit
and labor/wage in NEC
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2.
a)
b)
c)
NEC production and distrtibution theory
Theory of marginal productivity of production
factors (MPT) and marginal distribution theory
(MDT) as the main foundation of neoclassical
microeconomics
Law of diminishing marginal productivity (LDMP)
(law of diminishing returns on production factors)
Universal nature of MPT/MDP
Productive and value-generating character of all production
factors
Marginal product of a given production factor (MP) as the
measure of (1) its share (contribution to) in the value of
manujfactured (extracted) goods, (2) foundation of its reward
and (3) base for its market price
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Manners of interpretation of capital/profit
and labor/wage in NEC
NEC production funkction - PF as basic model of
neoclassical production and distribution theory
1.
Definition: general and neoclassical
General: quantitative manner of defining the relation between
the product and inputs of production factors which are required
for its manufacturing (extracting)
The very nature of that relation is determined by the technology,
understood here as the so called abstractive technology
Abstractive technology: set of technical characteristics (features)
of production function:
1.
Capital intensity of technology
2.
Scope of substitution between production factors (in
particular: labor for capital and vice versa)
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3.
Technologically determined economies of scale
Manners of interpretation of capital/profit
and labor/wage in NEC
NEC production function – PF as basic model of...
Definition and features of NEC PF
P = F(x1,x2,…xn)
x1,x2,…xn
homogenous production factors
P = F(x1,x2,…xn) 0 product can not be negative
P = F(K,0) = F(0,L) = F(0,0) = 0 (complementarity of
production factors; K – capital, L – labor)
MPK = f'K(P); MPL = f'L(P)– marginal product of K and L
MPK 0; MPL 0 ; marginal products have to be positive
(economic sense: rationality of economic behavior)
f’’K(P)<0, f’’L(P)<0 ; Law of DMP
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Manners of interpretation of capital/profit
and labor/wage in NEC
NEC production function – PF as basic model of...
a) Substituability of L and K, notion of capital vintage and
vintage PF, and the interpretation of technical/technological
progress (change) in the NEC production theory
1. Full substituability (ex ante and ex post): labor can be fully
substituted for capital and vice versa, the so called disembodied
technological progress, residual and exogenous (with regard to
economy) character of technological progress
2. Limited substituability (takes place only ex ante, labor is not
substituted for capital, and vice versa, ex post); there occur capital
vintages and, subsequently, the vintage production factor, technological
progress can be both embodied (within a given capital vintage) and
disembodied; there appears the problem of the so called life time of
(physical) capital
3. No substituability (K/L relation is fixed/rigid both ex post and ex
ante)
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4. „Cambridge contra Cambridge” controverse (NEC versus PKE)
Manners of interpretation of capital/profit
and labor/wage in NEC
Basic analytical forms of NCE PFs
Main criteria for distinguishing types of PFs
1. Technological economies of scale: interdependence
between the quantitative increase of product and
the increase of inputs of production factors
P = F(aK, aL); F= arF(K,L);
r – level of scale
economies
r= 1 costant; r>1 increasing; r<1 decreasing
Economies of scale = grade of homogenousness of PF
2.
Elasticity of substitution (L for K or vice versa) : relation
between marginal rate of substitution of L for K (or K for
L) and capital intensity of technology (K/L)
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Manners of interpretation of capital/profit
and labor/wage in NEC
Basic analytical forms of NCE PFs
Main criteria for distinguishing types of PFs
2. Elasticity of substitution of L for K
MRSK/L = ðK/ ðL , p>0, k = K/L
MRSK/L = p kδ δ>0 elasticity of substitution of L for K
Economic sense of elasticity of substitution:
Ratio of relative change in MRSK/L to relative
change in K/L
δ = d(MRSK/L)/ MRSK/L : dk/k
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Manners of interpretation of capital/profit
and labor/wage in NEC
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2.
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3.
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General features of NEC distribution theory
(MDT)
Strictly related to MPT
Technical character: shares of production factors
in (manufactured/extracted) product are determined
by;
Changes in the quantity of production factors (and, implicitly,
their marginal productivity)
Possibilities of technologically determined susbstitution
betweeb production factors
Social and institutional condtions do not affect the shares of
production factors
In the equlibrium, prices of goods are equal to their marginal
production (distribution etc.) costs > zero profit hypothesis 11
Manners of interpretation of capital/profit
and labor/wage in NEC
Let’s assume, there is the
macroeconomic NEC PF
P= f(K,L)
If it is homogenous of grade
1 (constant economies to
scale), it is equivalent to the
function
y = f(k);
Where: y=P/L (labor productivity
k=K/L (technical equipment
of labor, capital intensity of
technology)
y  f (k )  r  f ' (k );
y  rk  w
w  y  rk  f (k )  kf ' (k )
dr / dk  f '' (k )  negative
dw / dk  f ' (k )  f ' (k )  kf '' (k ) 
 kf '' (k )  positive
dr dw
:
 k  negative
dk dk
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Manners of interpretation of capital/profit
and labor/wage in NEC
Conclusions from the model
1.
2.
3.
4.
Wage rate changes directly (proportionally) to changes in K/L
ratio which means that in the process of capital accumulation
(economic growth) the reward of laboreres grow
Rate of interest (profit) changes inversely to changes in K/L
ratio. In the process of capital accumulation, the unit reward of
capital diminishes. It does not necessarily means that the
share of capital in social product falls. The tendency of capital
share to diminish may be effectively compensated by the
substitution of labor for capital, as well as by technological
progress (given specific features of that substitution and
progress).
Fair distribution is when the production factors are rewarded
accordingly to their marginal products
Fair distribution is taking place when the conditions of perfect
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competition are fulfilled.
Manners of interpretation of capital/profit
and labor/wage in NEC
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Manners of interpretation of capital/profit
and labor/wage in NEC
Analytical forms of PF
COBB-DOUGLASA PF
1.
2.
3.
Constant economies
to scale
Constant and equal to
1 elasticity of
substitution
Constant elasticities of
product with respect to
K and L
P = F(aK, aL) F= aF(K,L)
r=1
MRSK/L = p kδ δ=1
P  AK L
  E P / K ;1    E P / K

1
  (1   )  1  r
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Manners of interpretation of capital/profit
and labor/wage in NEC
P
MPK  AK L  ...
K
 1
1
MPL  AK L

1.
2.
(1 ) 1
P
 ...(1   )
L
Marginal product of capital is proportional to its
average product
Marginal product of labor is proportional to its
average product
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Manners of interpretation of capital/profit
and labor/wage in NEC
P
K  P
K
P
QL  MPL L  (1   ) L  (1   ) P
L
E P / K    QK / P; E P / L  1    QL / L
QK  MPK K  
1.
2.
3.
QK and QL - respectively, product generated by capital and labor,
whereas QK/P oraz QL/P stand for the shares of capital and labor in
the social product
Conclusion: in the Cobb-Douglas PF the elasticities of product with
respect to capital and labor are equal their shares in the social
product and remain constant
Cobb-Douglas PF may take a generalized form in which it is subject
to any positive economies of scale (EP/K + EP/L = r #1; r>0)
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Manners of interpretation of capital/profit
and labor/wage in NEC
Assumption which is underlying the Cobb –Douglas
PF (elasticity of substitution constant abd equal to 1)
may be generalized
If we assume that the elasticity of substitution (δ) is
constant but not necessarily equal to 1, we receive a
more general class of production functions. These
are the CES (Constant Elasticity of Substitution)
PFs
What is the conomic sense of δ : it is the ratio of
relative change in MRSK/L (marginal rate of
substitution of L for K) to relative change in K/L
(capital intensity)
δ = d(MRSK/L)/ MRSK/L : dk/k
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Manners of interpretation of
capital/profit and labor/wage in NEC
Marginal rate of substitution of labor for capital (MRS)
may be expressed as the relation of marginal labor
product (MPL) to marginal capital product (MPK).
For macroeconomic production function, it is the
relation of unit wage (w) to unit reward of capital (r)
K
MPL w
k ;p

L
MPK r
d ( MRSk / l ) dK dp dk

:

:
MRSK / L dL
p k
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Manners of interpretation of
capital/profit and labor/wage in NEC
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2.
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Thus, in macroeconomic approoach, the elasticity of
substitution measures how the relation of unit rewards
or prices of production factors changes when the
relative „saturation” of economy with capital (as
described by the K/L ratio) increases or decreases.
δ = 1; shares of labor and capital in the social product
remain constant (Cobb-Douglas PF)
δ>1; share of labor increases, share of capital
decreases (CES PFs)
δ<1; share of labor decreases, share of capital
increases (CES PFs);
Elasticities of product with respect to K and L are no
more constant (fixed) in the CES PFs
Cobb-Douglas PF is a special case of CES PFs
Variable Elasticity of Substitution (VES) PFs
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