The Notion of Vertical Integration in Economic Analysis

The Notion of Vertical Integration in Economic Analysis (1973) The Author constructs a model for vertically integrated sectors in the general case, within a new theoretical approach. First, commodities are measured in terms of physical units; then an alternative physical unit of measurement for capital goods is introduced. This is in terms of units of productive capacity. The Author begins with an analysis of an economic system in which all commodities are produced by means of commodities and are used as capital goods. Production is considered first with circulating capital goods only and then with fixed capital goods. Concerning the production of fixed capital goods, the assumption is made that each industry produces only one good. Quantities are directly observable and directly quantifiable. Each commodity resolves itself into wages and profits. The Author shows that each price is ultimately made up of wages and profits through labour coefficients. If the wage rate itself is used as the numeraire of the price system, all prices come to be expressed in terms of the wage rate (i.e. in terms of labour commanded). The Author then develops the same model within vertically integrated sectors of a higher order. A more specific definition of industry is given, generalizations and restrictions are discussed along with the role of technical progress. The new theoretical approach is shown to introduce dramatically new possibilities for dynamic analysis. Reprinted in: L. Pasinetti (ed.), Essays on the Theory of Joint Production, London: Macmillan; and New York: Columbia University Press, 1980, pp.16-43. Italian translation: "La nozione di settore verticalmente integrato nell'analisi economica", in: L. Pasinetti (ed.), Contributi alla teoria della produzione congiunta, Bologna: Il Mulino, 1977, pp.37-74.