1.Assumptions.docVIP

‘Happy Are the Poor’: An Austrian Tale of Roundabout Production* By Hiroshi Ohta, Professor of Economics, Aoyama Gakuin University, Tokyo For Presentation at National Taiwan University Workshop on International Trade and Industrial Organization, November 1, 2008 ABSTRACT Economic development may not require capital-intensive methods of production. Using a simple Austrian model, we show that if labor productivity in the primary sector is low enough, roundabout methods of production become feasible. Moreover, it is the more labor-intensive methods that yield the greater final output. A higher labor productivity may appear to be geared to greater final output, all the more if combined with a higher output elasticity of capital under more capital-intensive roundabout methods of production. But when primary labor productivity is high enough (relative to the total factor productivity of final output) the roundabout methods become strictly inferior to the direct method. Thus, whenever roundabout methods are feasible, the more labor-intensive methods become superior to the more capital-intensive methods. If output elasticity of capital is large enough, labor-intensive methods become infeasible, and roundabout methods fail. *Preliminary draft not to be cited without author’s permission. The author is indebted to Martin McGuire for his invaluable ideas and comments, and also Katsuhiko Akiba for his technical assistance. This paper is indeed a part of separate work under collaboration with them.‘Happy Are the Poor’: An Austrian Tale of Roundabout Production (A Neo-Classical Synthesis of Karl Marx and Boem Bawerk) “The standard of living in Hong Kong had multiplied more than tenfold in forty years (since 30s), while the standard of living in Calcutta has improved hardly at all.” --- John Templeton, quoted by Mark Skousen (2002) The quote above accounts for striking differences in economic growth that the two Asian nations in extreme poverty under the British control fared i