Flexible technologies and proportional saving

Abstract

We shall now move on to a two-sector economy with flexible technologies in both the capital good and the consumption good sectors. For such an economy, the assumptions of full employment and efficient allocation of the production factors (labor and capital) no longer (as in chapter 7) suffice to establish a deterministic dynamic system. A macro savings function, as in chapter 3–6 is again needed to determine the part of aggregate income assigned to asset accumulation. However, as there are two commodities, and the price mechanism (flexible commodity and factor prices) is instrumental to determining factor allocation and output composition, aggregate income and savings necessarily become monetary (value) concepts. Although savings, with no financial assets, correspond to the monetary value of the new capital good output, it is not the quantitative increase in the capital stock (physical size of the production factor, capital). Evidently, in contrast to one-sector growth models, a new feature of two-sector growth models with flexible technologies and efficient factor allocation is the intrinsic influence of the price mechanism, operating to give existence to momentary and moving general equilibria in the commodity and factor markets — “miniature Walrasian general equilibrium systems”, see ([163], [184], p. 42, pp. 58).