Fiscal financial intervention, factor prices and factor proportions : a review of issues

Abstract

An examination of the limitations to the scope for factor-price intervention to shift to efficient factor combinations with more employment per unit of capital in LDC economies indicates the features of the fiscal and financial systems that contribute to or alleviate market distortions and the scope of fiscal and financial policy in correcting factor price distortions. Once the problems that hinder econometric estimates of the scope for capital-labor substitution are understood, one can approach the four main limitations to the scope of factor-price intervention. Limitations are found in the low empirical and theoretical yield from the immense amount of work on production-function estimates of capital-labor substitution and in the failure of detailed microstudies to provide a viable alternative. Limitations associated with producer response to factor prices involve monopolistic and oligopolistic conditions in which producers are likely to dilute their cost-minimizing behavior with other considerations. Finally, limitations in the area of fiscal and financial interventions are associated with assumptions concerning complete capital malleability, extreme factor supply elasticities, and unified factor markets. Numerous references.

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