The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Replacement Policy

  • John J. McCall
Reference work entry


Technological change, variable tastes and the consequent replacement of obsolete physical and human capital comprised the driving forces of the industrial revolution. They continue to be the most important dynamic elements of the modern fluctuating economy. The birth and death of firms and industries, the birth of job vacancies in new and expanding firms and industries, and the elimination of jobs in dying industries and bankrupt firms – these replacements are the essence of a modern capitalist economy. Critics of this system emphasize the mobility costs implied by this dynamism, whereas champions of the capitalist system marvel at the speed and efficiency of these adjustments. Our task is not to evaluate these positions or suggest optimal solutions to this grand replacement problem. We only mention it to remind the reader that ‘replacement policy’ when broadly construed is at the heart of any economic system and that it includes both physical and human capital. Our essay concentrates on the optimal replacement of stochastically failing equipment.

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • John J. McCall
    • 1
  1. 1.