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The elasticity of derived demand, factor substitution, and product demand: Corrections to Hicks' formula and Marshall's Four Rules

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  • Chirinko, Robert S.
  • Mallick, Debdulal

Abstract

The concept of the elasticity of substitution between capital and labor, introduced by John Hicks and Joan Robinson over 75Â years ago, has had important implications in labor economics and several areas of economic inquiry. In his The Theory of Wages (1932/1963), Hicks developed a formula that has proven very useful in relating the substitution elasticity to the derived demand for productive factors, the distribution of factor incomes, and Marshall's Four Rules. This short paper shows that the original and subsequent derivations of Hicks' celebrated formula contained a slip (that factor shares are independent of the substitution elasticity and therefore constant), presents a new derivation and a corrected formula, and demonstrates that, with the corrected formula, Marshall's First Rule based on the substitution elasticity is no longer generally valid.

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Bibliographic Info

Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 18 (2011)
Issue (Month): 5 (October)
Pages: 708-711

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Handle: RePEc:eee:labeco:v:18:y:2011:i:5:p:708-711

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Keywords: Derived demand Substitution elasticity Hicks' formula Marshall's Four Rules;

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  1. Mario García Molina, 2005. "Capital theory and the origins of the elasticity of substitution (1932--35)," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 29(3), pages 423-437, May.
  2. Daron Acemoglu, 2000. "Labor- and Capital- Augmenting Technical Change," NBER Working Papers 7544, National Bureau of Economic Research, Inc.
  3. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, December.
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Cited by:
  1. Robert S. Chirinko & Daniel J. Wilson, 2010. "State business taxes and investment: state-by-state simulations," Economic Review, Federal Reserve Bank of San Francisco, pages 13-28.

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