Monday, September 18, 2017

Another Example Of A Real Wicksell Effect Of Zero

Figure 1: A Reswitching Example with a Fluke Switch Point
1.0 Introduction

A switch point that occurs at a rate of profits of zero is a fluke. This post presents a two-commodity example with a choice between two techniques, in which restitching occurs, and one switch point is such a fluke. Total employment per unit of net output is unaffected by the choice of technique. Furthermore, the numeraire-value of capital per unit net output is also unaffected by the mix of techniques adopted at a switch point with a positive rate of profits. This is not the first example I present in a draft paper.

2.0 Technology

Consider the technology illustrated in Table 1. The managers of firms know of three processes of production. These processes exhibit Constant Returns to Scale. The column for the iron industry specifies the inputs needed to produce a ton of iron. Two processes are known for producing corn, and their coefficients of production are specified in the last two columns in the table. Each process is assumed to require a year to complete and uses up all of its commodity inputs. (The coefficients were "nicer" fractions before I started perturbing it. Octave code was useful.)

Table 1: The Technology

This technology presents a problem of the choice of technique. The Alpha technique consists of the iron-producing process and the corn-producing process labeled Alpha. Similarly, the Beta technique consists of the iron-producing process and the corn-producing process labeled Beta.

3.0 Quantity Flows

Quantity flows can be analyzed independently of prices. Suppose the economy is in a self-replacing state, with a net output consisting only of corn. Table 2 displays quantity flows for the Alpha technique, when the net output consists of a bushel of corn. The last row shows gross outputs, for each industry. The entries in the three previous rows are found by scaling the coefficients of production in Table 1 by these gross outputs. Table 3 displays corresponding quantity flows for the Beta technique.

Consider the quantity flows for the Alpha technique. The row for iron shows that each year, the sum (9/356) + (11/356) = 5/89 tons are used as iron inputs in the iron and corn industries. These inputs are replaced at the end of the year by the output of the iron industry, with no surplus iron left over. In the corn industry, the sum 10/89 + 11/89 = 21/89 bushels are used as corn inputs in the two industries. When these inputs are replaced out of the output of the corn industry, a surplus of one bushel of corn remains. The net output of the economy, when these processes are operated in these proportions, is one bushel corn. The table allows one to calculate, for each technique, the labor aggregated over all industries per net unit output of the corn industry. Likewise, one can find the aggregate physical quantities of capital goods per net unit output of corn.

Table 2: Quantity Flows for Alpha Technique
Labor5/89 ≈ 0.0562 Person-Yrs.57,101/51,353 ≈ 1.11 Person-Yrs.
Iron9/356 ≈ 0.0253 Tons11/356 ≈ 0.0309 Tons
Corn10/89 ≈ 0.112 Bushels11/89 ≈ 0.124 Bushels
Output5/89 ≈ 0.0562 Tons110/89 ≈ 1.24 Bushels

Table 3: Quantity Flows for Beta Technique
Labor3/577 ≈ 0.00520 Person-Yrs.671/577 ≈ 1.16 Person-Yrs.
Iron27/11,540 ≈ 0.00234 Tons33/11,540 ≈ 0.00286 Tons
Corn6/577 ≈ 0.0104 Bushels2,519/2885 ≈ 0.873 Bushels
Output3/577 ≈ 0.00520 Tons5,434/2,885 ≈ 1.88 Bushels

4.0 Prices and the Choice of Technique

The choice of technique is analyzed based on prices of production and cost-minimization. Labor is assumed to be advanced, and wages are paid out of the surplus product at the end of the year. Corn is taken as the numeraire. Figure 1 graphs the wage curve for the two techniques. The cost-minimizing technique, at a given rate of profits, maximizes the wage. That is, the cost-minimizing techniques form the outer envelope, also known as, the wage frontier, from the wage curves. In the example, the Beta technique is cost minimizing for high rates of profits, while the Alpha technique is cost-minimizing between the two switch points. At the switch points, any linear combination of the two techniques is cost-minimizing.

One switch point is a fluke; it occurs for a rate of profits of zero. Any infinitesimal variation in the coefficients of production would result in the switch point no longer being on the wage axis. This intersection between the wage curves would then either occur at a negative or positive rate of profits. In the former case, the example would be one with a single switch point with a non-negative, feasible rate of profits, and the real Wicksell effect would be negative at that switch point. In the latter case, it would be a reswitching example, with the Beta technique uniquely cost-minimizing for low and high rates of profits. The real Wicksell effect would be negative at the first switch point and positive at the second.

5.0 Aggregates

In calculating wage curves, one can also find prices for each rate of profits. Table 5 shows certain aggregates, as obtained from Tables 2 and 3 and the price of iron at the switch point with a positive rate of profits. (Table 4 shows this price.) The numeraire value of capital per person-year, for a given technique and a given rate of profits, is the additive inverse of the slope of a line joining the intercept of the technique's wage curve with the wage axis to a point on the wage curve at the specified rate of profits. The capital-labor ratio, for a given technique, varies with the rate of profits, unless the wage curve is a straight line. Since a switch point occurs on the wage axis, the capital-labor ratio for both techniques at the other switch point is identical. As seen in Table 5, it does not vary among the two cost-minimizing techniques at the switch point with a positive rate of profits. The real Wicksell effect is zero at this switch point.

Table 4: Price Variables at Switch Point with Real Wicksell Effect of Zero
Rate of Profits125,483/209,727 ≈ 59.8 Percent
Wage9,226,807/24,957,513 ≈ 0.370 Bushels per Person-Yr.
Wage7,558/595 ≈ 12.7 Bushels per Ton

Table 5: Aggregates at Switch Point with Real Wicksell Effect of Zero
Net Output1 Bushel Corn
Labor674/577 ≈ 1.17 Person-Years
Physical Capital5/89 Tons Iron3/577 Tons Iron
21/89 Bushels Corn2,549/2,885 Bushels Corn
Financial Capitl113/119 ≈ 0.945 Bushels Corn
Capital-Labor Ratio65,201/80,206 ≈ 0.813 Bushels per Person-Yr.

6.0 Implications

A certain sort of indeterminacy arises in the example. For a given quantity of corn produced net, the ratio of labor employed in corn production to labor employed in iron production varies, at the switch point with a positive rate of profits, from around 1/5 to just over 223 to one. A change in technique leaves total employment unchanged, given net output, even as it alters the allocation of labor among industries. At the switch point, a change in technique, given net output, leaves the total value of capital unchanged, while, once again, altering its allocation among industries.

Suppose the economy is in a stationary state with the wage slightly below the wage at the switch point with a real Wicksell effect of zero. The Beta technique is in use. Consider what happens if a positive shock to wages result in a wage permanently higher than the wage at the switch point. The shock might be, for example, from an unanticipated increase in the minimum wage. Prices and outputs will be out of proportion, and a perhaps long disequilibrium adjustment process begins. Suppose that, eventually, after all this folderol, the economy, once more, attains another stationary state. The Alpha technique will now be in use. Labor hired per unit net output will be unchanged. The only variation in the value of capital goods per unit labor is a result of price changes, independent of the change in technique.

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