Substitution, Fixed Proportions, Growth and Distribution

The labor requirements of machines are fixed forever at the time of construction. The utilization of these machines may change over time. One of the products of this model is a theory of the operating life and labor intensity of capital goods. A machine is retired here when rising wages have absorbed all its revenues. A machine will operate longer the smaller its labor intensity. The labor intensity of the optimal type of new machine depends upon the anticipated course of wages and the rate of interest. These relationships introduce a new dimension to the connection between investment and the growth of productivity. An increase in thrift lowers the rate of return on capital and the labor intensity of new machines, and thus ultimately lengthens the operating life of all machinery. Increased thrift affects productivity through both the lengthening and deepening of capital. An increase in thrift, far from modernizing the capital stock, except temporarily, must eventually increase the average age of machinery.