Technical Advance and Economic Equilibria

Abstract

This article is an attempt to apply to certain problems of shifting equilibria some techniques which are familiar to readers of Professor Schumpeter. The problems to be examined are: the effect of a technical advance on the equilibrium position of a single firm which is in a position to adopt the new techniques; the effect of a technical advance on the optimum and typical size of firms in the industry; the social dispersal of benefits from a technical advance; the relation of a technical advance to the rate of investment and the rate of interest; and the implications of technical advance for social policy and the level of welfare.I wish first to consider the position of a firm in imperfect competition experiencing a technical advance over a period of time. Now, whatever the nature of this firm, there will be a point, at any moment, beyond which increases in output can be achieved only at an increased unit cost. The greater the proportion of fixed to variable costs the further to the right (graphically speaking) this point will be. In industries like railroading the point may be to the right of the relevant sector of the curves because the proportionate decline in fixed costs per unit of output is absolutely so great as to offset rising variable unit costs for any practicable output. However diminishing returns inevitably exist in the rigorous sense that the intensification of the use of fixed plant, at any moment of time, will eventually result in diminished increments of product per unit of variable factor employed, and this implies increasing marginal variable cost. Total unit costs will increase when, with each increase in output, the absolute increases in variable costs exceed the absolute decrees in fixed costs per unit; and we should remember that, though the decline in fixed costs is uniform as a proportionate decline (the fixed unit cost curve is always a rectangular hyperbola of the type xy=k), the absolute decline, as output is increased, becomes less and less. Thus, and this is a commonplace of economic theory, any change in the proportion of fixed to variable costs of the firm, will have a definite effect on the optimum cost point and on whether or not the firm is operating, within any practicable range of output, under increasing or decreasing costs.