Some Problems of Pricing and Optimal Choice of Factor Proportions in a Dynamic Setting

In general econonmic theory we have a stock of logically well-founded conclusions about the role of prices as a means of achieving efficiency in the use of economic resources. Such conclusions are usually derived in a static setting. Trying to apply them in practice, practitioners in planning often encounter difficulties. They feel-in my opinion correctly-that in taking decisions about technology, factor proportions and so on, one has to take into account expected future prices, expected trends in technology and other circumstances, although such considerations cannot easily be accommodated in traditional formal theory. The purpose of this article is to go some way towards filling this gap. The gap is due, in my opinion, to the assumptions made about factor substitution in the traditional theory of production. In this theory factor proportions formally appear as variables that can be adjusted continuously to changing factor prices, whereas they are in practice frozen for a considerable time because factor proportions are largely determined by the nature of production plant and equipment. On the other hand, one cannot dismiss variable proportions from allocation theory, because proportions are obviously variable ex ante, that is before the choice of technology has been embodied in physical plant and equipment. I have previously introduced a similar synthesis of variable and fixed proportions in the context of a macroeconomic growth model [3]2. I hope to show here that explicit recognition of the same principle will help to bridge the gap between the efficiency rules of economic theory and some considerations which planning practitioners feel it necessary to introduce. The exposition will be based on a simple example. It will be clear, however, that the conclusions obtained are valid for more general models. The ideas are presented in terms of continuous functions and the calculus; but most of the conclusions might have been obtained by parallel arguments in terms of programming theory. In fact, many parallel arguments and results are to be found in L. V. Kantorovich's The Best Use of Economic Resources [4]. Some conclusions similar to those obtained in the following pages are presented also in E. Malinvaud [8]

Context (archaeology) · Econometrics · Economics · Ex-ante · Factor price · Factors of production · Macroeconomics · Microeconomics · Production (economics) · Production theory · Stock (firearms) · Variable (mathematics) · Economic Growth and Productivity · Economic theories and models · Economic Theory and Policy · Engineering · Mathematics

• Welfare and Competition

  William J Baumol, Tibor Scitovsky•Economica•1972

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