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Published online by Cambridge University Press: 07 November 2014
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.
I am indebted to Professor H. S. M. Coxeter of the Department of Mathematics of the University of Toronto for redrawing my charts.
2 This is a concept we have not previously introduced and should be denned. It does not, of course, correspond to the optimum production of any given firm, a notion which can be given statistical reality only by an accountant with access to the costing and production sheets of the firm. But in most industries it appears that any index of efficiency shows a definite positive correlation with size of establishment up to a certain point. Beyond that point further increases in the size of the establishment do not appear to be accompanied by any further economies. This general proposition is supported by the findings of ProfessorRobinson, E. A. G. (Structure of Competitive Industry, London, 1931)Google Scholar, ProfessorFlorence, Sargant (“Economic Research and Industrial Policy,” in Economic Journal, vol. XLVII, no. 188, 12, 1937)Google Scholar, and Mr.Hillman, H. C. (“Size of Formation in the Boot and Shoe Industry,“ in Economic Journal, vol. XLIX, no. 194, 06, 1939)Google Scholar, and I have found evidence to support it in studies of the Canadian Census of Industry data.
3 Admittedly it was also a period when there was a great expansion of demand for newsprint. American mills could not supply the growing demand and were also facing a depletion of their forest reserves. American and Canadian companies built new mills with larger, faster machines that could tap the more cheaply accessible Canadian forests. The fact of the positive shift in demand does not impose modification of our argument. With decreasing costs competition would be unstable—as it definitely was, vide the series of rebellions against the price leadership of Canadian International—regardless of increased demand, and every incentive would be given to mergers and amalgamations to maintain price. Smaller establishments and firms were swallowed up by the growing trusts. One should not, perhaps, ignore the interest in this process of the stock promoter.
4 See also Investigation of Concentration of Economic Power by the Temporary National Economic Committee of the 76th Congress (U.S.A.), Monograph 13, The Relative Efficiency of Large, Small and Medium-Sized Businesses.
5 Cf. for example, Douglas, Paul, The Theory of Wages (New York, 1934).Google Scholar
6 Bell, Spurgeon, Productivity, Wages, and National Income (Washington, Brookings Institution, 1940).Google Scholar
7 We have, in this passage, been assuming a linked technical advance, that is that technical improvements are taken up and adapted from industry to industry. With major advances the assumption of their being linked and inter-industrial is a fair one. With minor advances it is less apt to be true.
8 This is at the beginning of the boom. Rising interest rates, generally associated. with expansion, appear later when the boom is established.
