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Economics 3 I 3
Account must be taken not only of new investment but also of depreciation of
productive capacity through obsolescence and wear and tear (shown as -a,
coefficient of contraction of the national income). On the other hand, national
income wil grow if the existing equipment is better utilized (represented by
coefficient U). The formula for the rate of growth r of the national income becomes:S1
i
r=--a+u
m
In a socialist economy, where it is assumed that productive forces are fully
employed and that, accordingly, the rate of growth is supply-determined (i.e.
is determined by the expansion of productive capacities) this formula can be
considered as offering a good starting point for discussion. It would not do,
however, for a capitalist economy where the problem of effective demand arises.
Variations in effective demand could, it is true, be taken care of in a purely for-
mal way by variations in the coefficient zi (making it positive or negative accord-
ing to the case). This however, would shirk the essential question for a capitalist
economy: the r61e of investment in stimulating additional effective demand, and
itsmultiplier effects in so far as idle capacities exist. To study the dynamics of a
capitalist economy, accordingly, a completely different model must be built,
starting from the observed fact that, contrary to what might be believed, it is the
investments made by capitalists that determine the level of their global profits as
a class, and not the other way round. It follows that the volume of the national
income wil also be determined by the investment and consumption decisions of
the capitalists. Unlike workers, who can spend to the extent to which they can
earn, capitalists taken as a class earn to the extent that they spend.52
Moreover, the rate of growth r may be approximately defined as the com-
bined effect of increasing the labour force and increasing labour productivity.
This brings complex problems to the fore: different types of technological pro-
gress and the extent to which they lead to changes in the capital-output ratio. In
theory, a clear distinction should be made between the mere substitution of
labour by capital (or, depending on the proportions, the substitution of capital
by labour) and technological progress as such; in practice, labour and capital are
superimposed and embodied in new investment.53 Different classifications of
technological progress are proposed by different authors (J. Robinson, Kaldor,
Bombach, Kalecki) but all depend, by and large, on the distinction between
progress which absorbs capital, saves capital or has no effect on capital - three
cases which obviously warrant separate treatment in any full-scale theory of
growth.
A distinction must also be made between economies according as their sup-
plies of labour are limited or unlimited. Once labour reserves are exhausted,
growth can be accelerated only by increasing the capital-output ratios.
We may then add the constraints imposed by difficulties in foreign trade.
All these factors are likely to induce changes in the capital-output ratios. How
will the economy be affected when part of the productive capacity is retooled,
involving a higher capital intensity; and how many years wil be necessary to