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Theories of Technical Change and Investment: Riches and Rationality.

It is generally agreed that investment and technical change are two key factors behind productivity growth and consequent welfare improvement. Yet, there is no well-defined and comprehensive theory of investment, technical change, and growth. The main problem is that the existing literature is restricted by the confines of various specialities such as industrial organization, theory of the firm, macro models, growth models, the economics of technical change, and economic history. Because of a lack of interaction among these specialities, there is no coherent understanding of relationships. Moreover, their implications, limitations and strengths are not clear. This book therefore is a welcome addition to the existing literature. As the title of the book suggests, Kurdas's goal is to shed light on the relationship between technical change and investment. She presents this book as preliminary work to pinpoint the problems, though, in the six chapters of the book, she reviews all major theories beginning with Ricardo's, and provides a detailed and critical account of the entire literature.

Chapter One constructs the infrastructure of the book by answering three critical questions: What is this study about and why and how should it be conducted? This chapter is short but precise. By providing different theories on investment and technical change, the author makes clear that the existing literature is far from complete. Furthermore, there is a compatibility problem due to varying terminologies, definitions of concepts, and the general framework each theory uses. Thus Kurdas specifies the need for a common ground, a reference point, for a fruitful survey of the literature. She launches a careful discussion of why and how we should study the interaction between investment and technical change. Her main idea is that present investment decisions, by their very nature, have future repercussions and effects. The key concept of rationality determines the specification within which an economic agent takes account of the future, and implicit within each theory is a specific understanding how rationality functions in this decision-making process.

Chapter Two introduces the Classics' investment theories. As in the other chapters, Kurdas employs simple algebraical expressions and diagrams to crystallize complicated theorems. She examines theories of Ricardo, Malthus, and Marx. The emphasis here is not on the relationship between investment and technical change but on the different behavioral assumptions about expectations. Ricardo explains investment decisions simply by profits, "power to accumulate." Malthus, however, insists on adding the "will to accumulate" as a second explanatory factor to capture the level of demand for future output. Thus, he is the first one to introduce the concept of expectations, albeit without an explicit and clear examination. Marx, like Malthus, also uses the "will to accumulate" as a key motive behind accumulation. Kurdas summarizes the three main components of Marx's theory of accumulation. Then, she describes two main mechanisms: Conspicuous accumulation and cyclically disappointed expectations. After revealing Marx's implicit assumption that the capitalist behaves according to given social rules, she displays the inconsistency between this assumption and the "epoch-changing" investor behavior of a capitalist under changing conditions.

Chapter Three examines Keynes and the Post-Keynesians. It starts with the two explanations of investment in chapters 11 and 12 of Keynes's General Theory. The first one explains "marginal efficiency of capitol" and the inverse relationship between the interest rate and investment, while chapter 12 emphasizes the impossibility of making the calculations the first explanation requires. Future returns can not be calculated due to uncertainty. There are three different directions in the literature based on different interpretations of Keynes's chapters 11 and 12. The first two directions ignore chapter 12 (Neoclassicals), and the third one regards chapter 12 as the canon (Post-Keynesians). Here, Kurdas focuses on this third direction. She demonstrates the indeterminacy of Joan Robinson's growth model and then examines Kalecki's model with a dual time structure (short-run and long-run). Kurdas states that "Kalecki's formulation shows what is missing, but doesn't fill the gaps" [p. 39] and then goes on to examine Kaldor's technical progress function, his attempt to explain the secular rate of capital accumulation, and the relationship between the markup and the firm's investment plan. Finally, as a recent synthesis of Keynesian and Classical ideas, Stephen Marglin's approach is explained. Again, this model is indeterminate as well. Kurdas argues that all the Keynesian models, in general, reflect arbitrariness, and this is precisely why Keynesian explanations of investment and growth are undermined.

Chapter Four is about Neoclassical models and their underpinning concept, "unbounded rationality." It begins with the basic stationary theory of investment and continues with the first generation of Neoclassical models. It covers models by Solow, M. Scott, Romer, and Lucas. In the same manner as she did in the previous chapter, Kurdas defines precisely the inconsistencies of the Neoclassical theory. They stem from the following: First, future productive capacity changes due to present investment, though, in Neoclassical models, investment is determined based on the given full information set about the future. Second, rate of investment is characterized by equilibrium, and any changes in equilibrium would be exogenous. However, technical change, a potential source of any change, depends on investment.

Chapter Five presents Neo-institutionalism. Having both Keynesian and Neoclassical theories dismantled, Kurdas presents an alternate approach with "bounded rationality." Her main message is that because of the nature of investment and technical change a different theoretical setting is necessary, one that recognizes the "limitations on calculations" and the fact that the "choice set" is not easily ascertained. Rather, the emphasis should be on how the choice set is created and evaluated during the course of action. After briefly defining institutional economics and bounded rationality, Kurdas, one by one, explains the building blocks of this approach, e.g., the capabilities theory of firm, routines, investment possibilities, investment strategies, innovative investment strategies and the selection environment, and technological discontinuities. Finally, to show how these building blocks can be applied, she introduces a case study from the pharmaceutical industry in the appendix.

Chapter Six summarizes all of these theories with the pros and cons of each, as in, for example, the applicability but irrelevance of Neoclassical theories and the relevance but inapplicability of Neo-institutionalist theories, and so forth. If you are not an expert on these issues it might be a good idea to read this chapter right after the introduction. By doing so, you will get more out of your reading.

Overall, this is a compelling book. It is carefully and well written. It gives a clear review of the existing literature with a healthy dose of criticism, provides satisfactory answers on certain issues, and raises several questions to think about. The reference section of the book with more than three hundred sources is a great bonus. I strongly recommend this book for researchers in this field, whether they are theorists or practitioners.

Omer Gokcekus Duke University
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Author:Gokcekus, Omer
Publication:Southern Economic Journal
Article Type:Book Review
Date:Jan 1, 1996
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