1. UNIVERSITÀ DEGLI STUDI DI PADOVA
FACOLTÀ DI SCIENZE POLITICHE
Corso di Laurea Magistrale in
ECONOMIA INTERNAZIONAE
Curriculum: ECONOMIA POLITICA INTERNAZIONALE
TECHNICAL PROGRESS INCORPORATED AND
REPLACEMENT OF CAPITAL TO LABOUR
Lucato Desirè
A.A. 2010/2011

2. INDEX
INTRODUCTION……………………………………………………………………………………2
CHAPTER 1
ECONOMIC PROGRESS AND EMPLOYMENT: SUMMERY OF THEORETICAL
COBTRIBUTION FROM THE MERCANTILISTS TO SOLOW MODEL
1.1
The mercantilists……………………………………………………………………………...3
1.2
The thought of the classical economist: Smith, Ricardo and Marx…………………………..3
1.2.1 Adam Smith…………………………………………………………………………………..4
1.2.2 David Ricardo………………………………………………………………………………...5
1.2.3 Karl Marx……………………………………………………………………………………..6
1.3
The thought of Keynesian economist and the Solow’s neoclassical model of growth………7
CHAPTER 2
THE TECHINICAL PROGRESS INCORPORATED: A TECHINCAL RAPPRESENTATION …8
1.1
Definition……………………………………………………………………………………..8
1.2
Replacement of technically obsolete equipment……………………………………………..9
1.3
The apparent substitution of capital for labour……………………………………………...12
CONCLUSIONS …………………………………………………………………………………...15
BIBLIOGRAPHY…………………………………………………………………………………..16
2

3. INTRODUCTION
The theme of the relationship between technological progress and unemployment in a growing
economy has been treated by the major classical economists like Smith, Ricardo and Marx and then
again, after the long period that has seen historic precedence marginalist thought, by
Schumpeter and, more recently, by growth models Keynesian of Harrod and Domar. The
importance of this subject is not only theoretical if it is true that it ends up crossing with the
controversial issue of "technological unemployment" and the fear, often irrational,
but still widespread, that the machines can eliminate jobs. The neoclassical Solow growth model is
born as a response to the models of Harrod and Domar, where there is evidence that economic
development is unable to grow steadily to the "natural rate" that assures full employment of labour
and technological progress which defines together with the rate of population growth, the
magnitude of this natural rate. The "steady growth" and a low unemployment rate "of Western
economies since the Second World War in the early seventies" has encouraged the consolidation of
the model of stable growth and full employment proposed by Solow at the expense of that of
Harrod. In the model of Solow the focus is on real aspects of the economy, ignoring or at
least implicitly considering only monetary ones. On the other hand, in the seventies the
development of the theory of the natural rate of unemployment has led neoclassical economists to
study unemployment in relation to the monetary aspects of inflation in the first place.
In chapter 1 are reported the salient traits of classical and Keynesian theories, while in chapter 2 we
can see a technical representation of the technological progress incorporated, based on the theories
and on the models reported in chapter 1.
CHAPTER 1
3

4. ECONOMIC PROGRESS AND EMPLOYMENT: SUMMERY OF
THEORETICAL COBTRIBUTION FROM MERCANTILISTS TO
SOLOW MODEL
1.1The mercantilists1
Already the mercantilists2 discussed the relation between employment and technical change: the
latter was defined as “Simplifications of the Arts.”
These were generally viewed favourably because, as Sir William Petty ² argued, it allowed for
“one man to do the work of five men” (Petty, 1690).
However, as soon manifested a negative impact on employment, it was decided to introduce
legislation restricting the use of machinery.
Colbert ³ himself opposed to the introduction of machinery (which he called “enemies of labour”)
in private enterprises, and in that sense, he developed a so-called law against machines. Conversely,
he argued their adoption in public enterprises “to shorten the time and cost savings.”
Mercantilists noted the benefits of technological superiority in terms of international trade, but at
the same time they feared social disorder due to substitution of labour.
Their contribution, in some ways, laid the foundations for later and more complex thought of the
Classics.
1.2 The thought of the Classical Economist: Smith, Ricardo and Marx
In 1767 James Steuart3, anticipated half a century the thought of Ricardo, explaining how
machinery could lead to a sudden temporary unemployment. He realized that the use of machines
could reduce costs and therefore prices, which have rarely stated explicitly a link with the demand
for labour, so to be able to predict unambiguously the sign and magnitude of the final variation.
The theme of economic growth is central in the thinking of most classical economists, starting
with Smith and Ricardo up to Marx . The study assumes economic growth of interest in a dynamic
economy, able to reproduce and develop. The basic idea shared by the economists is that the
economy is determined in a surplus, which allows, if it is accumulated, or if it is converted into
capital, to fuel the growth of the economy. The surplus is what remains of the social
product once reinstated the consumer goods necessary for survival and reproduction of workers.
In general the Classical Economists argued the validity of the theory of compensation4, the
temporary nature of the sacrifices that must be borne by workers because of the direct effects that
technical progress leads to the total of the workers.
They believed that the introduction of machinery would reduced employment in the short term, but
in the long term loss of jobs will not remain permanent, because the workers expelled by the
machines would be returned to the manufacturing process to produce and to respond to
increased question, given the decline in prices caused by new technologies.
In this view, the compensation of the effects was an endogenous mechanism and required no special
1
Valeria Maria Pozzi: “ICT and employment (real or virtual?) the case Unitec”. Thesis in Economy of labour, Political Science,
University of Rome, 2000/2001
2
The term “mercantilism” was used for the first time by Adam Smith to describe the protectionist policy of European states in the
XVI centuries. The Mercantilists were a group of authors who lived between the XVI and XVIII century, many of whom hold
position in the public life of their respective countries.
3
James Steuart accepted a responsibility of government to maintain stable employment, through a series of interventionist measures.
4
This theory expresses the central thesis of neoclassical thought about the effects of technical progress on employment.
4

5. behaviour of the various classes.
Basically, technological unemployment for the Classical Economists could then occur when there is
an increase of production capable of reabsorbing it (since there is an insufficient increase in global
demand), or because there is insufficient supply of capital for this purpose.
The most famous Classics Smith Ricardo and Marx, consider the central role played by technical
progress which, by increasing labour productivity, allows, with the same number of employees, to
increase the product and then support the process of accumulation. With regard to technical
progress, however, what distinguishes the contribution of Ricardo and Marx, on the one hand, and
that of Smith, on the other, are the effects that it generates on employment.
1.2.1 Adam Smith
In 1776 the work of Adam Smith5 marked the birth of modern economic thought. The industrial
revolution that began in England in the second half of the eighteenth century, rapidly changed
relationships and methods of industrial production by laying down the shift from an exchange
economy to one based on the factory system.
Regarding the relationship between the introduction of machines and jobs, Smith did not see as
inevitable the idea of technological unemployment. He believed that with a substantially increases
of productivity6, increasing production, they could leave unchanged the number of employees, if the
major product obtained was entirely placed on the market: “This large increase in the amount of the
product, since the division of labour is generated by the same volume occupied for three reasons:
1. for increased dexterity of the individual worker;
2. saving time, which is normally lost in passing from one species to another task;
3. for the invention of a large number of machines which facilitate and reduce the working time
“(Smith, 1776, p. 6)..
According to this reasoning, technological unemployment could exist only in cases where the
market was unable to fully absorb the increased production resulting from technological change.
In Smith’s thought, the division of labour is at the centre of inventive activity because it allows to
focus on one job or occupation, in order to increase yields.
It is seen essentially as a specialization, through which it is better explained the relationship
between different levels of production capacity and various types of workers.
In his theoretical model of industrial structure, which he examined the split between sectors and
branches, Smith considers various groups of workers whose specific skills are involved in
production.
In conclusion, the author sees the work as a heterogeneous factor, as those involved in the
production process have different abilities and different levels of qualification.
The thought of Smith significantly influenced the debate that arose soon after on the technological
unemployment, partly because of various historical events of the period.
In March 1812 we held the first organized social revolt against the use of machines in a suburb of
Nottingham, England. This movement, which was defined as “Luddites”, named after its legendary
leader, the worker Ned Ludd, opposed the introduction of a new loom for socks (the Spinning
Jenny) in the knitting at home.
It was a revolt against the loss of labour and the poor quality of the product, made by independent
highly qualified workers. They defended the extension of the machines, which allowed the massive
recruitment of women and children in place of skilled Labour.
The “General Ludd” argued that the deterioration in quality would have resulted in the loss of many
markets and a further fall in employment.
The movement was well organized and achieved some success, what brought great alarm : was
increasingly invoked the doctrine of Classical Economics to justify repressive measures against the
Luddites (who were punished with death) and against the unions.
5
Adam Smith (1723 - 1790) was the founder of modern economics. He wrote as base of economic theory Inquiry Into the Nature and
Causes of the Wealth of Nations
6
Productivity: the amount of product obtained per unit of labor input in the production process.
5

6. 1.2.2 David Ricardo
The above describe was the background that gave rise to the thought and work of David Ricardo7,
classical economist who first manifested a change of opinion, compared to previous theories, on the
question of the employment impact of innovation.
In 1821 Ricardo in the third edition of his Principles8 clearly stated that the introduction of
technological innovations could harm workers, because the high cost of machinery, reducing the
wages fund, would create unemployment.
Ricardo argued, more precisely, that the replacement of human Labour to machines were, in
general, harmful to the interests of the working class, and was generally profitable for the capitalists
and landlords. In this regard unleashed a bitter diatribe by saying: “The opinion, of the working
class, that the use of machinery is often harmful to its interests, is not based on bias or error, but is
aligned with the correct principles of politics “(Ricardo, 1817, pag.392).
The reasoning is based on the assumption that the increase in net revenue generated by technical
change (of which only benefit the landlords and capitalists) is not necessarily accompanied by an
increase of gross national product (from which depends, however, the total income and the level of
total employment): on the contrary, this may even decrease.
Ricardo shows that the introduction of machinery led to a change in the composition of capital,
transforming a part of it from working capital to fixed capital . If the total capital is given, the
increase of the fixed reduces the share of capital allocated to the maintenance of workers (wages
fund), then leads to a reduction in employment.
If use of new technologies (and therefore a new technique of production) ensures the same profits of
the previous technique, although with a smaller production, then the capitalist can be satisfied,
while the workers are harmed by what Ricardo called “ Unemployment by mechanization.“ To
increase the working capital, however, there is the possibility of increasing global capital: it
depends on a propensity to save on your positive income of the capitalist and the decrease in
prices9. But if these two conditions were not verified, it generates unemployment because of the
lags and inflexibility of the mechanisms of Labour, directly resulting from supply constraints. At
that time, however, Ricardo felt compelled to change its formulation to detect very severe longterm compensatory effects.
The introduction of machinery promotes the reduction of goods prices, because decrease the
production costs, so, for the same nominal income and needs, the capitalist will be able to save
more.
The capital increase allows an increase in employment. Even if the production increase, thanks to
the machines, so to provide in the form of the net product the same volume of goods previously had
as a gross product, there would necessarily be even unemployment.
Basically, Ricardo believes that machines and work are constantly competing with each other and
the introduction of machinery in the production of goods depends on the price of Labour. In
conclusion, in the scheme ricardian the technical progress is working against investor interest in the
production of technological change. The possibility of reabsorption of the workers “liberated”
depends on the size of the net product which determines the level of capital accumulation, the share
of this allocated to working capital and from the level of demand for goods and services. In some
cases, all of these elements may facilitate the absorption of the “mechanization of unemployment”
through the growth of total employment.
1.2.3 Karl Marx
Another of the key authors of economic thought was inserted into the vein classic was Karl Marx10.
He believed that technical progress was a key variable in the whole economic system. In this sense,
7
David Ricardo (1772 - 1823) was an economist and politician English that advocated the free trade. He dealt with issues relating to
income, agricultural tariffs, international trade. Influenced the political thought of Marx.
8
In his most important work, “On the Principles of Political Economy and Taxation”, Ricardo treated in Chapter XXXI (on
Machinery) the argument of the introduction of machines in production processes.
9
For Ricardo, is that real wages should increase, and since money incomes are assumed constant, must decrease the price level .
6

7. capitalism was characterized by a continuous search for new products and industrial processes.
Especially laid stress on the importance of the social transformations caused by the “technological
revolution”.
Marx showed that bitter conflicts in the Labour market may lead to an acceleration of the processes
of mechanization, with a subsequent expulsion of many workers from the production process
(Marx, 1952, I, chap. XIII, 5).
In his view, competition among entrepreneurs induces them to adopt the techniques to more and
more capital-intensive, indirectly causing a downward pressure on wages: “The more productive
capital grows, the more you extend the division of Labour and the ‘use of machinery. The more the
division of Labour and the use of machinery are extended, the more it extends the competition of
the workers, the more it shrinks their wages “(Marx, 1849).
Marx also stressed that the accumulation of capital, the basis of economic development, causes the
increase of the organic composition of capital, ie the ratio of fixed capital and variable.
This results in a relative decrease in the demand for Labour and, therefore, an increase in
unemployment. This creates an industrial reserve army, whose size varies in different phases of the
business cycle.
In conclusion for Marx, technological unemployment is caused by a progressive replacement of the
machines at work.
1.3 The thought of Keynesian economists Harrod and Domar and the Solow’s neoclassical
model of growth11
In the previous paragraph we have finished our analysis with the thought of Marx. As already
mentioned, the marginalist school, which develops in the second half of the nineteenth century
10
Karl Marx (1818 - 1883) was an economist and philosopher. Developed a comprehensive philosophy, "historical materialism"
centered on the concept of class struggle and to demonstrate the historical necessity of overcoming capitalism
11
Raffaele Contini, Thesis “Growth, technological progress and unemployment”. Political Science, University of Pisa, 2002/2003
Panico (1998 ), p. 56
7

8. brought a change of perspective in economic theory. The fundamental problem was the allocation
of resources, and disappeared any reference to that of economic growth. At the same time "neoclassical economists believed that market forces, operating through changes in relative prices and
the substitution of production factors, generate a spontaneous tendency to full employment12."
If Schumpeter13 had already constructed a theory in which the growth, technological progress and
unemployment were treated in the same context, a decisive push to reconsider the problem of
economic development together with that of unemployment came from the Great Depression that
"endangered the political stability and ... gave rise to the need of a new economic theory that can
clarify whether market forces could lead the economy towards full employment. "
The fundamental problem faced by Harrod 14if an economic system can grow with full
employment and stable workforce. The conclusion reached is, however, that any equilibrium
solution is unstable: any deviation from the path of growth "guaranteed" leads the economic system
moving further away from equilibrium. It is also very difficult for the economy to grow at that rate
"natural" that would ensure full employment of workers.
A very similar conclusions also comes Domar15. His model wants to determine what course
should have the investments and the income of an economy because entrepreneurs demand all entire
workforce on the market. The problem is similar to that posed by Harrod, but there are differences
between the two models: the so-called "principle of instability" for example, is in Domar only
sketchy.
The neoclassical response to Harrod and Domar model is contained in the Solow16
model. Assuming price flexibility and substitutability of production factors, there are for Solow,
natural forces that ensure that the economy can grow along a path of growth steady-state and in
conditions of full employment. It 'can also demonstrate the possibility of balanced growth and an
unemployment rate of just putting a positive constant and that the labour supply curve, rather than
rigid, both positively and elastic.
Problems with the problems of Harrod and Domar arise, according to Solow, from the assumption
of fixed coefficients of production and, more generally, the use of assumptions valid in the short
term, but incompatible with a growing economy. Solow gives a common interpretation of the
models of Harrod and Domar, by bringing together the contributions of the two economists in a
single model: the "Harrod-Domar model."
The Solow model is capable of explaining all the "stylized facts" of growth, some empirical
regularities observed in the development of modern economies, only if it is introduced a
technological advancement that increases at a constant rate and exogenous. However, when the
labour supply is elastic, technical progress makes that growth is accompanied by a progressive
reduction in the unemployment rate, so it is impossible to coexist the steady-state growth with a rate
of constant unemployment.
CHAPTER 2
12
Joseph Schumpter (1883-1950) was an Austrian-American Economist and political scientist. He popularized the term “creative
destruction” in economics.
13
Roy Harrod (1900-1978) was an English Economist also known for his International Economics, a former standard textbook, the
first edition of which contained some observations and ruminations that would foreshadow theories developed independently by later
scholars (such as the Balassa-Samuelson effect).
14
Evsey Domar (1914-1997) was a Russian American Economist. He has made contributions in three main areas of economics:
economic history, comparative economics and economic growth. In 1946 he advanced the idea that economic growth served to
lighten the deficit and the national debt.
15
Robert Merton Solow (1924) is an American economist particularly known for his work on the theory of economic growth that
culminated in the exogenous growth model named after him. He was awarded the John Bates Clark Medal (in 1961) and the 1987
Nobel Memorial Prize in Economic Sciences.
16
8

9. TECHINIAL PROGRESS INCORPORTAED: TECHNICAL
RAPPRESENTATION17
1.1 Definition
We have technical progress incorporated when the it is realised in the form of new and
more advanced machinery and equipment, i.e. it incorporated in new capital goods.
On the contrary, so far has always believed that technical progress was used for the benefit of
all existing manufacturing processes, whatever the time when they were introduced, and it
was not necessary to specify how they were applied.
This is confirmed by Neoclassical theory of growth.
So, we can write a function of production as:
(1)
To represent the technical progress, supposing that operates with only passage of the time and
allows more production equal to capital and labour, i.e it is assumed that technical progress is not
incorporated, which favours similarly the production processes that use capital goods old and new.
In this case we can cite the metaphor of technical progress: “it rains like manna from heaven”:
manna that you have without doing anything special and that favour all the production processes
similarly, independently of age. If instead you consider the production processes, above all those
industrial (crucial point in the modern economic system) , you can see that very significant part of
the technical progress is” incorporated “ in new capital goods. If the technical progress is
incorporated in new machinery and equipment , manna falls only on new capital goods. This idea
was always been absent in the minds of economists, but was always been familiar to historians,
who have dealt the industrial revolution and economic development.
De Long E Summers (1992) observe that the beginning of the industrial revolution was already
identified by Blanqui in 1837, with two machines, the steam engine and the power loom, and since
“ the historical debates on the growth have underlined the role of the investments in machineries in
increasing the production capacity of labour”. They have taken over the phrase of Landes: “ The
machine is at the heart of the new economic civilization”, and using the expression of Mokyr, they
say that “ The technology incorporated in the machines has been the lever of wealth”.
Models with technical progress incorporated give much weight to investments. The technical
progress incorporated, that gradually becomes available as construction of machineries and
equipment, enters in the economic system only if investments are made (gross): only to the extent
that these new machines and equipments are purchased and installed. It establishes a link of cause –
effect between an economic variable – investment – and technical progress, that is a (partial) form
of its endogenous process.
17
L. Boggio, G. Seravalli : “The economic development. Facts, theories, policies” Il Mulino 2003
9

10. The concept of technical progress incorporated in machines and the models that use it provide an
important contribution with regard to the link between accumulation of capital and higher wages. In
the traditional neoclassical model the higher wages leads to the adoption of techniques more
“capitalist” (with more use of capital to replace labour ). This assumes and requires the idea that
there are many techniques (with many different efficient combinations of labour and capital) to
produce the same product, and the idea that wage increases have no effect on productivity growth.
The empirical connection between growth and wages and the increase in capital intensity of
production processes could be explained in another way, with the effect of wage growth on the
adoption of more modern techniques ( independently if they are flexible or not in capital/labour
ratio).
To understand the mechanism that can operate in this way we have to think about the process of
replacement of technically obsolete equipment.
1.2 Replacement of technically obsolete equipment
In years models technical progress incorporated finds its clearest explication; so is necessary to
distinguish capital goods for “vintage” ( the date on which each of them was installed) , and show
how technical progress changed capital goods and their production process form year to year. These
following diagrams try to reduce this complications. We will assume the presence of production
process with “fixed coefficients”. The coefficient of work decreases by a year to the next, while
remain constant the other coefficients.
= labour productivity ( the inverse of labour coefficient, CL ( ) associated with capital goods
(machines) produced and installed at time , i. e. then of year, is a date between 0 and t, and t
is the last date considered (t as current moment, so T indicates a moment in the past). Every
machine, of any year, produce in each unit of time, a unit of final product and its cost is the capital
coefficient CK, that remain constant in the time. The technical progress incorporated shows as:
(2)
To an older machine – of year < t – corresponds a labour productivity less than that of the latest
machine (year t). With latest and more efficient productivity process don’t disappear immediately
those old. Their survival don’t depend only by the slowness with which knowledge and information
about new technologies they spread.
A process remains operational until “the current unit cost for the operation of the machine” is less
than the total unit cost, including depreciation, associated with the production process
more recently.
Suppose that the production process involved an initial cost of purchasing a machine, equal to CK,
The depreciation ,a, is calculated on the basis of the cost of the machine and of time with which you
expect/want to recover this cost (payback period) T33. The current unit cost for the operation of the
machine, is equal, per unit produced, to:
(3)
Where b is the cost per unit produced of materials,
is the wage rate at time t wt /π ( ) is the
labour cost per unit produced at time t in a production process started at time < t). All quantities
are expressed in term of final product. The total unit cost on the new machine is:
10

11. (4)
This is what the company’s revenue have to cover for a period not less than T if it want to
depreciate the initial cost for the purchase of the machine, CK.
age at time t of the machine with vintage ; a and b don’t depend on the age of the
machines. The current cost of operation, can be write as :
(5)
At any given moment t is different depending on the age of machines: it grows with the age. While
the wage rate is identical for all production process, no matter what machine use, productivity of a
machine is smaller the greater the age, because the technology incorporated in each machine is
much more advanced than the lower its age.
In the figure 4, where you can see an hypothetical situation in a given instant of time t, this
proposition is represented by a series of vertical segments, each of which expresses the current cost
of operation of the machine that has an age equal to the distance of the segment from the vertical
axis. This series is increasing with the age of the machine.
At time t , remain alive (working) all production process whose the current cost of operation is not
greater than the total unit cost of the productive process using more new capital goods (δ = 0)
If at time t the old machine can still produce with a unit cost of operation less than the total unit cost
of the new machine, there is no reason to abandon it. At time t remain alive all machines, so we
have:
(6)
In the figure 1 is represented the right side of inequality 6 , the total unit cost of the new machine is
equal to the distance of the horizontal line AB from horizontal axis ; δ*= age of the oldest machine
for which inequality is satisfied (6).
11

12. The machines with inferior age remain in live.
(segments on the left of δ*), the others are already
been eliminated (segments on the right of δ*).
Analyzing the inequality 4 we can understand the significant of the figure.
If at time t the firm have to choose between start the production or with the machine of age δ > 0,
or with the more new machine of age δ = 0, certainly would chooses the second. The old machine
should be purchased and so its unit cost should include the depreciation of initial investment (a),
how the new machine , while the new machine is more efficient.
Fig 1 Survival and substitution of productive process with old machine
The problem is if to continue the production with the old machine or leave that machine and replace
it with the new. In this choice is irrelevant if at time t the company has already recovered or not the
cost of the old machine ( selling quantities at least equal to those under which it was calculated the
depreciation, at a price not less than its total unit cost). If this recovery has not happened yet , if the
inequality 6 is not satisfied, insist on producing with the old machine (obsolete) would result in
higher unit cost than would be obtained when replacing with the new machine. Would not be
convenient to replace a old machine with new machine , when the unit cost of operation of the first
is less than the total unit cost of the second ( including the initial investment) In this case if the unit
price of selling the products, p, can cover the total unit cost of the second:
(7)
The company will allocate the depreciation of the old machine (or profit, if the depreciation has
already finished), for each unit sold, the sum ɛ + the difference between the unit cost of operation of
the old machine and the total unit cost of the new machine. This difference would be lost if the old
machine was replaced.
12

13. 1.3 The apparent substitution of capital for labour
Now we consider the effect of real wage growth , one of the stylized fact of the modern economic
development. The abandonment of an old machine for a new also depends on the level of wages.
The advantages of the first on the second are inversely proportional to the level of the wages and if
these are high enough, the advantage is relative and it is convenient replace it. In this way the
growth of real wage accelerates the process of substitution of machines.
V(w, δ , t) = the advantage of the new machine of year
= (t – δ) respect to a new machine
(of vintage t > ), defined as difference between total unit cost of a new machine and the cost of
operation of the old machine.
From 5 and 6 we have:
(8)
The productivity of the old machine is less than the productivity of the new machine,
so we have:
,
(9)
The advantage of the old machine is reduced with the increasing of wages. It resets when w = w*,
where w* is defined by:
(10)
(11)
13

14. According to (9), (10) and (11) we can represent the trend
of the advantage of the old machine with the increasing
of wages, in a graphic (graphic 2). Until wt > w* , it is
convenient maintain in function the old machine, if
wt < w* it is convenient to substitute it with a new
machine. The new machine have a capital/labour ratio CK
π (t). π ( ),the labour productivity is the inverse of the
labour coefficient , CL ( ). So
Fig. 2 Wage growth and replacement of used machine
(12)
For the old machine:
(13)
As:
(14)
14

15. Now:
(15)
When wages increase and reach the level w*, a new machine with higher capital/labour rate,
substitutes a old machine with lower capital/labour ratio.
So wages increases determined a” substitution of capital for labour “, in the sense intended by the
neoclassical theory, that is as moving as determined by the wages increase, along an isoquant. In
fact it’s everything else. It isn’t substitution of capital for labour, but it is substitution of capital
goods and productive process technologically oldest with others newest and most advanced.
15

16. CONCLUSIONS
The theories and models reported in Chapter 1 allow to better understand the incommunicability
between economy of the labour and of the growth, and the importance of models came after, such
as models of Pissarides18, Aghion19 and Howitt20, which have stimulated the research of neoclassical
theory to treat in a unitary contest growth, technological progress and unemployment.
The common misunderstanding reported at the end of Chapter 2, has rooted in the thinking and in
the language of those involved in economic development the idea that the neoclassical substitution
of capital for labour is an important phenomenon in the modern economic development. This has
served to validate the pervasive use of the neoclassical function of production , that in the
substitutability between factors , in particular between capital and labour, find one of its main
features. As the neoclassical apparatus is considered by the most part of neoclassical economists
the instrument par excellence that can express the substitution of capital for labour determined by
the real wages increase, if one is convinced that this substitution is a very important fact in the
modern economic development, the interpretative value of the neoclassical apparatus resulting
exalted. This conclusion, based on what has been said in these chapter, seems little foundation.
18
Christopher A. Pissarides (1948) is a Cypriot economist. He currently holds the Norman Sosnow Chair in Economics at
the London School of Economics. His research interests focus on several topics of macroeconomics, notably labor, economic growth,
and economic policy. In 2010, he was awarded the Nobel Prize in economics, jointly with Peter A. Diamond and Dale Mortensen, for
his contributions to the theory of search frictions and macroeconomics.
19
Philipe Aghion (1956) is a French economist. He is Robert C. Waggoner Professor of Economics at Harvard University. His main
research work is on growth and contract theory. With Peter Howitt, he developed the so-called "Schumpeterian paradigm", and
extended the paradigm in several directions; much of the resulting work is summarised in his joint book with Howitt entitled
"Endogenous Growth Theory".
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Peter Howitt (1946) is a Canadian econimist He is the Lyn Crost Professor of Social Sciences at Brown University. Howitt is a
Fellow of the Econometric Society since 1994 and a Fellow of Royal Society of Canada since 1992. He served as President of
the Canadian Economics Association in 1993-1994 and was the editor of the Journal of Money, Credit, and Banking in the period
1997-2000. His most important work is “Innovation Competition and Growth: A Schumpterian Perspective on Canada’s Economy”.
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17. BIBLIOGRAPHY
Valeria Maria Pozzi: “ICT and employment (real or virtual?) the case Unitec”. Thesis in Economy
of labour, Political Science, University of Rome, 2000/2001
Raffaele Contini, Thesis “Growth, technological progress and unemployment”. Political Science,
University of Pisa, 2002/2003
L. Boggio, G. Seravalli : “The economic development. Facts, theories, policies” Il Mulino 2003
Wikipedia: the free encyclopedia.
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