Ludwig Lachmann: Review of Productivity, Wages, and National Income (1942)

Ludwig Lachmann’s August 1942 book review assesses Spurgeon Bell’s empirical study of technical progress and income distribution in the interwar United States. Its argument moves from appreciation of Bell’s statistical findings to a methodological criticism of his treatment of capital. Lachmann welcomes research that gives technological change its proper economic significance, but argues that the measurement of capital and income must itself account for the transformations technology produces.

The opening identifies a conceptual weakness in economic theory: treating innovation as a rearrangement of already existing productive resources rather than as the emergence of new ones.

All too often, the temptation to treat what is essentially the creation of new factors of production as variations of combinations of existing factors proves stronger than the zest for exploring new problems.

This distinction explains why Lachmann regards Bell’s empirical inquiry as particularly welcome. Technical progress presents problems that cannot simply be absorbed into familiar accounts of factor combinations. Bell studies its distributive effects across the American economy and separately in manufacturing, railways, mining, and electric light and power. Lachmann also notes the detailed investigations in chapters VI–X, which trace relationships among productivity, output, and incomes in five selected industries during the twenties and thirties.

Bell’s principal finding is that productivity rose substantially between 1923 and 1938, whereas production generally failed to expand proportionately. Under-utilisation consequently prevented Americans from enjoying much of the potential benefit. Lachmann regards this broad conclusion as somewhat meagre relative to the research effort, while distinguishing the general result from the more rewarding evidence contained in the charts and tables.

The finding he considers most striking concerns the New Deal’s influence on the distribution of productivity gains:

After 1933 these gains (and sometimes more than that) went entirely to the wage earners in the form of higher wage rates, while prior to that year they were divided between consumers and the recipients of profits.

The qualification that wage earners sometimes received more than the gains themselves makes the change especially noteworthy. Lachmann also draws attention to Bell’s finding of a close correspondence between wholesale prices and wage cost per unit in almost every industry. The late twenties supplied an important exception: falling wage costs were not matched by equally large price reductions. He presents this divergence as a suggestive observation for students of industrial fluctuations, without developing it into a separate explanation of the cycle.

The review’s critical centre is Bell’s treatment of capital. Lachmann argues that Bell recognises facts that undermine his own quantitative comparisons:

He knows that with unused capacity the productivity of capital becomes all but immeasurable.

Bell also acknowledges that the decline in recorded capital after 1930 reflected insolvencies, asset write-downs under changed conditions, and replacement at lower cost. For Lachmann, these are not incidental qualifications. They compromise comparisons of capital quantities across periods of rapid industrial change. Yet Bell continues to report comparable rates of return for 1923–24 and 1936–37. The objection is therefore directed less at a lack of empirical awareness than at the failure to carry that awareness through into the analytical method.

A further criticism concerns annual profits. Bell bases his distributional analysis on a concept of net output value that excludes depreciation. Lachmann argues that this procedure conceals an important effect of innovation: new machinery may replace obsolete equipment before the latter is physically worn out, with the savings from replacement sufficient to absorb its remaining life and still increase income. The method obscures precisely the relation between technological improvement, premature replacement, and measured earnings that the study should illuminate, except insofar as it appears as an accelerated decline in capital.

Lachmann closes by affirming the book’s value as a rich source of information and a contribution to closer relations between theoretical and empirical economics. The review’s enduring conceptual point is that documenting technical progress is insufficient if the measures used to interpret it presuppose stable, comparable capital quantities. Its praise and criticism serve the same purpose: making empirical economic research responsive to the changes in productive resources that innovation brings about.