Substitution

This chapter addresses the question of what happens if there is a choice of techniques, so that the dominant technique may change in the course of the Traverse? It starts from a situation in which an old technique, belonging to an old technology, is dominant. A new range of practicable techniques is introduced at time 0. If the invention of these new techniques is to be effective, some of them must be more profitable than the old technique at the initial rate of wages. One must then be the most profitable; so for processes started at time 0, and perhaps for some time afterwards, this new technique will be adopted. In the course of adjustment to that first new technique, the wage will change; and it may well be that as a consequence of the change in wages, another technique becomes the most profitable. Thus, between time 0 and time T₁, newly started processes use the first new technique, while there are old processes that are still unfinished; while after T₁ newly started processes use the second technique, while old processes and first new technique processes are still unfinished. At time T₂ there is (or may be) a second such switch; and so on. This sequence depends on three effects. The first runs from wages to choice of technique; the second from choice of technique to productivity; the third from productivity to wages. The first and second depend on the techniques (the parameters of the techniques); but the third is quite different, for it depends on saving. With any reasonable assumption about saving, a rise in productivity will lead to a rise in wages.