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  • br Problem solved By the time Wicksell wrote

    2018-11-13


    Problem solved By the time Wicksell wrote his 1900 article on marginal productivity and volume 1 of his Lectures (preface dated February 1901), it became clear that the main issue involving the machinery question was not empirical, but theoretical. If correct, the notion that a viable technical change (that diminishes production costs and increases net profit) may reduce output for a given amount of productive factors represented a blow to the proposition that perfect AMG 925 leads to maximum aggregate production. Such a proposition about the efficiency of perfect competition has been recognized as one of the main features of “Pareto optimum” since Little (1950, p. 89) introduced the term, but matters were still unsettled around 1900. Apart from Wicksell, Barone (1935 [1908]) and the mathematician Scorza (1903), Pareto\'s optimality concept did not receive much attention until after Bergson (1938) discussed it and turned it into one of the foundations of mainstream welfare economics. The optimality conditions were independently rediscovered and formulated by Lerner (1934a,b) in his articles about socialist economies, with no reference to Pareto (see Niehans, 1990, pp. 329–332). Indeed, it was only in the 1930s that the entire set of marginal conditions of social optimum was stated explicitly. As put by Blaug (1985, p. 592), “Pareto and Barone did not go very far beyond a statement of the optimum conditions of exchange”. From Wicksell\'s perspective in the Lectures, Pareto\'s (1894, 1964 [1896–1897]) treatment of the optimality of perfect competition introduced a new essential element in the interpretation of the machinery question. This belonged to welfare economics, which was only implicit in Wicksell (1890). Surely, Pareto did not discuss Ricardo\'s machinery question, and neither did Wicksell (1958 [1900], pp. 100–106; 1934 [1901,1911], pp. 133–144) refer to Pareto in his sections about the influence of technical change on distribution. Nevertheless, those sections were written under the impact of and as a reaction to Paretian welfare economics. Wicksell\'s mature discussion of the machinery question introduced explicitly the distinction between maximum output and maximum social welfare, as part of his formulation of the marginal technical conditions for output maximization. Wicksell (1958 [1900], p. 103; 1934 [1901,1911], p. 137) built on Pareto\'s framework to show that the “objection raised by Ricardo is theoretically untenable”, but at the same time he used Ricardo\'s machinery question to argue, against Pareto, that output maximization may be associated with a reduction in wages and welfare of workers (Wicksell, 1958 [1913], pp. 169–171). Wicksell (1958 [1897–1899], pp. 142–144; 1934 [1901,1911], pp. 72–83) criticized both Walras (1954 [1874]) and Pareto (1964 [1896–1897]) for arguing that, under free competition, the gain from exchange is an absolute maximum for each trading agent and for the sum total of satisfactions of all agents as well. Wicksell rejected both claims (see also Samuelson, 1947, pp. 204–206). The first assertion – associated mainly with Walras – was based on confusion between the notion that the equilibrium position reached in pure competition is an optimum for each AMG 925 individual trader given its endowments and prices, and the view that pure competition produces optimal results. Another system of prices (fixed by the authorities or by monopolistic producers) may yield better results for traders. The second claim – developed particularly by Pareto – was only warranted under the assumption that the marginal utility of the commodities exchanged is the same for all individual traders, which means an approximate position of economic equality. Otherwise, it would be possible to replace competitive prices by another price system generating an increase in total utility, as demonstrated by Wicksell (1958 [1896–1897], p. 143, n. 1; 1934 [1901,1911], pp. 79–80).