What is Hick’s classification of technical change?

Hick’s classification of technical change

Hicks presented a classification of technical progress in his book The Theory Sir John of Wages, published in 1932. Hicks looked at technical progress in terms of the effect of technical change on the ratio of marginal product of is neutral and if the ratio falls, it is called capital saving, capital to that of labour.

If after the technical change the ratio increases, in Hichs’s terminology it is to be called labour saving. If the ratio stays the same it is neutral and if the ratio falls, it is called capital saving.

To explain this further, let us use some notation. Let

F_K (t1) be marginal product of capital before technical progress.

F_K (t2) be marginal product of capital .after technical progress.

F_L (tl) be marginal product of labour before technical progress.

F, (t2) be the marginal product of labour after technical progress.

There is another way of looking at the Hicksian classification of technical progress. We know that in equilibrium the marginal product to each factor of production equals its price. Thus the marginal product of capital F_K equals rental on capital r and the marginal product of labour F_L equals the wage rate w.

In Hicks’s classification, a labour saving technical progress increases the ratio r/w while a capital saving technical progress reduces the ratio r/w. A technical change that saves labour reduces the wage rate relative to the rental of capital. A similar argument carries through in the case of capital saving technical progress.

We can now state the Hicksian classification of technical progress in the following way: A technical progress will shift the per-worker production function upward.

This technical progress is said to be labour- saving if at any given value of capital-labour ratio, the ratio of marginal product of capital to the marginal product of labour has increased. If this ratio decreases for a given value of capital labour ratio, the technical progress is said to be capital saving, and if the ratio stays the same it is Hicks-neutral.

The relative share of capital in total product is rKJ Y while the relative share of labour in total product is wL/Y. The ratio of the relative shares is [rK/YJ/ fwL/Y] =rK/wL. Let us denote this by S. Since the title of Hicks’s book is Theory of Wages we can understand that he was interested in studying what happens to the share of labour as technical change takes place.

We have seen that in the Hicksian classification we see what happens to F_K/F, to r/w, we have also seen that Hicksian classification is relevant where K/L is constant. We can understand that if K/L stays constant and r/w changes, rK/wL, that is, S will be affected. So we could state Hicks s classification in terms of relative factor shares.

We say that technical progress is labour saving in the sense of Hicks if, at any constant value of K/L, the ratio of relative shares S = rKJ wL is increasing, that is dS/dt is positive where dS/dt is the derivative with respect to time. Technical progress is capital saving in the sense of Hicks if, at any constant value of K/L, the ratio of relative shares S = rKAvL is decreasing, that is dS/dl is negative.

Technical progress is Hicks-neutral if, at any constant value of K/L, the ratio of relative shares S = rKAvL stays the same, that is dS/dl is equal to zero.

It has been proved by Uzawa that Hicks-neutral technical progress is equivalent to factor augmenting, which is equally labour and capital augmenting technical progress. In other words, Hicks neutrality implies that the production function can be written as

Embodied technological change (ETC)-or quality change-in the context of capital refers to the productivity gains -resulting from the use of new capital above and beyond the gains obtainable from a comparable amount of pre-existing capital.

Some researchers have tried to measure ETC via the price side. To get at the technological change embodied in the new equipment, government statisticians and others often try to estimate “hedonic,” also known as “characteristic,” prices.

There are two potential problems. First, this approach has trouble dealing with what is known as the “new goods problem.”

A second shortcoming of the price-side approach is that the detailed data required for hedonic price estimation often are unavailable for many capital goods, forcing those who measure prices to revert to more traditional techniques, which generally do not account for quality change very well.

We measure ETC from the production side using data on productivity, current and past investment, and other productive inputs. As in the price-side approach, where ETC is typically measured as the decline in investment prices relative to consumption prices, the production-side approach also defines ETC in consumption terms.

By deflating current revenues as well as current and past nominal investment by a consumption price index, we can, in concept at least, properly identify ETC by the consumption units gained in productivity benefits relative to the consumption units given up for investment.

The main advantage of the production- side approach is that new goods do not pose a problem. The approach identifies technological change via changes in productivity, so changes in the actual characteristics of the underlying capital are irrelevant.

If a new PC has a set of characteristics that the old PC could not have had because the technology did not exist, the production-side approach still picks up the increased technological change as long as these new characteristics generate productivity benefits.

The distinction between embodied and disembodied technological change is especially important to keep in mind since these two vehicles of technological change are referred to often in the literature and most certainly affect the labour market differently.

Otherwise stated, embodied technological change refers to an investment in new capital in which there is some level of knowledge (or technology). Disembodied technological change refers to the knowledge embodied in people which can potentially be applied (process) or used (product) and can transform the whole economy relatively quickly depending op how this innovation is protected (patent law).

Embodied technological change may transform the nature of work in a particular industry but is likely to take time as investment in new capital takes time and massive layoffs are likely to be avoided by management.

In the present paper, only embodied technology is examined, through computer investment and capital intensity indicators.

Computer investment includes both hardware and software and thus some level of embodied knowledge; this knowledge changed tremendously (through software) and came to be processed at an incredibly higher rate (through hardware, which includes microprocessors) over the 1971 -1991 period studied here.

Capital intensity refers to new capital investment and will provide us with a good approximation of the state of technological change in a given industry. This will be very useful in delineating the impact of other technological equipment and will provide a benchmark for the second paper which will directly tackle the impact of AMTs (Advanced Manufacturing Technologies) in the manufacturing sector.

The second paper will also include a comparison between embodied technological change (using R&D/sales as a measure) and disembodied technological change in the manufacturing sector.

Technical progress is embodied if it is a result of new equipment or new skills, and is called disembodied if output increase as a result of improvement in productivity of old equipment (and existing skills) when quantity of inputs remain unchanged. Characteristic of disembodied technological change is thus factor augmentation.