[OPE-L:2927] Re: Value of LP // Real Wage

Gil Skillman (gskillman@wesleyan.edu)
Fri, 30 Aug 1996 13:40:17 -0700 (PDT)

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In response to the following from me,

>> Second, a question. Duncan, do you think that English Cambridge must
>> necessarily deny the principle of factor substitution in production (in the
>> absence of technical change)? If so, how could they?

Duncan writes:

>This is a complicated issue. My impression was that the Cambridge school
>was very skeptical about substitution, both because of their attack on the
>idea that profit was a measure of the "scarcity" of capital, and because
>many of them opposed wage-cutting "solutions" to unemployment.

Don't both of these arguments put the cart before the theoretical horse?
Putting aside the "reswitching" problem (which does not challenge the
*possibility* of factor substitution), a higher rate of interest necessarily
increases the relative opportunity cost of capital-intensive production
techniques, whatever is thought about what profit measures or what should be
done about unemployment (and if unemployment is understood in the Keynesian
sort, the notion that wage cutting is a "solution" is possibly a _non
sequitur_), and thus induces factor substitution to the extent continuously

These objections thus cloud the real issue, which concerns the empirical
relevance of the assumption of variable proportions technology. So if these
are the reasons the English Cambridge rejects factor substitution, then they
have even less going for them than I thought.

> There is
>surely nothing logically inconsistent about assuming no substitution (and
>maybe it's quite close to the truth over short time horizons).

Agreed. But factor substitution is a feature of "long-term" time horizons;
does anybody believe that fixed proportions applies universally as a
description of reality within such a horizon?

In solidarity, Gil