2 - Who Adjusts to a Supply Shock and Who Resists It

Summary

Whether a society adapts to a supply shock or resists it coercively depends on the costs of each action. The more costly is adaptation, the likelier is a coercive response. We consider three kinds of adaptation, each usually costlier than the last: factor substitution, factor mobility, and factor-saving technology. Where substitution is elastic, producers can readily substitute a cheaper factor for one that has become suddenly expensive. Inelastic substitution forecloses that alternative, but often a suddenly devalued factor can exit to a different sector or region where it remains in higher demand. Where neither substitution nor exit is possible, a factor-saving technology or institutions that use a factor more efficiently – e.g., where labor is suddenly scarce, a labor-saving technology – can sometimes be adopted or invented. The puzzle, addressed in the next chapter, is why a new technology does, or does not, arise.