Economics Dictionary of ArgumentsHome
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| Wicksell Effect: The Wicksell Effect describes how changes in interest rates impact capital valuation and income distribution. It has two forms the price Wicksell Effect, where interest rate changes alter relative capital values, and the real Wicksell Effect, affecting capital intensity in production. It plays a key role in capital theory debates, including the Cambridge capital controversy. See also Interest rates, Joan Robinson, Capital structure, Capital, Production function._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Geoffrey C. Harcourt on Wicksell Effect - Dictionary of Arguments
Harcourt I 40 Wicksell effect/Harcourt: In the modern literature the 'real' and 'financial' aspects of an increase in social capital have come to be discussed under the heading of real and price Wicksell effects, respectively. The wage-rate-rate-of-profits trade-off analysis (…) allows a simple discussion of this distinction and allows us to show in a simple way what Swan had in mind when he described the (price) Wicksell effect as an inventory revaluation. >Wicksell effect/Swan. Def Price Wicksell effect: The price Wicksell effect relates to changes in the value of capital as w and r change their values but techniques do not change, i.e. it is associated with the w-r relationship that corresponds to one technique. Def Real Wicksell effect: Real Wicksell effects relate to changes in the value of capital associated with changes in techniques as w and r take on different values, i.e. they are differences in the values of capital at (or, rather, very near) switch points on the envelope of the w-r relationships. Switch points are the intersection points where two techniques are equi-most profitable. Both effects reflect the influence, through w and r, of the 'time' pattern of inputs of production, but real effects reflect in addition changes in production methods, i.e. changes which reflect real production potentials, not just their market values. Consider an economy-wide technique which has a net output per head of a consumption good, q. Assume that we are in a stationary state (which is formally equivalent to what Garegnani [1970a](1) calls an integrated consumption-good industry) and that capital goods last forever. Then q = rk + w where all values are measured in consumption-good units per head, so that k = q – w / r When r = 0, q = wmax, the maximum wage which is also output per head. Because of our assumptions, q = wmax for all values of r. If we had more than one consumption good, or were considering a growing economy in which net investment formed part of the national product, q = HW would hold only when r = 0 and net investment were either zero or the same good, because the value of q is affected by the relative prices of capital goods in terms of consumption goods which are themselves affected by the value of r. Harcourt I 41 (…) a w-r curve which is concave to the origin implies a negative price Wicksell effect - the value of capital is lower, the lower is the value of r, the inventory revaluation is negative. By exactly analogous reasoning we may show that a w-r relationship which is convex to the origin implies a positive price Wicksell effect and that a straight-line one implies a zero or neutral price Wicksell effect, a crucial result (…). Wicksell effect/Economic theories: Economic interpretations which relate the slopes and shapes of the w-r curves to the technical coefficients of production in each sector of the economy may be found in Bhaduri [1969](2), Garegnani [1970a](1), Hicks [1965](3), Robinson and Naqvi [1967](4), Samuelson [1962](5), Spaventa [1968(6), 1970(7)], Nuti [1970b](8). Harcourt I 43 It is only at switch points that the differences can be said, in general, to be entirely 'real'. For it is only at switch points that the wage and profits rates are the same for both methods so that any difference between the values of their ks must be attributable to the differences in the productivities of the methods. Anywhere else, though one factor price will be common to both, the other one will not, it being greater for the technique which is in use, i.e. is on the w-r envelope. Harcourt I 45 Rate of profits: in the traditional case, we consider the implications of a change in the rate of profits (which in the limit becomes infinitesimally small) for the ratio of the change in output to the change in the 'quantity of capital'. In the case above, though, we consider the implications, for the (limiting) ratio of the increments, of a change in the proportions in which two equi-profitable techniques are combined, the rate of profits remaining unchanged - as does, of course, the amount of labour in both cases. Real/price effects: The differences between the two concepts highlight the crucial point that z/the marginal product of capital is to be part of an explanation of the rate of profits itself, the changes in the 'quantities' as we go from one technique to another must themselves be independent of changes in the rate of profits. 'Capital', like labour, has to be measured in a unit which is independent of distribution and prices. >Capital/Robinson, >Econometrics, >Production function, >Aggregate production function. 1. Garegnani, P. [1970a] 'Heterogeneous Capital, the Production Function and the Theory of Distribution', Review of Economic Studies, XXXVII (3), pp. 407-36. 2. Bhaduri, A. [1969] 'On the Significance of Recent Controversies on Capital Theory: A Marxian View', Economic Journal, LXXIX, pp. 532-9. 3. Hicks, J. R. [1965] Capital and Growth (Oxford: Clarendon Press). 4. Robinson, Joan and Naqvi, K. A. [1967] 'The Badly Behaved Production Function', Quarterly Journal of Economics, LXXXI, pp. 579-91. 5.Samuelson, P. A. [1965] 'Review of J. E. Meade, Efficiency, Equality and the Ownership of Property 1964', Economic Journal, LXXV, pp. 804-6 6. Spaventa, L. [1968] 'Realism without Parables in Capital Theory', Recherches recentes sur la fonetion de Production, Centre D'Etudes et de Recherches Uni- versitaire de Namur, pp. 15-45. 7. Spaventa, L. [1970] 'Rate of Profit, Rate of Growth, and Capital Intensity in a Simple Produc- tion Model', Oxford Economic Papers, xxii, pp. 129-47. 8. Nuti, D. M. [1970b] 'Capitalism, Socialism and Steady Growth', Economic Journal, LXXX, pp. 32-57._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Harcourt I Geoffrey C. Harcourt Some Cambridge controversies in the theory of capital Cambridge 1972 |
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