"On Concepts and Measures of Changes in Productivity" with "Comment" by R.Solow and "Reply" by the Author

The article describes technical change and the difficulty in analysing it due to the hard variables which need to be dealt with in analytical terms. The Author sustains that the statistical data came as quite a surprise to economists, because their theories, from the Ricardian to the neo-classical, did not lead them to expect such results. The Author criticizes the limited approach commonly used by economists (ratios of production to man-hours) to interpret the outcomes of changes in technology, while not considering the introduction of capital. A case study of the United States from 1929-1950 is provided which shows that, on the average and in the long run, shares of labour and capital in the national product did not change very much, that wages did not remain at the subsistence level but rose in proportion to national income, that capital per man indeed increased but output per man also increased in proportion, and that the rate of remuneration of capital remained almost constant. The Author analyses the traditional concepts of technical change in making capital itself and suggests a procedure for evaluating it, with respect to all factors of production. This article – fruit of LLP’s stay at Harvard University in 1957-58 – became the basis of a controversy with Professor Robert Solow who published, in the same issue of the Journal a “Comment” (pp. 282-85) followed by a “Reply” by the Author (pp. 285-86). Solow and the Author dealt with two alternative procedures for measuring the increases in productivity of the economy of the United States in the first half of the 20th century. Solow’s methodology was founded on an application of the traditional (neoclassical) production function. The Author’s methodology instead applied the concepts of the theory of capital – at that time novel –developed in Cambridge, England, mainly by Joan Robinson. The Author pointed out that, in evaluating the increases in productivity, it is essential to distinguish the variations in time of the capital/labour ratio from those of the capital/output ratio. Solow claimed to have measured a shift in time of the production function and, at the same time, a movement of the economic system along the same production function, with a resulting increase in capital intensity, with a procedure that left a significant residue entirely unexplained. The Author was able to demonstrate, using the same data, that Solow’s conclusions were contradictory: the capital/output ratio and the capital/labour ratio, in the period considered, varied in opposite directions: Capital intensity if expressed by changes in capital/output ratio, as Harrod’s model would have required, had decreased over the period considered; not increased as Solow affirmed. There was indeed an increase of the capital/labour ratio, which implied an increase, not of capital intensity, which had decreased as just said, but of the degree of mechanisation. Thus, Solow’s result made it impossible to gauge whether in the period investigated, capitalistic production had increased or decreased.