Factor Price Changes and Factor Substitution in an Evolutionary Model
Volume: Volume 6, No. 2
Issue: Autumn 1975
Pages: pp. 466-486
Authors: Richard R. Nelson and Sidney G. Winter
Title: Factor Price Changes and Factor Substitution in an Evolutionary Model
Abstract: This paper argues that economists have been schizophrenic regarding the theory of the firm in a competitive industry. In much (but not all) of their formal mathematical modeling, maximization and equilibrium are taken literally. Ordinarily, however, both maximization and equilibrium are interpreted as tendencies in the verbal articulation. Such a "tendency" theory, which is thought by many economists to be closer to reality, is believed to be intrinsically difficult to formalize in such a way as to obtain verifiable theorems -- for example, that a shift in the ratio of the factor prices will induce the industry to change factor proportions in the opposite direction. This paper offers a more optimistic view of the prospects for formalizing this tendency approach. A formal evolutionary model is presented in which essentially neoclassical conclusions regarding the effect of factor prices on factor ratios are deduced without any recourse to concepts either of maximization or industry equilibrium.
JEL Classification
Microeconomics Theory of Production (0223)