Structural change and prices of production

Abstract

The classical theory of prices of production and their formation within competition traditionally abstracts from structural change by assuming a given state of technology, distribution and consumption patterns (the ‘structure’). The analysis focuses on the determination of long-term equilibrium, with an evenly distributed profit rate among industries and homothetical growth, and the analysis of the stability of this equilibrium for a given structure. This paper extends this analysis to the consideration of structural change, which is modeled as a stochastic process. It combines simulation and analytics. It is shown that capital mobility is a very efficient mechanism. Structural change is manifested in a small profitability differential in comparison with the differential in growth rates. Prices and outputs follow the movement of equilibrium prices and quantities. Such prices and outputs do not gravitate, however, exactly around the sequence of long-term equilibria, but around a different trajectory, at a distance from these equilibria, that depends on the strength of the reaction of economic agents to the observation of disequilibria. If adaptive expectations are included in the model, then this differential vanishes.