Abstract

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Blackwell Publishing and Economic History Society These descriptive categories are rooted in certain dynamic propositions about supply, demand, and the pattern of production; and before indicating the historical content of the categories I shall briefly state the underlying propositions. A Dynamic Theory of Production The classical theory of production is formulated under essentially static assumptions which freeze -or permit only onceover change-in the variables most relevant to the process of economic growth. As modern economists have sought to merge classical production theory with Keynesian income analysis they have introduced the dynamic variables: population, technology, entrepreneurship, etc. But they have tended to do so in forms so rigid and general that their models cannot grip the essential phenomena of growth, as they appear to an economic historian. We require a dynamic theory of production which isolates not only the distribution of income between consumption, saving, and investment (and the balance of production between consumers and capital goods) but which focuses directly and .in some detail on the composition of investment and on developments within particular sectors of the economy. The argument that follows is based on such a flexible, disaggregated theory of production. When the conventional limits on the theory of production are widened, it is possible to define theoretical equilibrium positions not only for output, investment, and consumption as a whole, but for each sector of the economy.1 Within the framework set by forces determining the total level of output, THE ECONOMIC HISTORY REVIEW sectoral optimum positions are determined, on the side of demand, by the levels of income and of population, and by the character of tastes; on the side of supply, by the state of technology and the quality of entrepreneurship, as the latter determines the proportion of technically available and potentially profitable innovations actually incorporated in the capital stock.1 In addition, one must introduce an extremely significant empirical hypothesis; namely, that deceleration is the normal optimum path of a sector, due to a variety of factors operating on it, from the side of both supply and demand.2 The equilibria which emerge from the application of these criteria are a set of sectoral paths, from which flows, as first derivatives, a sequence of optimum patterns of investment. Historical patterns of investment did not, of course, exactly follow these optimum patterns. They were distorted by imperfections in the private investment process; by the policies of governments; and by the impact of wars. Wars temporarily altered the profitable directions of investment by setting up arbitrary demands and by changing the conditions of supply; they destroyed capital; and, occasionally, they accelerated the development of new technology relevant to the peacetime economy and shifted the political and social framework in ways conducive to peacetime growth.3 The historical sequence of business cycles and trend periods results from these deviations of actual from optimal patterns; and such fluctuations, along with the impact of wars, yield historical paths of growth which differ from those which the optima, calculated before the event, would have yielded. Nevertheless, the economic history of growing societies takes a part of its rude shape from the effort of societies to approximate the optimum sectoral paths. At any period of time, the rate of growth in the sectors will vary greatly; and it is possible to isolate empirically certain readings sectors, at early stages of their evolution, whose rapid rate of expansion plays an essential direct and indirect role in maintaining the overall momentum of the economy.4 For some purposes it is useful to characterize an economy in terms of its leading sectors; and a part of the technical basis for the stages of growth lies in the changing sequence of leading sectors. In essence it is the fact that sectors tend to have a rapid growth phase, early in their life, that makes it possible and useful to regard economic history as a sequence of stages rather than merely as a continuum, within which nature never makes a jump. The stages of growth also require, however, that elasticities of demand be taken into account, and that this familiar concept be widened; for these rapid growth phases in the sectors derive not merely from the discontinuity of production functions but also from high price or income elasticities of demand. Leading sectors are determined not merely by the changing flow of technology and the changing willingness of entrepreneurs to accept available innovations: they are also partially determined by those types of demand which have exhibited high elasticity with respect to price, income, or both. The demand for resources has resulted, however, not merely from demands set up by private taste and choice, but also from social decisions and from the 1 In a closed model, a dynamic theory of production must account for changing stocks of basic and applied science, as sectoral aspects of investment, which is done in The Process of Economic Growth, especially pp. 22-25. 2 Ibid. pp. 96-i03.