Capital and Time: A Neo-Austrian Theory

By J. R. Hicks | Go to book overview
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VIII The Fixwage Path


I proceed in this chapter to work out the Fixwage path in the Standard Case. I begin with this, rather than the Full Employment path, as it is somewhat easier. Even so, many readers will prefer to read this chapter in conjunction with sects. 9-11 of the Appendix, where the argument is formally set out in mathematical terms.

We begin (since we are to analyse a Traverse) with a steady state under an old technique. Then at time 0 (which is the start of year 0) there is a change in technology, by which new processes become available that were not available before. At the given wage (carried over from the old steady state and remaining inflexible) there will be some particular process which is now the most profitable; we may suppose that it is one of the new techniques, since otherwise the change would be ineffective. Since the wage is fixed and remains fixed, that same new technique will continue to be dominant, throughout the Traverse which is to be discussed. Thus there is no more than a single switch, from the old technique (C*) to the new technique (C).

Since it is profitable to switch from C* to C, the rate of return on C must be higher. The rate of interest will thus rise, from r* to r. Since the wage is fixed, the rate of interest will remain at r, so long as there is no further change in technology.

What remains to be established is the growth of the system, in particular the path that will be followed by employment (AT). We are assuming Full Performance, so this depends on saving. What assumption we make about saving is crucial for the determination of the path.

There are various possible assumptions. To work out the path for each separately would be laborious, and unnecessary. It will suffice to work it out for some particular assumption, indicating subsequently what changes would have to be made if that assumption were varied.

What assumption we choose for this purpose can be decided by convenience. For the analysis of steady states, the most convenient


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