1. The neo-classical model so far examined in full detail assumes, among other things, (a) that firms can be classified into two or several industries, each producing a single output, (b) that capital goods do not suffer wear and tear, or they depreciate by evaporation, (c) that the stock of capital goods can be transferred freely from one firm to another, and (d) that the neo-classical price mechanism does work so as to automatically establish the full employment of capital stocks and the labour force. All these assumptions are unrealistic; they crucially affect the model's capacity to analyse the capital structure of the economy.
According to the neo-classical evaporation treatment of depreciation, capital goods that were produced several years ago and have been subject to wear and tear are considered to be physically equivalent to some smaller amounts of new capital goods of the same kind. This is a useful assumption simplifying the matter, but it does over-simplify the age structure of the available endowments and cannot very well deal with the mortality of the capital goods. It is even self-contradictory, because if an entrepreneur has a certain amount of a capital good that is in its final stage of wear and tear, he will have no capital equipment at the beginning of the next year; while if he has a certain amount, however small, of a new capital good, he may use it for production throughout its whole lifetime. As this extreme case shows, it is generally impossible to find quantitative equivalents, in terms of a new capital good, of capital goods damaged in various degrees from past use. Only by treating capital goods at different stages of wear and tear as qualitatively different goods, can we adequately deal with the age structure of capital stock.
Von Neumann suggested that used capital goods appearing simultaneously with products at the end of the production period could be treated as by-products of the manufacturing process. A process that uses capital equipment is regarded as a process that converts a bundle of 'inputs' into a bundle of 'outputs'; inputs are defined to include capital goods left over from the preceding period and outputs are defined to include qualitatively different capital goods left over at the end of the current period. 1 As long as we use some capital goods which may be