Institute for Development Studies, University of Nairobi

This theoretical paper considers the investment strategy of an economy trying to shift from old to new technology. The two technologies are described by fixed capital/output and labor/output coefficients, The new technology has a lower labor/output requirement. Structural unemployment due to capital shortage is a possibility. Aggregate investment is limited by the economy's propensity to save and the strategic problem is the allocation of investment between the two sectors. It is shown that if the new technology requires more capital per unit of net output, investment should be allocated to the old technology until full employment is achieved and then split between the two sectors in proportions that preserve full employment. There is no conflict between maximizing employment and maximizing growth of output and consumption. If, however, new technology is less capital-using than old, it may happen that full employment and full development are incompatible objectives. The impasse can be broken if additional saving is temporarily available and in the use of such saving employment and output growth are competing objectives.