Secondly, in a steady state economy technologies do not change and are well-known to everyone. All manufacturers use the most advanced technologies that are available at a given time. Otherwise, there would be a real opportunity to increase the output of goods and services and there would be economic growth. An economy such as this is at the limit of its production capacities. All enterprises use their existing production resources with the same level of efficiency. The marginal product of resources is equal to their price, therefore there are no profits. The steady state economy markets are very much like perfect competition markets. The profit of one manufacturer will definitely cause a loss in another, competition is irreconcilable and a bitter struggle. And a struggle such as this does not depend on the number of participants. Even if the entire economy consists of one monopolist the revenue will remain the same. They will receive exactly as much as they pay workers, as they are the only buyers of their goods and services. In order to break free from the tenacious grip of perfect competition and receive a profit we need to introduce certain production and/or managerial innovations that are able to significantly increase the productivity of labour. An enterprise such as this receives profit because the cost of labour is determined by the average productivity of all workers, including those working at slower enterprises with a lower level of productivity. It is evident that enterprises working with old technology will begin to suffer losses.
The marginal product at a leading enterprise will be greater than the salary and at all other enterprises the opposite will be true. A successful enterprise will temporarily gain a monopoly advantage and competition will become imperfect for such an enterprise. Events such as these will cause innovations to be implemented all around, economic growth will appear and will stop when all enterprises implement existing innovations. The economy will reach the limit of its production capacities and competition will once again become perfect. Is this not the cause of the cyclic nature of economic development? With this approach an economic crisis comes about when the economy reaches the limits of its economic capabilities and falls into a state of perfect competition. The lack of profit does not allow credit received during a period of prosperous economic growth to be returned. Many enterprises cease operations, unemployment rises and moods become more negative. Let us stop here because this is a separate topic of discussion.
The features of the steady state are easily illustrated using a small, closed economy as an example. Imagine a small country where there lives an owner of an enterprise (he or she is a capitalist and an exploiter) and ten workers. The enterprise produces food that is consumed by the workers. The owner pays the workers 100 currency units. After selling the products the owner invariably has 1,000 currency units. After a certain period of time the owner grows tired of this charity and he decides to become an exploiter. He or she now pays each worker 90 currency units. However, very soon everybody discovers that in actual fact nothing has changed at all. The workers continue to buy all the products as they did before, their real salaries have not changed. The nominal salary has gone down, but prices for food have also gone down. Having saved 100 units, after the sale of the goods the owner will now receive only 900 currency units and he or she will still have 1,000. Of course, being concerned with the situation he or she may rush to buy up the goods to spite everybody. But on the whole they do not need this, they need capital that will bring in additional income. How can this be obtained without causing damage? We will answer this a little later, but now let us discuss once again the results obtained.
It is very clear that in a closed economic system at any time the following equation must be true:
PQ = wL,
where p – price of products manufactured, Q – product quantity, w – cost of labour (wages), L – number of people working. In this case all of the products will be bought and all of the wages spent. On the other hand for a single enterprise the production function will be as follows:
pq = wl + rk,
where r – price of capital, and k – amount of capital. The cost of capital is the wages of the employees producing capital goods and equation will be true for the whole economy. But in this case where are the profit, investments and savings? There are none in a steady state economy and there can never be. In an economic crisis when economic growth stops, profits, savings and investments go down to zero. They only appear when the opportunity arises to increase the productivity of the use of resources, when innovations are implemented into the production process, when enterprises purchasing resources at market prices produce more products than they used to. The marginal product of a resource is greater than the fixed market price for the resource. The difference between them is what causes profits, savings and investments. They only occur under conditions of economic growth, which is what we shall now discuss.