Chapter

Economic Implications of the ‘Revolution’

Michio Morishima

in Theory of Economic Growth

Published in print December 1969 | ISBN: 9780198281641
Published online November 2003 | e-ISBN: 9780191596667 | DOI: http://dx.doi.org/10.1093/0198281641.003.0006
 Economic Implications of the ‘Revolution’

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The neoclassical model so far examined in the book 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 neoclassical price mechanism works so as to establish automatically the full employment of capital stocks and the labour force; however, all these assumptions are unrealistic and crucially affect the model's capacity to analyse the capital structure of the economy. According to the neoclassical 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, but an oversimplification of the age structure of the available endowments, and does not deal well with the mortality of the capital goods. In contrast, 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; this treatment of capital goods requires the discarding of assumptions (a) and (c). Another task assigned to the theory of capital is to find out when a capital good ceases to be used and is replaced by a new one; in growth theory, this problem is especially important, and the von Neumann device of regarding capital goods at different ages as different goods allows the endogenous determination of their economic lifetime simultaneously with other economic unknowns (in fact, capital goods die economically and become free goods when they become unprofitable). The different sections of the chapter look at technological aspects of the von Neumann revolution, his specification and symbolization of production processes, two interpretations of the original von Neumann model (genuine and bastard), the introduction of consumer choice, equilibrium within a period, the working of the system over time (the temporary equilibrium approach versus balanced growth approach), a ‘Pasinetti’ or ‘anti‐Pasinetti’ solution, and the generalized Leontief model (revisited).

Keywords: balanced growth; capital goods; capital stocks; capital structure; consumer choice; depreciation; economic growth; employment; general equilibrium; growth models; growth theory; labour; W. W. Leontief; Leontief model; neoclassical economics; J. von Neumann; output; L. L. Pasinetti; prices; production processes; products; temporary equilibrium; wear and tear

Chapter.  14078 words. 

Subjects: Economic Development and Growth

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