Caption titleAt head of title: Economics / 6. December 1, 1953. P.N. Rosenstein-RodanHandwritten on cover: C/53-9. 408Mimeographe

Rosenstein-Rodan, P. N.

DSpace@MIT

A.ucnAuhcs /uDecember 1, 1953P fio RosensteinJ-odanFACTOR PROPORTIONS 1N THE 1TALlAN ECONOMYEconomics 1, 3 and 5 rightly consider the technological unemployment -described as "the factor proportions issue" or as "structural disequilibriumat the factor level" as the central problem of the Italian Economy0"The theoretical remedy for factor disequilibrium is..: a change infactor endowments to accord with the factor prices, or a change in factor pricesto accord with factor endownent. A change in factor proportions can be substi-tuted for a change in factor endowments"i The diagnosis of technologicalunemployment in Italy is undoubtedly correct, but the therapy proposed isbased on the assumption of variable coefficients of production. Thisassumption is almost certainly unrealistic for any short-period analysis andmay prove of limited applicability even for the longer-run analysis. The"factor proportions issue" should therefore be analyzed under the assumptionof fixed coefficients. The theoretical remedy" may still be indicated undersuch more realistic assumptions, but its modus operandi, its range and itsdosage may have to be substantially qualified and restricted.1. huilibrium under fixed coefficients.Assuming two factors of production (labor and capital) in given amountsand several products, "equilibrium" may have two different meanings --(a) maximum value of output (b) full employment of factors. These twomeanings coincide under the assumption of variable coeffi. ients of productionbut do not coincide in the case of fixed coefficients*Full employment of both factors may be technically impossible. Evenif it were possible the full employment combination of products may represent1) ~o P. Kindleberger "Structural Disequilibrium" page 766.-a lower value of output as a whole. Under normal competitive conditions,market forces will tend rather towards a position of maximum value of outputas a whole than towards a full employment position.The larger the number of goods the less likely (or smaller) will bethe unavoidable unemployment of one factor and the smaller the divergencebetween the maximum value of output and the value of full employment output.Owing to demand conditions, however, this divergence may persist. It willbe the smaller, the lower is the degree of convexity of indifference linesof consumption. it will also be considerably reduced by international trade.The marginal productivity of the unemployed factor is zero but in thecase of labor some arbitrary positive price is nonetheless payed. if this"arbitrary" price were lowered, a different combination of goods would beproduced depending on the income and price elasticity of demand. Thefollowing questions arise in that connection:1. Will the total wages bill be higher, lower, or equal?2. By how much will the fall in the price of labor lower real wages?3. What determines the deviation between the value of the fullemployment output and the maximum value output?. What are the elasticity of demand conditions for a higher volumeof employment without a fall in the value of output as a whole?II Limited discontinuous variability of coefficients of production.The assumption of rigidly fixed coefficients will probably be realisticonly for some industfies in the same way in which continuous variability ofcoefficients is probably the exception rather than the rule. A limitedand discontinuous variability of coefficients seems to be the most realisticassumption for the largest part of industry. Let us assume, therefore, thatin many industries factors can be combined in three alternative proportionsgiving us three distant points on isoquants;a. High capital intensity kexample: automatic loomSe)very high productivity of labor.bo "Normal" capital intensity (example: ordinary looms), noenallyhigh productivity of labor0c. Very low capital intensity in handicrafts (example: hand looms),very low productivity of laborein the short run (with given equipment), some additional productionmay be secured by employing factor proportion b ("normal" capital intensity)in an industry using preponderantly the factor proportion a. In the sameway the factor proportion c may coexist with the factor proportion b. Anoptimum output cannot be securedv however, by a combination of all the threefactor proportions. On the assumption of a given wage rate only combinationab or bc are possible, while the coexistence of a,b and c is impossible.If the distance on the isoquant between the points a, b and 9 is verygreat, a lower wage rate need not necessarily lead to full employment oflabor without a fall in the value of output as a whole. Income-elasticityof demand effects may be such that workers receiving lower wages may notdemand the goods produced in more labor-intensive ways.The existence of three possible factor proportions for the productionof one good, introduces the same type of problems on the supply side asin the case of several goods under the assumption of rigidly fixed coefficients.The discussion of the theory of production may therefore proceed as if therewere no difference between the different processes producing one good andthe different factor proportions for producing different goods. The possibilityof producing many goods in three different degrees of capital-intensity makesit easier however to come nearer to a full-employment output irrespective ofdemand conditions; it should, in other words, at least reduce the divergencebetween the maximum value of output and the value of full employment output.1 Short of a most improbable case in which all the three points ab,c, lieon the same price-line.JtlalyEconomics/6In an open economy, it may be assumed that products of more laborintensive industries will be produced for export, while products of morecapital intensive industries will be imported. It is not clear, however,to what extent these international trade factors could alleviate the Italiansituation. Fuller employment in italy means higher demand for imports.Demand for foodstuffs by the formerly unemployed will be quantitativelymore important thanthe import content of additional output. Since evenat the present level of unemployment Italy is a net importer of foodstuffs,its marginal propensity to import will certainly be very high, i.e. theprice-elasticity of demand for Italian imports will be very low. Internationaltrade would only help to solve the Italian full employment problem if Italy's"marginal propensity to export" were even higher than its high propensityto import: i. e. if the price-elasticity of demand for Italian exportswere higher than the low price-elasticity of demand 1 for Italian imports.This implies successfull competition with other exporters like U.K., Germanyand Japan: prospects here cannot be said to be very good. Internationaltrade will undoubtedly help but it is not a perfect substitute for fullyvariable coefficients of production.Ill Coexistence of two different methods of production in the same industry,In the short run additional output may be produced by a more laborintensive method especially if wages are lowered, koven in the long runtwo methods of production may coexist at a given wage-rate, but an incentivemay be needed for reaching & higher employment combination of methods.Price-discrimination in the labor market in various forms may constitutea3uch an incentive, but practical difficulties of handling it grow with timeuntil they become unsurmountable in th - long run. Subsidies for "additional") While price-elasticity is low, income-elasticity of demand for importsis high.-taiyEconomics/6labor employed may be appropriate in a short run. In the long run employerswould simply hire less labor in order to obtain more subsidies for "additional"labor. Only rigidly institutionalized and well thought out wage-discrimination(f.1 4 using unemployed workers in specific industries, or some public worksor public enterprises) might be compatible with a long-run equilibrium.IV Economic policy conclusions.The argument of 1, 11 and Ill leads to the following conclusions aboutthe long-run technological unemployment in Italy: Under variable coefficientsof production even small changes in wage-rates would lead to different factorproportions and to higher employment, without a fall in Real National Income.Under rigidly fixed coefficients of production even large changes in wage.rates may not lead to an appreciable increase in employment without a fallin Real National income. Under "discontinuously variable" coefficients ofproduction large changes in wagis may be required to increase employment;the reduction in wages may, however, affect the income'and price-elasticitiesof demand in such a way that the higher employment-output may represent asmaller value than the previous output-combination. Additional taxationof the "maximum-value output" may compensate the unemployed while leavingeverybody else better or not worse off than before. If the proceeds ofsuch a tax were to be used for wage-subsidies, additional production wouldbecome possible using the unemployed workers at wages lower (by the amountof the subsidy) than the current rate. If such compensatory taxation andsuch wage-discrimination were possible in practice, a higher National Incomeand a "Maximum hconomic Welfare" could be realized.The italian Economy consists presumably of three sectors: 1) a smallone with fixed coefficients, 2) a large one with "discontinuously variable"coefficients, 3) a small one with variable coefficients of production.Italyhconomics/6The last sector may be too small to eliminate technological unemploymentalthough it helps to reduce it. International Trade has an effect similarto an extension of the "variable coefficients" sector; it reduces but doesnot eliminate the divergence between the maximum-value and the full-employment output.V The problem of verification.The above conclusions follow only if the assumptions about the spreadand the type of coefficients of production correspond to the Italian reality.The assumptions under 1,11 and 111 have obviously to be tested. Severaldifficultieshowever, stand in the way of verification.A production function is only "given" in the case of a firm; it involvesdifficult problems of agpregation in the case of an industry. Firms employingdifferent factor proportions at the same wage rate in the same industry maycoexist owing to different qualities of entrepreneurship. More often,however, different factor proportions coexist in the same industry becausewages for the same quality of labor, or wages per efficiency unit of laborvary between different localities. Only a thorough knowledge of an industrywill enable us to differentiate between such two cases.1. A thorough knowledge of mechanical industry in Italy should enableIRI to make such tests,a) Let us select one industry (several firms producing the sameproduct) and ascertain the factor proportions used, in each firm as a whole,and in each process of production within a firm. If the factor proportionsdiffer, let us examine whether this difrerence is due to different wage.rates in various locations, or to differences in entrepreneurship. ineither case an explanation should be attempted of why different firms usingdifferent factor proportions coexist, and why one firm or group of firms7- I talyEconomics/6does not expand more than it did in fact at the expense of others. Averification of the range of variability of coefficients of productionmay be thus obtained in several industries.IRI would also be able to indicate which factor proportion type wasexpanded whenever an expansion of production in one of the industrieswhich use different factor proportions was realized (or intended). Woulda different method of production had been chosen at a wage-rate 10%, 15%or 20% lower?While the management of any one firm may erroneously believe thatit has no choice in technology, i. e. that there are fixed coefficientsof production in its industry, it is more difficult to believe that allthe firms in one industry would labour under the same illusior; andit is quite clear that the management of institutions like 1R1, or theFINMECCANICA controlling or surveying all such fins and having the dataabout different methods of production would be wel aware of sur h variabilityof coefficients as the existing technology provides.b) Similar enquiries might be possible in other tndustries, f. i.in the field of the FINSIDER< An enquiry comparing the coefficients ofproduction in corparable sectors of the shipbuilding inlustry in Italy,Great Britain and Holland might f. i. be extracted from the rich dataand studies material which is already available in this field.c) The working sheets of the Italian lnput-Output Study mightfinally contain data referring to coefficients of production of variousfirms in an industry. Wherever the inputs were calculated. by aggregatingda-:a firm by firm this would be possible.2. What type of coefficients of production obtain in Italian agriculture?Would lower wages make more agricultural employment possible? Or is the factthat agricultural wages are markedly lower than the industrial wages offer-8- ItalyEconomics/6sufficient evidence that the range of variability of coefficients isrestricted in agriculture to a degree comparable with industry? --A joint enquiry by the institute of Agrarian Science, Rome and the SVIIEZmay be suggested.3. An estimate of the existing excess capacity in certain industriesshould be made. is excess capacity confined to export-industries only?* * *Such tests in large and representative sectors of Italian industryand agriculture may show to what extent our assumptions about the rangeand spread of fixed, discontinuously variable and variable coefficientsof production correspond to reality, If they do, then Italian economicpolicy would seem to be confronted with a dilemma: to aim at eithera) high productivity, higher value of output as a whole with a largervolume of unemployment, or b) lower productivity, lower value of outputas a whole with a lower volume of unemployment,

Factor proportions in the Italian economy

http://dspace.mit.edu/bitstream/1721.1/85046/1/51346335.pdf

Factor proportions in the Italian economy

Abstract

Similar works

Full text

Available Versions

DSpace@MIT