The Online Library of Liberty

A project of Liberty Fund, Inc.

• Acknowledgements
• Part One: Introduction
• Walter E. Grinder, In Pursuit of the Subjective Paradigm: Walter E. Grinder
• Austrian Economics In the Present Crisis of Economic Thought
• Part Two: Setting the Stage
• The Significance of the Austrian School of Economics In the History of Ideas
• The Role of Expectations In Economics As a Social Science
• Professor Shackle On the Economic Significance of Time
• The Science of Human Action
• Model Constructions and the Market Economy
• Part Three: the Market Process
• Some Notes On Economic Thought, 1933–1953
• Methodological Individualism and the Market Economy
• Economics As a Social Science1
• Ludwing Von Mises and the Market Process
• Part Four: Problems In Macroeconomic and Capital Theory
• Complementarity and Substitution In the Theory of Capital
• Mrs. Robinson On the Accumulation of Capital
• Sir John Hicks On Capital and Growth: (review Article)
• Sir John Hicks As a Neo-austrian: (review Article)
• A Reconsideration of the Austrian Theory of Industrial Fluctuations
• Part Five: On Economic Policy
• Causes and Consequences of the Inflation of Our Time
• The Market Economy and the Distribution of Wealth
• Cultivated Growth and the Market Economy
• Appendix: Economic Writings of Ludwig M. Lachmann

Mrs. Robinson on the Accumulation of Capital

1.

In the literature of this decade, not otherwise remarkable for the quality of its economic writing, Mrs. Robinson's latest book stands out as a landmark.1 It is not merely the most elaborate contribution to post-Keynesian literature to date. It has, of course, all the qualities of rigour, lucidity and sophistication which we have come to expect from its author. But in certain respects it is quite unique.

The author, deliberately renouncing the instruments of marginal analysis, attempts to view the problems of economic progress from a classical perspective; her theme is the conditions of continuous expansion. Most of the analysis is conducted with the help of a model of a high degree of abstraction. But Mrs. Robinson has, as few other model-builders have, a flair for realism. She takes great care to tell the reader which are the important features of reality excluded from the model. From this endeavour to combine a measure of realism with a fairly high degree of abstraction there arise certain problems, as we shall see. But in the interest of more palatable economics than we have had of late, it is to be hoped that Mrs. Robinson's candour in stressing the limitations of her model will find many imitators.

The title of the book is, of course, borrowed from Rosa Luxemburg. Of its main problem the author says that it presented itself to her as “The Generalisation of the General Theory, that is, an extension of Keynes's short-period analysis to long-run development.” In spite of these appearances, however, Mrs. Robinson is neither a Keynesian nor a Marxist, but a latter-day Ricardian.

Reprinted from South African Journal of Economics 26 (June 1958).

Keynes, of course, was mainly concerned with underemployment equilibrium, a short-run problem, whereas our author deals with the long run. Keynes, she says, “left a huge area of long-run problems covered with fragments of broken glass from the static theory and gave only vague hints as to how the shattered structure could be rebuilt.” But Mrs. Robinson does not accept at least two major hints Keynes gave to his disciples for the long run. She explicitly rejects the “Psychological Law” of the declining marginal propensity to consume which, rather curiously, she terms the “Liberal underconsumption thesis,” and which she ridicules as “the inevitable destiny of prosperous economies to drown themselves in cream.” She also points out that a “lack of investment opportunities” is not a necessary result of rapid capital accumulation, but a possible result of a decline in the intensity of competition, while Keynes, of course, assumed perfect competition throughout. Mrs. Robinson's status as a Keynesian must, therefore, remain in doubt.

As a Ricardian, Mrs. Robinson embraces a cost-of-production theory of value, but not a pure labour theory. “Interest enters into the cost of capital goods both in respect of the period of gestation when equipment is being constructed and the pipe-line of work-in-progress filled up, and in respect of the period of the earning life of equipment,” a sentence which would, of course, be anathema to Marxists.

A wish to return to the classical mode of thought implies, of course, a rejection of much of modern economics which is so largely concerned with human choice and decision. In Mrs. Robinson this rejection is quite deliberate. “Economic analysis, serving for two centuries to win an understanding of the Nature and Causes of the Wealth of Nations, has been fobbed off with another bride—a Theory of Value.... Faced with the choice of which to sacrifice first, economists for the last hundred years have sacrificed dynamic theory in order to discuss relative prices.”

One may question the truth of this statement since modern economics is as much concerned with relative quantities as with relative prices. One may also wonder whether it is possible to discuss economic progress while ignoring not merely relative prices but also, for instance, intersectional shifts in output and resources. But such criticism would here be out of place. In the book Mrs. Robinson obviates it by assuming all output to be homogeneous. And although, as we shall see, this assumption gives rise to a host of difficulties, we must not question the level of abstraction as such on which an author chooses to conduct the argument.

In the next section an attempt will be made to present a brief and concise outline of the central argument of the book. The following two sections of this paper are devoted to critical reflections on what appear to be crucial issues arising from this argument. In the concluding section certain methodological aspects of the attempt to revive the classical style of analysis in the midst of the twentieth century will be examined.

There can, of course, be no question of doing justice to such a book within the space at our disposal. We shall have to ignore whole sections of it and some important strands of thought, and concentrate on what appear to us to be the crucial issues. The reader, we trust, will not allow himself to be misled by the preponderance of critical matter in this paper. In the first place, an argument such as this, fenced in as it is by such a formidable set of assumptions, can hardly be discussed adequately without criticism. But, secondly, it is precisely because the issues raised are so crucial for our science and, thirdly, because the book is in any case bound to become a focus of widespread discussion, that it requires to be subjected to close scrutiny. But on no account, we hope, will the reader allow himself to be deterred from reading the book itself. It is worth it.

2.

In the classical manner Mrs. Robinson's main concern is with the conditions of progress through capital accumulation, and in particular with its origin in and effects on the distribution of incomes between wages and profits. Her chief problem is whether, and in what circumstances, continuous progress under “the capitalistic rules of the game” is possible. These circumstances are enshrined in a model first set out in Chapter 7 and subsequently modified in many respects. “With the aid of this model we shall examine the problems of accumulation over the long run.... Our chief concern is with the relation between wages and profits, and the argument is conducted in terms of (1) the relations of the stock of capital to the available labour force, (2) the influence of competition, and (3) the technique of production.”

At first our author assumes that all profits are saved and all wages consumed; there are, at this stage, no other incomes. The rate of accumulation is therefore identical with the rate of profit on capital and, if we assume a constant capital-output ratio, with the rate of expansion of output as a whole.

The assumptions embodied in the model engender a high degree of abstraction. All index number problems are eliminated by assuming complete homogeneity of labour and output. A “given technique of production” means fixed coefficients of production. The stock of capital goods “required to produce a given flow of output is rigidly determined by the technique in operation. Since commodities are produced in rigid proportions, the stock of equipment of all kinds must be in appropriate proportions.” Technical progress thus means that the cost per unit of the composite commodity of which all output consists is reduced. The influence of variable expectations is eliminated by the assumption “that at every moment entrepreneurs expect the future rate of profit obtainable on investment to continue indefinitely at the level ruling at that moment; that they expect the rate of technical progress (which may be nil) to be steady; and that they fix amortisation allowances for long-lived plant accordingly. When something occurs which causes a change, we assume that expectations are immediately adjusted, and that no further change is expected.” There are at first only entrepreneurs and workers in the economy, though rentiers and landlords enter later on. The economy is a closed system and there are no economies of scale.

Superimposed on this model there is another set of assumptions determining what Mrs. Robinson calls a golden age, a moving equilibrium of the economic system as a whole. It is thus described: “When technical progress is neutral, and proceeding steadily, without any change in the time pattern of production the competitive mechanism working freely, population growing (if at all) at a steady rate and accumulation going on fast enough to supply productive capacity for all available labour, the rate of profit tends to be constant and the level of real wages to rise with output per man. There are then no internal contradictions in the system.” It is important to note that in this moving equilibrium not only does the rate of profit tend to be constant and uniform for all industries, but “total annual output and the stock of capital (valued in terms of commodities) then grow together at a constant proportionate rate compounded of the rate of increase of the labour force and the rate of increase of output per man.” In other words, the capital-output ratio remains constant. Capital per worker increases, but output per worker also increases in such a fashion as to leave the capital-output ratio constant through time.

We are, of course, repeatedly warned that the conditions of a golden age are unlikely to be found in reality, but, says our author, “The persistence of capitalism till today is evidence that certain principles of coherence are imbedded in its confusion.”

How is the rate of progress linked to the distribution of incomes? The answer is provided by the well-known Keynesian maxim that while workers spend what they earn entrepreneurs earn what they spend. “Thus each entrepreneur is better off the more investment his colleagues are carrying out. The more the entrepreneurs and rentiers (taken as a whole) spend on investment and consumption, the more they get as quasi-rent.”

But there is an upper limit to the amount of investment possible at each moment which is set by what our author calls the inflation barrier. “Higher prices of consumption goods relative to money-wage rates involve a lower real consumption by workers. There is a limit to the level to which real-wage rates can fall without setting up a pressure to raise money-wage rates. But a rise in money-wage rates increases money expenditure, so that the vicious spiral of money wages chasing prices sets in. There is then a head-on conflict between the desire of entrepreneurs to invest and the refusal of the system to accept the level of real wages which the investment entails; something must give way. Either the system explodes in a hyper-inflation, or some check operates to curtail investment.”

On the other hand there is no minimum level of profits as such. Profits are the result, not the cause of investment. But for the inflation barrier “accumulation is limited by the energy with which entrepreneurs carry it out” and nothing else.

Under the assumptions set forth the accumulation of capital by making capital less scarce and labour scarcer tends to raise real wages unless it is accompanied by such an increase in population that capital per worker cannot increase, or actually decreases. But the extent to which this happens depends upon the degree of competition. “The mechanism which ensures that actual output expands more or less in step with the rise in potential output due to technical progress is the competition which keeps prices in line with costs, and so raises the real-wage rate with productivity.” When this does not happen, when entrepreneurs do not permit prices to fall as productivity rises, the economy is in danger of falling into stagnation, since entrepreneurs can succeed in keeping prices high only by keeping output low. Once prices have become inflexible “the main defence against the tendency to stagnation comes from pressure by trade unions to raise money-wage rates. When they succeed, the stickiness of prices tells in their favour, for entrepreneurs may prefer (within limits) to accept a cut in margins rather than to alter their price policy. Insofar as this occurs, real-wage rates rise. If by this means real wages can be made to rise as fast as output per man the root of the trouble is cut, and the economy can accumulate capital and increase total product at the rate appropriate to the pace at which technical improvements are being introduced just as though competition were still active.”

But though such a “high wage economy” is better than stagnation it is far from being an ideal. “A kind of live-and-let-live system is then established, and provided that real wages are rising somewhat (over the long run) no one is concerned to inquire if they might be made to rise faster by a more rapid rate of accumulation.”

What happens if output increases less than capital so that the capital-output ratio increases? The rate of profit will then tend to fall and entrepreneurs substitute capital for labour by choosing a more capital-intensive method of production. While, if capital accumulates faster than the population grows, the distribution of incomes shifts in favour of labour, this process will also be arrested when entrepreneurs choose a more capital-intensive technique. “They cross the mechanisation frontier” in Mrs. Robinson's terminology. “Our argument brings out the fact that it is accumulation as such which tends to raise wages, while mechanisation checks the fall in the rate of profit that would occur if accumulation continued in the absence of scope for mechanisation.”

The argument is also significant in another way. It shows how far Mrs. Robinson has moved away from her Keynesian moorings. “A failure of accumulation to be maintained in actual economies is often attributed to a ‘lack of investment opportunities’ but, in a technical sense, there is never a lack of investment opportunities till bliss has been reached. There is always a use for more capital so long as it is possible to raise the degree of mechanisation.... The conception which underlies ‘the failure of investment opportunities’ is rather that the capitalist rules of the game create a resistance to a rise in the ratio of capital to labour when it entails a fall in the rate of profit.”

The essence of Mrs. Robinson's thesis is that accumulation of capital raises real wages. Where it is accompanied by sufficient technical progress, capital-output ratio and rate of profit remain constant. Expansion then follows the path of a golden age. Where this is not so and output grows less than capital the rate of profit will tend to fall. Entrepreneurs then take evasive action by more intensive methods of production (“capital deepening”) which check the rise in real wages. If they do not, if they reduce investment instead, they will thereby reduce their own earnings since they are the people who earn what they spend.

The model is later on modified in many ways which do not affect the validity of the main argument. Allowance is made for the fact that a part of profits is consumed. Hence, the rate of profit now exceeds the growth ratio of the economy by the proportion of their incomes capitalists devote to consumption. In Marxian terms, “The prices of consumption goods exceed their wages costs to a sufficient extent to permit of capitalists' consumption, as well as investment.”

Other sections of the book are devoted to the short period, “a period within which changes in the stock of capital can be neglected but output can alter,” to finance, land and various other topics. But the main outline of the analysis as described above is not affected by arguments presented in these sections.

3.

The notion of a stock of capital the growth of which accompanies the growth of output is crucial to Mrs. Robinson's analysis. It is also crucial that “over the long run the stock of capital corresponds more or less to the sum of all the net investments made” (p. 334). We shall call this the integrability condition. The author says that “it is broadly true” that this condition holds in reality. Evidently where this is so there can be no capital change other than investment and disinvestment. There can be no capital gains and losses, or at least, when they occur they are without economic significance. The model has no room for them. The question arises, however, whether the integrability condition is consistent with the conditions of technical progress, a question we shall take up in the following section.

But how can we measure capital? Our author emphasises that “the absence of tranquility makes it impossible to define precisely the meaning of a quantity of capital.” How, then, can we make sense of the notion of a stock of capital in a changing world?2 The answer is that this is just the purpose which the notion of a golden age is meant to serve: it enables us to combine “tranquillity” with change.

It is well known why in a world of unexpected change the quantity of capital is a meaningless notion, but in a golden age all change is expected change. In a stationary state the whole problem would not arise. Here all capital values can be ascertained without ambiguity since all capital goods are worth their cost; cost values and discounted earning values are identical. But our author is concerned with progress. The real significance of her golden age concept is that it denotes a moving equilibrium, a dynamic counterpart to the stationary state, the latest version to date of Cassel's “Uniformly Progressive Economy” of forty years ago, in which all those relationships the constancy of which enables us to determine the quantity of capital in a stationary state remain constant, yet are projected on to a dynamic world. In this moving equilibrium entrepreneurs always discount future earnings at the rate of profit which has obtained in the past, and there is only one such!

The reader is scarcely surprised to learn that in her endeavour to retain the benefit of stationary conditions when dealing with a world of change, our author soon runs into trouble. In the conditions of a golden age, to be sure, it is possible to measure the quantity of capital since “the value of the stock of capital is then determined by the rate of profit ruling in the given golden-age conditions.” But how can we compare stocks of capital in economies at different stages of development, each of them in a golden age of its own, where the over-all homogeneity postulated for our model does not exist? “One set of difficulties flows from this difference in the composition of output in the different economies. Another set of difficulties flows from the fact ... that a different wage rate in terms of output entails different relative values of commodities, capital goods and labour time, so that there is no simple unit of value in which to reckon.”

In the chapter on “The Evaluation of Capital,” perhaps the most penetrating discussion of this forbidding subject in the literature, our author, having at length expounded all these difficulties, rather surprisingly concludes that the problem of the measurement of capital is really a purely verbal one. “The problem of measuring capital is a problem about words. The capital is whatever it is, no matter what we call it. The reason for taking so much trouble about how we describe it is to save ourselves from being tricked by our own terminology into thinking that different things are alike because they are called by the same name. Since no way of measuring capital provides a simple quantity which reflects all the relevant differences between different stocks of capital goods we have to use several measures together.”

Among the several measures of capital now introduced by our author, it becomes apparent that the key-concepts are productive capacity (“an outfit of capital goods that can be used by the appropriate quantity of labour to produce a flow of output specified in physical character and in its future time-pattern”) and the real-capital ratio (“the ratio of capital reckoned in terms of labour time to the amount of labour currently employed when it is working at normal capacity”). The latter, we are told, “corresponds most closely to the conception of capital as a technical factor of production,” and is really the measure of the degree of mechanization or capital intensity. We are warned, however, that this relapse into the labour theory of value does not mean that all labour time is homogeneous: the two kinds of labour time expressed in this ratio are not in pari materia; “one consists of past labour time, compounded at interest, embodied in a stock of capital goods, the other is a flow per unit of time of current labour.” This, of course, is the heresy Rosa Luxemburg would never forgive.

The notion of productive capacity has no unambiguous meaning unless the output produced is homogeneous. This fact not merely precludes us from introducing into the model new products, a normal feature of economic progress. How are we to compare output in different economies with different rates of investment? Mrs. Robinson candidly admits that “this comparison has an exact meaning only for economies in a state of zero net investment. When, as is generally the case, accumulation is going on at different rates in economies using different techniques, the composition of output (which includes increments of capital goods) is different in each, and the comparison is subject to the same index-number ambiguity that we encountered above.” It is, of course, common knowledge that international comparisons of production index figures make little sense.3 To say that the growth of productive capacity is a measure of economic progress is therefore not to say very much, except in a world of homogeneous output.

What about the other key-concept, the real-capital ratio, our measure of the degree of mechanization? In a golden age it remains constant along with the capital-output ratio and the rate of profit since productivity increases uniformly throughout the system. But technical progress may affect the relative scarcity of labour and capital and thus the rate of profit. When this happens, and in general whenever entrepreneurs are impelled to change the degree of mechanization, the real-capital ratio changes in a situation in which the change in the rate of profit makes it impossible to compare the value of capital assets before and after the change. We have here a transition from one golden age to another, that is, from one equilibrium to another, a problem in comparative statics. But where is there a system of coordinates which, unaffected by the change, can serve to measure it?

To most economists this would be just another instance of the impossibility of comparing the quantity of capital in two different equilibrium positions. But our author is undaunted. She replaces the set of assumptions defining the golden age economy by another set of special assumptions “designed to make it possible to analyse the transition from one technique to another as though it took place without any disturbance to tranquillity. The argument, for this reason, is somewhat fanciful, but setting it out in this way enables us to see the workings of the mechanism, which are hard to follow in the hurly-burly of short-period disequilibrium in which it actually operates.”

By then, however, the moment has come when even the most patient reader cannot but ask himself whether the game is worth the candle. Does an argument confined by such stringent abstractions throw any light at all on the industrial world as we know it? Why do we have to measure capital in circumstances in which we know that it cannot be done?

Mrs. Robinson, as a Ricardian, would probably reply that in labour time we have an “objective” measure of capital embodied in the real-capital ratio which we can compare before and after the change. There is, to be sure, the problem of adding up labour hours spent in different years and paid for at different wage rates. But if we have a constant “notional interest rate”4 to compound our labour units, to compute the present value of hours worked in the past, the problem seems not insurmountable. It would appear that in this way a labour theory of value, albeit in a modified version, can be put to economic use.

But what have we really gained? What does an hour of work done in Britain in 1957 have in common with one done two hundred years ago except that they both last sixty minutes? The attempt to find in a changing world somewhere an unchanging entity to serve as a measure of change is bound to fail. Economic change affects the economic significance of hours of work along with everything else. Labour hours have no “intrinsic qualities” which do not change and have economic significance.

We cannot but suspect that this is another instance in which a method developed in the natural sciences is being used in economics without due care for the limits of its meaning. In physics (at least prior to Bohr and Heisenberg) the space-time continuum was used as the universal system of co-ordinates. All processes in nature were then reduced to changes in space and time which could be regarded as the “ultimate categories.”

In the realm of human action, however, the mere lapse of time has no significance, except possibly as a framework of chronological order. As a dimension of human action a labour hour does not remain constant over the years since more or less may be done in it. When Mrs. Robinson writes, “Work takes time, but time does not do work,” we have to add that the same work does not always take the same time. Labour hours are being bought and sold in markets and interact with other economic magnitudes in a sense which has no counterpart in classical physics. The heroic attempt to find a measure of capital invariant to time, whether as real-capital ratio or in any other form, thus far cannot be said to have succeeded. Mrs. Robinson has failed to do what cannot be done.

4.

It would be hardly fair to criticise our model for its level of abstraction, high though it is. The same might be said, after all, of such neoclassical notions as the stationary state, or of certain models of economic expansion which have of late won wide acclaim among economists. It is, on the contrary, Mrs. Robinson's striving for realism, the endeavour to let her model reflect circumstances and processes we know from the world around us, which so often arouses the reader's misgivings as to whether such circumstances and processes are at all compatible with the conditions of her model. It is when our author suddenly lowers the level of abstraction to enable her to “catch” an interesting feature she has observed, that the most embarrassing situations are likely to arise. Only too often the reader remembers well other occasions on which what must be regarded as at least equally important features of reality were left out, and had to be left out, because the model had no room for them.5 This “selective” lowering of the level of abstraction becomes most awkward when our author has to deal with technical progress. A good deal of this section will therefore be concerned with the paradoxes which the introduction of this topic creates in Mrs. Robinson's model. But we shall first give a more general example.

Mrs. Robinson is much concerned with the modus operandi of what she calls capitalism. Again and again, we are told that “under the capitalist rules of the game” such and such will happen. The question whether these rules, and how many of them, are at all applicable to her model economy is, however, never asked. In reality the most important of these rules is surely that capital is invested where “net of risk” it promises to yield the highest return. But in an economy in which the stock of capital always has exactly the composition required to produce a given flow of composite output, the whole problem disappears. Malinvestment is abolished by definition. All investment yields the optimum return. The whole range of choices which in reality confront those who have to make investment decisions vanishes from sight. In what sense, then, can we still meaningfully speak of “the rules of the game” if we are actually confined to the choice between a very few moves? It would still be possible to play chess and obey “the rules of the game” even though each player is given, say, only a king, a queen and a bishop to play with. But most of these rules then become inoperative, for instance, all rules about the movements of knights and rooks. The reader of Mrs. Robinson's book is never warned that her rules of the game are a rather mutilated version of the real thing.

It is easy to see why the collision between realism and abstraction, latent in the whole of our author's technique of analysis, becomes most disturbing when she comes to grapple with technical progress. Homogeneity and progress are at bottom incompatible with each other. A progressive economy is an economy in which at each moment a number of experiments is being conducted with new products and new methods of producing old products. Even were all of these to succeed, their results would not be consistent with each other; at the very least relative opportunity costs would change. Mrs. Robinson later on admits as much. But even though some of these experiments will fail they are nevertheless indispensable elements of economic progress as they provide valuable knowledge, a kind of “negative know-how,” to others. But they will also leave what our author calls “fossils” in the capital structure and thus affect the composition of the capital stock.

Nevertheless, if the same new methods of production were adopted by everybody at once there might not be much of a problem. But for Mrs. Robinson progress means the diffusion through competition of innovations introduced by entrepreneurs; her conception is here essentially Schumpeterian. The innovators at first make large profits, but sooner or later the imitators catch up with them, prices fall, real wages rise, and in the end the uniform rate of profit is restored. We are back in a golden age equilibrium.

Two problems arise. How can a capital stock of “appropriate proportions” continue to exist during a period of technical innovation? And will the new equilibrium which will be reached at the end of the process of diffusion, when the innovation has gained universal acceptance, be independent of the events taking place during the period of transition?

As regards the first problem, Mrs. Robinson conceives of the change from one technique of production to another as a gradual process during which old equipment is being replaced by new equipment as it wears out. As long as this is so, the second problem does not arise as the duration of the process of transition is entirely determined by the age and durability of the existing equipment. During the transition, it is true, the rate of profit cannot be uniform. But competition is at work all the time, and if we confine ourselves to a comparison of equilibrium positions, viz. to a problem of comparative statics, it seems that we can keep the second problem at arm's length.

But our author has to admit that other forces will influence the transition process. “The speed at which new methods are diffused throughout the economy depends partly upon the physical life of capital goods,” but where this is long it largely depends on the intensity of competition. The mechanism of competition “tends to grow weaker as the economy progresses, for the more vigorous is competition between entrepreneurs the more rapidly do the strong swallow up the weak, so that the number of separate sellers in each market tends to fall as time goes by.” In other words, not all firms survive the transition process. What happens to the resources of those who do not survive it?

We are told that they may be forced to scrap their equipment before it has been fully amortized, a possibility which is of course inconsistent with the integrability condition. Another possibility, well known in industrial history, is that the strong “swallow up” the weak by taking them over as going concerns. But the strong are unlikely to make such “take-over bids” to the weak unless they see a possibility of using the resources of the latter in ways in which they have not been used hitherto. One of the things which will happen on our path of transition is that existing resources will be turned to different (more appropriate?) uses.

Technical progress does not mean merely the introduction and diffusion of new and better machines, it also means the more efficient use of existing resources. Even though we may ignore this possibility in our formal model we cannot keep it out of our description of the secondary processes of adjustment to change. Whatever may be the innovation with which we start, how golden the next golden age is going to be depends also on the changes in use of from one equilibrium to the next.

In order to make a smooth transition plausible, from one technique to the next better technique, our author also has to assume that innovations come forward sufficiently slowly for the economy to have adapted itself completely to the first before the next begins to make its impact. Where this is not so, where innovations follow each other so fast that the economy never has time fully to digest one before the next appears, there never will be equilibrium. At each moment of time we shall find ourselves in the midst of a process of transition. When, then, do we return to the golden age? What happens to our moving equilibrium with its uniform rate of profit?

Mrs. Robinson's attempt to insert progress into her moving equilibrium model thus succeeds only where the speed of diffusion is very high and the speed with which innovations follow each other, i.e. the speed progress itself, fairly low. The important case where different entrepreneurs attempt to improve their methods by experimenting in different directions without in the end all accepting the same new method, is of course excluded from the model, as are all cases of product differentiation. In the end it would appear that more features of progress as we know it are left out of the model than are included in it.

For Mrs.Robinson, as we saw, the stock of capital equals the sum of all investments. To measure capital means to add up the annual investments over the years. The integrability of these investments is the sine qua non of such capital measurement. But progress means that men acquire new knowledge. It is therefore inevitable that the capital goods existing at any moment in time will not provide a homogeneous structure. Some of them would not have been constructed at all had today's knowledge been available at the time of their construction. They are the “fossils” of an earlier age we mentioned above.

Our author's method of dealing with these, of safeguarding the continued maintenance of a homogeneous capital structure, is based on the assumption that these fossils will all be eliminated in the normal course of replacement, or even be scrapped earlier as soon as they cease to yield a return over prime costs, if competition is sufficiently fierce. But the latter possibility actually destroys the integrability of capital since it means that something that once was capital has ceased to be capital without being replaced. On the other hand, there are durable capital goods, like buildings, the productive capacity of which may be increased without replacing them, simply because men learn to utilise them more efficiently, for instance, by installing lifts. These capital resources can be made to fit into different capital structures reflecting different states of knowledge.

The parallelism between the growth of capital and output which underlies the constant capital-output ratio, a fundamental condition of the golden age, is therefore inconsistent with many manifestations of progress. Where capital has to be scrapped without being replaced, capital is being decumulated without being disinvested, yet in measuring today's capital such decumulation would have to be deducted from the current investment. On the other hand, more output now flows from the remaining capital resources.

But increased productive capacity of existing resources is also incompatible with a constant capital-output ratio. We may regard it as a “capital-saving innovation.” Such capital-saving innovations, however, may not actually save much capital if the capital “saved” exists in such a specific form that it cannot be turned to other uses. Progress in the form of better utilisation of existing resources, so far from being capital saving, may actually increase the demand for capital by opening up new investment opportunities for complementary capital resources, for instance, an innovation may make it possible for more work-in-progress to be processed by the same plant. In all such cases capital gains and losses will be made which Mrs.Robinson, as a Ricardian, is forced to ignore, but which in reality often determine direction and magnitude of change and investment.

Mrs. Robinson who, with her usual candour, admits that we introduce a “patch of haziness into the analysis” whenever “the relation between the rate of investment in physical terms and in terms of value is highly variable,” has carefully excluded all these possibilities by one of the special assumptions introduced when she deals with variations in the real-capital ratio in a “quasi-golden age” where accumulation takes place without inventions. Here she explicitly assumes that “the length of life of individual capital goods is short so that an individual entrepreneur can readily change his stock of capital goods from one form to another, without loss of value.” But the very same problem arises wherever innovation makes existing specific capital redundant.

The conclusion seems inescapable that we face a dilemma here. We must either exclude all premature redundancy by assuming all capital to be sufficiently short-lived, that is, by extending the special assumption mentioned to all phases of a golden age, in which case a change of technique could hardly take the form of a process in time. It would then become clear that the model, revealing its true nature, works smoothly only where change is followed by instantaneous adjustment. Or, if in our model we wish to allow for such features of the world around us as durable equipment and time taken by processes of adjustment, we shall also have to allow for others. We then can, for instance, no longer regard the existing stock of capital (whatever that may mean) as the result of simple accumulation, hence the notion of a constant capital-output ratio becomes untenable. We also have to realise that investment opportunity is not independent of the efficiency with which existing resources are being utilised, and that new capital goods compete with some, and co-operate with other old resources.

When we have reached this insight it is not perhaps too difficult to understand why hardly any form of progress is compatible with the notion of a stock of capital which, whatever happens, invariably retains its “appropriate” composition.

5.

The distinguishing characteristic of the school of economics which flourished from 1871 to 1936 is the axiom that the ultimate causes of the economic processes we observe in reality have to be sought in the individual human minds, in choice and decision; and that economic phenomena are what they are because of the purposes pursued, the plans made and revised by millions of people in households and workshops. In this view, the quantities of the various goods produced and the prices paid for them are all compromise results reflecting the push and pull of these millions of decisions, of which there is of course no reason at all to believe a priori that they will be consistent with each other. It is only the continuous market process which gradually brings them into consistency as knowledge spreads throughout the market. The essence of the thought of this school of economics is the method by which we reduce objective market phenomena, like prices and quantities of goods, to the subjective preferences and expectations which give rise to them.

Every attempt to abandon this scheme of explanation has to find the causes of economic phenomena not in the multifarious variety of human minds, but “something else.” The classical economists, true to their eighteenth-century intellectual origins, found it in “natural forces,” like the Malthusian Law or the diminishing fertility of the soil. These natural forces were the true determinants of all human phenomena. All economic action came to be regarded as merely a response to them. Since, moreover, it was a major classical tenet that all men respond to economic stimuli in a virtually identical fashion, the human mind and its acts (interpretation of experience, the making and carrying out of plans) could be ignored. It is well known that, for all its methodological crudity, the classical mode of thought proved remarkably successful in its time and day: it provided a unifying principle of explanation for a large body of experience.

But those who wish to return to the classical style of thought today are facing a peculiar dilemma. Since the demise of Malthusianism (at least in the West) and the rise of modern scientific technology, there are not many “natural forces” left to serve as the independent variables in the economic system. The most notable recent attempt in this direction, Keynes's “Psychological Law” of the declining marginal propensity to consume which, as we know, Mrs. Robinson rejects, has not been much of a success.

But Mrs. Robinson is not really a naturalist, the eighteenth century is not hers, and the attempt to dress in a rococo costume when discussing industrial progress in the twentieth century remains unconvincing. Confronted with the dilemma she falls back upon another classical device. The actors in her model are not real individuals but “ideal types” of economic agents with a restricted but predictable range of action. Thus “workers” and “entrepreneurs” become the protagonists of the drama, later to be joined by “rentiers” and “landlords.” We are back in a Richardian world in which the functional distribution of incomes between workers, capitalists and landlords is the main determinant of progress. This means a great simplification of the issues with which economists have to contend; since workers and entrepreneurs can act only in their collective capacities, we neither can nor need bother about all those cases in which different sections of each group move in different and often incompatible directions. The whole area of choice and decision-making in which some entrepreneurs show their mettle by being better than others at grasping what it is that the market wants from them, disappears from sight. If we think that the style of thought which freed us from the classical cliché of profit-maximising Economic Man and enabled us to explore the whole area of choice and decision, whatever the aim pursued, was a step forward, it is hard to avoid the conclusion that the reappearance of similar clichés in 1956 is a backward step.

It is interesting to observe that Mrs. Robinson, for all her devotion to the classical method, is on occasion unable to persevere in it. When she comes to grapple with the reality of progress she cannot but remember that some entrepreneurs are more progressive than others and that competition is sometimes more intense than at other times.

Would it be a very long step, one wonders, to the realization that all progress does not start with investment in new machinery, but often with thousands of entrepreneurs experimenting with, and in the process reshuffling, their existing capital combinations; or that in addition to the innovators and their imitators there are also those who try to go one better than those whose achievements they emulate, so that a new technique of production becomes modified and diversified in the very process of diffusion? How bold, then, would the next step be, viz. the realisation that the notion of a stock of capital which invariably has the “appropriate” composition required by circumstances, is an obstacle rather than a help to our understanding of the nature of economic progress?

NOTES

[[1]]Joan Robinson, The Accumulation of Capital (London:Macmillan & Co., 1956).

[[2]]The whole Keynesian edifice rests on the possibility that capital can be measured; Keynesian investment is net investment, Keynesian income is net income.

[[3]]On the numerous ambiguities surrounding the meaning of productive capacity, see now G. Warren Nutter, “On Measuring Economic Growth,” Journal of Political Economy 65 (February 1957):51–63.

[[4]]The effect of changes in the rate of interest has therefore to be treated as negligible, see p.144 n2.

[[5]]Against what we have said it is no defense to claim that every author must be free to choose his own level of abstraction. Quite so, but once he has chosen it he must adhere to it. It is quite legitimate to abstract from any class of facts, but it is illegitimate, once such a class has been admitted into the model, to make an arbitrary selection between the members of the class.