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Factor Price Changes and Factor Substitution in an Evolutionary Model

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  • Richard R. Nelson
  • Sidney G. Winter

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.

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  • Richard R. Nelson & Sidney G. Winter, 1975. "Factor Price Changes and Factor Substitution in an Evolutionary Model," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 466-486, Autumn.
    • Handle: RePEc:rje:bellje:v:6:y:1975:i:autumn:p:466-486
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    Cited by:

    1. Beach, E. F., 1977. "Une théorie réaliste des prix et de la production," L'Actualité Economique, Société Canadienne de Science Economique, vol. 53(1), pages 65-81, janvier.
    2. Carl Futia, 2010. "Invariant Distributions and the Limiting Behavior of Markovian Economic Models," Levine's Working Paper Archive 497, David K. Levine.
    3. Deepankar Basu & Oscar Orellana, 2023. "Technical change, constant rate of exploitation and falling rate of profit in linear production economies," Metroeconomica, Wiley Blackwell, vol. 74(3), pages 512-530, July.
    4. Gerasoulis, A. & Kydes, A.S., 1980. "Market penetration - a probabilistic approach," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 22(4), pages 340-352.
    5. Ruttan, Vernon W., 1996. "Sources Of Technical Change: Induced Innovation, Evolutionary Theory And Path Dependence," Bulletins 12974, University of Minnesota, Economic Development Center.
    6. Blind, Georg, 2015. "Behavioural rules: Veblen, Nelson-Winter, Oström and beyond," MPRA Paper 66866, University Library of Munich, Germany.
    7. Gérard Duménil & Dominique Lévy, 1995. "A Stochastic Model Of Technical Change: An Application To The Us Economy (1869–1989)," Metroeconomica, Wiley Blackwell, vol. 46(3), pages 213-245, October.

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