Value & Capital, CHAPTER XVI, Section 7

In this final section of the chapter, the author shifts his attention to the effects of changes in the price of an input to production.  (Earlier sections in the chapter had dealt with changes in the price of the output.)  

In general, the effects of changes in input prices are analogous to the effects of changes in output prices.  If the price of an input is expected to increase and to remain at the higher level, then it must be the case that the planned use of that input will decrease.  As with changes in output prices, the effects of changes in input prices need not be spread evenly over future time periods;  likewise, a lasting price change for an input will tend to have a greater effect on input levels at later times than in the near future.

As before, the main reason for these effects comes from the nature of unfinished goods, or work in progress at the time of the price change.  For these goods, the author explains, “work has already been done on them with the object of converting them in the end into a certain kind of product;  if this process is at all far advanced, the degree to which its ultimate object can be changed will be limited.”  As long as the price increase is not too large, it will pay to continue the production process as planned for these goods.  Longer term, more extensive changes to the production process can be expected.

For a decrease in an input price, similar conclusions hold, but the author also mentions an additional possibility — namely that the entrepreneur may start an entirely new process of production.  Technical factors will play an important role in determining the exact shape of the new input stream.  The author states that it is “quite possible for technical factors to induce input streams of any conceivable shape.”  But generally after some time the rate of input will ramp up to its peak.

The author closes the chapter with a remark on the economic importance of the delay in achieving the peak input rate:

Marshall’s doctrine of the short and long periods has familiarized us with the notion of lags on the output side;  it is a pity that the corresponding lags on the input side have not received more attention.  They are closely connected with some of the major social problems that concern the economist — unemployment and the intractability of unemployment;  in this direction above all a theory which leaves out the probability of input lags is likely to be gravely misleading.