The assumption of constant returns to scale

Abstract

Nicholas Kaldor was right to maintain that this assumption is unrealistic, but that does not mean that it is useless. There are propositions that can be proved assuming it, which would never have been found without it, but that look as if they are independent of it. Two examples: (1) Paul Samuelson's factor-price equalization theorem in international trade and (2) the author's theory of relations between factors in production ( elasticity of substitution in a modern form). P-and q-substitutes (complements) must be distinguished. Weakly related factors are p-substitutes and q-complements. This is the only case when no more than two factors are present. Otherwise, two factors (out of many) may be strong substitutes (substitutes both ways) or strong complements (complements both ways). The excluded case, when they would be p-complements and q-substitutes, appears, in the presence of scale economies, to be excluded a fortiori. Copyright 1989 by Oxford University Press.