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TECHNOLOGICAL PROGRESS, PRODUCTIVITY


AND PROFIT RATE IN MACROECONOMICS

1. PRODUCTIVITY AS INDEX OF TECHNOLOGICAL PROGRESS
The relation of net domestic product versus employment in an economy varying
with time can be approximated within a production period by a bilinear production
function ( ) Y Y N = ruled by the economys total capital stock K and the level of
technology within the production period under consideration. Owing to changes in
technology, the bilinear production function ( ) Y Y N = may differ from period to
period. The approximation is depicted in the following Fig. 1



















where K stands for the capital stock of the economy, i.e. the total capital in-
vested in means of production,
Y stands for the income as the net domestic product (value added),

FE
Y stands for the income at full employment of the capital stock K ,
which is the maximum value of income, i.e.
FE
Y Y s ,
N stands for the number of labour (or employment) units (i.e. hours of
work of a lay man) entered as input in the net domestic product Y,

ZI
N stands for the number of labour units corresponding to zero income
0 Y= and the initiation of positive income 0 Y> ,

FE
N stands for the number of labour units corresponding to full employ-
ment of the capital stock K .
According to Fig.1, no additional income (net domestic product) Y can be pro-
duced if the labour units N exceed
FE
N .
Fig. 1: Bilinear production function ( ) Y Y N = for given capital K
( ) Y Y N =
N
Y
FE
N
FE
Y
ZI
N
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Technological progress represents but an increase of the efficiency of the capital
stock K , which can be measured as the ratio of income
FE
Y to capital stock K ,
thereby representing a higher income-capital ratio /
FE
Y K. This ratio therefore is
characteristic of the real potential of technological progress inherent in a given
capital stock K , and is herein called characteristic technological productivity,

/
FE
Y K Characteristic Technological Productivity . (1.1)

Further, if the level of income Y falls below the full-employment income
FE
Y , then
the ratio / Y K represents an active technological productivity smaller than the
characteristic technological productivity /
FE
Y K. For given capital stock K , the
ratio of the active technological productivity / Y K to the characteristic technologi-
cal productivity /
FE
Y K equals the income activity ratio /
FE
Y Y ,

/
/
/
FE
FE
Y K
Y Y
Y K
= Income Activity Ratio , (1.2)

which implies

( ) ( )
/ / /
FE FE
Y K Y Y Y K = Active Technological Productivity . (1.3)

In view of Fig. 1, the income activity ratio /
FE
Y Y can be expressed in terms of la-
bour units as below

/
ZI
FE
FE ZI
N N
Y Y
N N

Income Activity Ratio , (1.4)



and hence, the employment ratio /
FE
N N can be expressed as follows

( ) ( )
/ 1 / / /
FE ZI FE FE ZI FE
N N N N Y Y N N = + , (1.5)

which indicates that the employment ratio /
FE
N N is an increasing function of the
income activity ratio /
FE
Y Y , with the increase rate of the former being smaller
than the increase rate of the latter for
FE
N N s .

For the capital stock K measured in constant prices of a given base year, techno-
logical progress reasonably leads to a higher capital-labour ratio /
FE
K N , whose
product with technological productivity /
FE
Y K defines the labour productivity
/
FE FE
Y N at full employment,
( ) ( ) / / /
FE FE FE FE
Y N Y K K N = Full - Employment Labour Productivity . (1.6)

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Evidently, the labour productivity /
FE FE
Y N refers to prices of the given base year.
On account of the fact that both of the technological productivity /
FE
Y K and the
capital-labour ratio /
FE
K N increase with technological progress, it follows that
the full-employment labour productivity /
FE FE
Y N must increase with technologi-
cal progress, thereby being an index characteristic of the technological progress.
Further, if the level of employment N falls below the full employment
FE
N , then
the ratio / Y N represents a real labour productivity smaller than the full-employ-
ment one, due to the bilinear production function ( ) Y Y N = used in Fig. 1.
By means of the income activity ratio /
FE
Y Y and the employment ratio /
FE
N N ,
the labour productivity / Y N becomes equal to

( )
/
/ /
/
FE
FE FE
FE
Y Y
Y N Y N
N N
= Labour Productivity , (1.7)

which also refers to prices of the given base year, and due to equation (1.5) can
be put in the formulation

( ) ( ) ( )
( )
1
/ /
1 / / /
FE FE
ZI FE ZI FE FE
Y N Y N
N N N N Y Y
=
+
. (1.8)

Equation (1.8) implies that for given capital stock K and production function
( ) Y Y N = , the labour productivity / Y N increases with increasing income activity
ratio /
FE
Y Y up to its maximum value /
FE FE
Y N .
Further, equation (1.8) after rearranging terms in the denominator and replacing
the labour productivity /
FE FE
Y N according to equation (1.6) becomes

( ) ( )
( ) ( )
1
/ / /
1 / 1 / 1
FE FE
ZI FE FE
Y N Y K K N
N N Y Y
=
(
+

, (1.9)

which discloses that the labour productivity / Y N, and hence, its growth, can be
attributed to only four sources:
1) The technological productivity /
FE
Y K, which is exclusively dependent on the
technological level of the means of production used, and hence, on the techno-
logical progress. With all the others remaining constant, the larger the techno-
logical productivity /
FE
Y K is, the larger the labour productivity / Y N becomes
2) The capital-labour ratio /
FE
K N , which also is exclusively dependent on the
technological level of the means of production used, and hence, on the techno-
logical progress. With all the others remaining constant, the larger the capital-
labour ratio /
FE
K N is, the larger the labour productivity / Y N becomes.
3) The income activity ratio /
FE
Y Y of the economy. With all the others remaining
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constant, the larger the income activity ratio /
FE
Y Y is, the larger the labour
productivity / Y N becomes.
4) The labour ratio /
ZI FE
N N , which exclusively depends on the bilinear produc-
tion function ( ) Y Y N = corresponding to the production period considered.
With all the others remaining constant, the larger the labour ratio /
ZI FE
N N is,
the smaller the labour productivity / Y N becomes.

In line with the relations (1.7) and
FE
Y Y s , the labour productivity / Y N becomes
smaller than its full-employment value /
FE FE
Y N by adding unproductive (unnec-
essary) labour units
UN
N to the productive (necessary) labour units
FE
N ,

/ /
FE FE FE UN FE
Y N Y N N N N N < = + > for . (1.10)

On the other hand, equation (1.3) implies that the active technological productivity
/ Y K remains equal to the characteristic technological productivity /
FE
Y K, for
FE UN FE
N N N N = + > ,

/ /
FE FE UN FE
Y K Y K N N N N = = + > for . (1.11)

2. INCOME DISTRIBUTION AND TECHNOLOGICAL PROGRESS
The income Y can be analysed into the profits ( ) + K N w r of its capital input
and the real wages N w of its labour input as below

( ) Y K N w r N w = + + , (2.1)

where w stands for the real wage of the labour unit used for measuring the total
labour (or employment), and
r stands for the profit rate in aggregate terms (i.e. for all the economy).
The distribution of the income Y between capital and labour is described by the
following ratio e

( )
1
/
K N w r
Y N w Y N
e
N w N w w
+

= = =

, (2.2)

which corresponds with the Marxist surplus-value rate or exploitation rate.
Combining equations (2.1) and (2.2) yields

( ) 1 Y e N w = + , (2.3)

which for full employment can be given the form
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( ) 1
FE FE EF EF
Y e N w = + , (2.3a)

and define

( ) / 1
FE FE FE FE
Y N e w = + Full - Employment Labour Productivity , (2.4)

where
FE
e and
FE
w stand for the surplus-value rate and the real wage, respec-
tively, at full employment.

Recalling that the full-employment labour productivity /
FE FE
Y N increases with
technological progress, equation (2.4) implies that the magnitude ( ) 1
FE FE
e w +
increases with technological progress. This allows both the real wage
FE
w and
the income distribution ratio (i.e. the Marxist surplus-value rate or exploitation rate)
FE
e to rise with technological progress, on the condition that each of them in-
creases less than the full-employment labour productivity /
FE FE
Y N .
Now, equation (1.7) in view of equation (2.4) can be given the form

( )
/
/ 1
/
FE
FE FE
FE
Y Y
Y N e w
N N
= + Labour Productivity , (2.5)

which implies that for given capital stock K , income activity ratio /
FE
Y Y , and
production function ( ) Y Y N = , with the given income activity ratio /
FE
Y Y and
production function ( ) Y Y N = implying given employment ratio /
FE
N N , the la-
bour productivity / Y N increases with the magnitude ( ) 1
FE FE
e w + .

Equation (2.3a) in view of equation (1.1) can be written as

( )
( )
1
/
FE
FE
FE FE
e
Y K
K N w
+
=

Technological Productivity , (2.6)



where ( ) /
FE FE
K N w is a percentage which corresponds with the Marxist organic
composition of capital at full employment.

On account of equation (2.6) it follows that for constant surplus-value rate
FE
e , the
organic composition of capital ( ) /
FE FE
K N w decreases with increasing techno-
logical productivity /
FE
Y K, that is, with technological progress, which contradicts
Marxs assertion about the opposite.
Within this frame and taking into account that equations (1.3) and (2.6) yield

( )
( )
( )
1
/ /
FE
FE
FE FE
e
Y K Y Y
K N w
+
=

Active Technological Productivity , (2.7)


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it is deduced that for constant surplus-value rate
FE
e and given income activity ra-
tio /
FE
Y Y , the active technological productivity / Y K increases with technologi-
cal productivity /
FE
Y K, that is, with technological progress.

3. PROFIT RATE AND TECHNOLOGICAL PROGRESS
The profit rate at full employment
FE
r can by equation (2.1) be defined as

1
FE
FE
FE FE FE FE
FE
FE
FE FE
FE
w
Y K
Y N w K N
r
w
K N w
K N


= =
+
+
Full - Employment Profit Rate , (3.1)

which, recalling that both of
FE
Y K and /
FE
K N increase with technological pro-
gress, allows the full-employment profit rate
FE
r to increase with technological
progress, on the sufficient condition that the ratio of the full-employment real wage
FE
w to the full-employment capital-labour ratio /
FE
K N , that is, the inverse of the
full-employment organic composition of capital ( ) /
FE FE
K N w , will not increase
far more than in proportion to the characteristic technological productivity
FE
Y K.
For constant
FE
Y K and /
FE
K N , which represents technological stagnation, the
only way for an increase of the full-employment profit rate
FE
r is a decrease of the
full-employment real wage
FE
w . By doing so, an economy of lower technological
level (lower
FE
Y K and /
FE
K N ) tries to become more attractive to investments
and able to sell the product
FE
Y at a price lower than its real value without loss of
the initial profits, thereby becoming competitive in comparison with economies of
higher technological level. However, such a counter-labour policy meets the rea-
sonable reactions of the labour class, and may set in danger the cohesion of the
society of the production factors.

Equation (3.1), in view of equations (2.2) and (2.3), can be put in the equivalent
formulation

1
1 1
FE FE
FE
FE
FE FE FE
e e
r
K e
N w Y K
= =
+
+ +

Full - Employment Profit Rate , (3.2)



which, recalling that the technological productivity
FE
Y K increases with techno-
logical progress, implies that the full-employment profit rate
FE
r increases with
technological progress under constant full-employment surplus-value rate
FE
e .
This outcome actually overturns the Marxist law of the tendency of the profit rate
FE
r to fall with technological progress under constant surplus-value rate
FE
e .
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The profit rate r in the general case of partially (i.e. not fully) employed capital
stock can by means of equations (1.3), (2.1) and (2.2) be defined as

( ) ( )
1 1
1 1 1
/ /
FE FE
e e e
r
K e e
N w Y K Y Y Y K
= = =
+ +
+ + +

Profit Rate , (3.3)

which indicates that for given income activity ratio /
FE
Y Y , the profit rate r in-
creases with the technological productivity
FE
Y K , and hence, with technological
progress, under constant surplus-value rate e . This outcome also overturns the
Marxist law of the tendency of the profit rate r to fall with technological progress
under constant surplus-value rate e .
Only if the income activity ratio /
FE
Y Y incidentally tends to fall with technological
progress so that the product ( / ) ( / )
FE FE
Y Y Y K will decrease, the profit rate r
incidentally tends to fall with technological progress under constant surplus-value
rate e . In short, the Marxist law of the falling tendency of the profit rate r can
only comply with a falling income activity ratio /
FE
Y Y .