NEC PRODUCTION AND DISTRIBUTION THEORY

NEC PRODUCTION AND DISTRIBUTION THEORY
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

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) Prices of final goods are fixed There occur no profits: zero profit hypothesis Dynamics: all above mentioned conditions/constraints are subject to change. In particular, there appear new technologies

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 (inherent) 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 Profit as the reward for uncertainly-bearing and not of risk-taking in a business (F. Kahn)

Capital and profit as categories occuring in the so called economic dynamics – cont. Profit as the reward for innovations (J.A.Schumpeter) Equilibrium /statics: no profits, no entrepreneurs, production (extracting, manufacturing) based on routine methods Evolution/development: there appear innovations and entrepreneurs (entrepreneur=innovator) Innovations vs. inventions and sources of financing innovations

Innovations are profit driven but opportunities for innovations may result both from changes in supply and demand Origin of profit: difference between social marginal costs (=market price) and individual (in a given enterprise) marginal costs (of production, distribution) Imitation (diffusion) of innovation, gradual disappearence of profits and the return to statics Evolution/development as a process of creative destruction

NEC production and distrtibution theory – general characteristics Theory of marginal productivity of production factors (marginal productivity theory/MPT) and marginal distribution theory (MDT) as the main foundation of neoclassical microeconomics (interelated character of MPT and MDT) Law of diminishing marginal productivity (LDMP) (law of diminishing returns on production factors) Origins of LDMP and MPT/MDP and their universal nature Productive and value-generating character of all production factors (criticism of labour value theory)

Assumption of common microeconomic rationality of producers/suppliers of goods as a „hidden foundation” of LDMP Static (short-term) character of LDMP Marginal product of a given production factor (MP) as the measure of its share (contribution to) in the value of manufactured (extracted) goods, (2) foundation of its reward and base for its market price 3. Micro- vs. microeconomic interpretation of LDMP and its potential outcomes from the point of view of international competition (competitiveness)

NEC production function - PF as basic model of neoclassical production and distribution theory 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), as well as between inputs 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: Capital intensity of technology Scope of substitution between production factors (in particular: labor for capital and vice versa) Technologically determined economies of scale

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 Homogeneity implies possibilities of substitution between factors (substituability) 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) Complementarity means that there are limits to substitution 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 (diminishing returns)

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 (possible ex ante and ex post): labor can be fully substituted for capital and vice versa, it implies the so called disembodied technological progress, which is residual and exogenous with regard to the economy 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) 4. „Cambridge contra Cambridge” controverse (NEC versus PKE)

Basic analytical forms of NCE PFs Main criteria for distinction of analytical types of PFs 1. Technological economies of scale: interdependence between the quantitative increase in product and the increase in inputs of production factors P = F(aK,aL); F= arF(K,L); r – level of scale economies (a>0) r= 1 constant; r>1 increasing; r<1 decreasing Economies of scale = grade of homogeneity of PF 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 = k)

Basic analytical forms of NCE PFs Main criteria for distinguishing types of PFs 2. Elasticity of substitution of L for K MRSK/L = dK/ dL , 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

General features of NEC distribution theory (MDT) Strictly related to MPT Technical character: shares of production factors in (manufactured/extracted) product are determined by productive and technological conditions (features) of the economy: Changes in the quantity of production factors (and, implicitly, their marginal productivity) Possibilities of technologically determined susbstitution between 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

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) Solow’s production function

Conclusions from the model Wage rate changes directly (proportionally) to changes in K/L ratio which means that in the process of capital accumulation (economic growth) the unit reward of laborers grows 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 competition are fulfilled.

Analytical forms of PF COBB-DOUGLAS PF 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

Marginal product of capital is proportional to its average product Marginal product of labor is proportional to its average product

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 to 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)

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

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)

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

NEC PRODUCTION AND DISTRIBUTION THEORY

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NEC PRODUCTION AND DISTRIBUTION THEORY

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