In a discussion of the effect of changes in technique upon the position of long-period equilibrium, in my Essays in the Theory of Enaploynrent,1 I made use of Mr. Hicks’s classification of inventions, according to which an invention is said to be neutral when it raises the marginal productivities of labour and capital in the same proportion, and is said to be labour-saving or capital-saving according as it raises the marginal productivity of capital more or less than that of labour, the amounts of the factors being unchanged. I analysed the effect of an invention upon the relative shares of the factors in the total product, when the amount of capital is adjusted to the new technique (so that full equilibrium is attained, with zero investment), in terms of this classification of inventions and the elasticity of substitution, showing that, with a constant rate of interest, the relative shares are unchanged, in equilibrium, by an invention which is neutral in Mr. Hicks’s sense provided that the elasticity of substitution is equal to unity, while if an invention is labour-saving or capital-saving in Mr. Hicks’s sense, the relative shares are unchanged (in equilibrium, with a constant rate of interest) if the elasticity of substitution is correspondingly less or greater than unity.
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