The Review of Economic Studies, Ltd.

III. The Question of Symmetry

Author(s): A. P. Lerner
Source: The Review of Economic Studies, Vol. 3, No. 2 (Feb., 1936), pp. 150-151
Published by: Oxford University Press
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I50 THE REVIEW OF ECONOMIC STUDIES
does not give his reasons for rejecting Dr. Hicks' statement that the demand
for output in terms of itself must always have infinite elasticity.
Cambridge. JOAN ROBINSON.
III. THE QUESTION OF SYMMETRY.
IN his enlightening article in the last volume of the REVIEW OF ECONOMIC
STUDIES, Dr. Machlup raises the question as to whether the elasticity of
substitution is symmetrical. I think the difficulties in connection with this
question can be shown to rest entirely on a lack of clarity as to what is meant
by symmetrical movements. The different possible meanings can easily be
enumerated.
The elasticity of substitution always refers to a change in the constellation
of elements engaged in the bringing about of a result. If A is one such constel-
lation and B is another, it is clear that the elasticity of substitution must be
the same for a movement from A to B as from a movement from B to A. It
will not matter how complicated the movement is, or how large, or whether
we are speaking of factors producing a product or of commodities giving
satisfactions or of a combination of these. The change in the ratio between
the quantities of the elements and the change in the ratio between their
marginal effectiveness are the same for both movements and the elasticity of
substitution is the ratio between these ratios. The movement is symmetrical
and so is the elasticity of substitution. The question is exactly parallel to
that of the symmetry of arc elasticity of demand.1L
One must be careful, however, to see that there is no change in the nature
of A or B. Here the time factor may come in unobserved. If time is not
allowed for full adjustment, whichever position is the new one will have a lower
product and a lower relative marginal product for the relatively increased factor.
This will lower the figure for the elasticity of substitution in both cases and
unless the rate of adjustment is the same in both directions the elasticity of
substitution will appear to be assymetrical. There is, however, no reason why
one should expect these two elasticities of substitution to be the same. A
movement from a fully adjusted A to a not fully adjusted B is not the reverse
of a movement from a fully adjusted B to a not fully adjusted A.
Symmetry is sometimes claimed for a pair of movements from B to A
and from B to C where B is in some sense intermediate between A and C. Thus
the addition of labour to a combination of labour and capital is paired with
an addition of capital to the same original position; or the substitution of
labour for capital (keeping the product constant) is paired with the substitution
of capital for labour starting from the same position. There is in such a case
no reason whatever for expecting the elasticity of substitution to be the same
for both movements in the pair if the movements are of finite size. They
refer to different regions where conditions may be quite dissimilar.
1
See A. P. Lerner,
"
The Diagrammatical Representation of Elasticity of Demand," REVIEW
o0 ECONOMIC STUDIES, OCt., I933, P.
4I.
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FURTHER NOTES ON ELASTICITY OF SUBSTITUTION
I5I
If the movements are, however, considered to be infinitesimal and the
conditions to change continuously if at all, the change of conditions over the
range may be neglected and the elasticity of substitution considered to be the
same in both directions. This may be called " point " elasticity of substitution,
which like " point" elasticity of demand is symmetrical, so that the direction
of movement does not have to be specified.
It will have been observed that it makes no difference for this purpose
whether we consider the elasticity of substitution to deal with additions to
the elements in a constellation or only with literal substitution of some of one
element for some of another. In a comment on a similar point 1 I once used
language that may have suggested that assymetry arises whenever changes
due to variations in scale are lumped in with changes due to substitution in
the strict sense. This is, of course, not the case.
I would like to take this opportunity of observing that my diagrammatical
treatment of elasticity of substitution to which Dr. Machlup refers 2 is in no
way restricted to " technical" substitution, but is intended to be, and can
equally well be applied to the different kinds of substitution that he has
enumerated.
London. A. P. LERNER.
(Leon Fellow of the UIniversity of London).
IV. REPLY.
IN my article on "The Commonsense of the Elasticity of Substitution," I
stated that the concept and the formula used by Dr. Hicks in the Appendix
of his " Theory of Wages " fit in with the concept and definition employed
in Mrs. Robinson's " Economics of Imperfect Competition." Mr. Friedman
and Mrs. Robinson emphasise this again in their notes. But what they say
to show that these two concepts are in fact the same does not touch the main
point of my argument about the distinction between those two identical
concepts on the one hand and the one used by Dr. Hicks in the text of his book
on the other; which Dr. Hicks uses to determine how the factors' relative share
in the national dividend changes with the amount of the factors employed.
The mere formal congruence of two concepts should not blind us to the
difference in their material content. The elasticity of substitution as far as
it " is determined by the technical conditions of production " (Mrs. Robinson,
" Economics of Imperfect Competition," p. 256) cannot be made equal to the
elasticity of substitution determining the factors' share in total income by
simple assumptions about the " demand for output as a whole," either " in
terms of itself " or in terms of money. We must not be satisfied with assuming
that the demand for output as a whole is infinitely elastic, because this output
changes not only in quantity but also in composition. I tried to make it clear
that the composition of output will change as relative prices change and that
the change in composition changes the demand for different factors. This is
I
See L. Tarshis and A. P. Lerner,
"
Notes on Elasticity of Substitution," REVIEW
OF
ECONOMIC STUDIES, Feb., I934.
2
REVIEW OF ECONOMIC STUDIES, OCt., 1933,
pp.
68-71I
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