The economy has the capability to operate at many interest rates. Suppose that the distribution of wealth is narrow. People are mostly equally poor. In this case the rate of interest will be high. Roundabout means of production will not be very practical. But they will remain available as will past capital. An odd rich person may mature his wine for a decade or build a castle that will last centuries.

If there is a more uneven distribution of wealth then the rate of interest will be lower. The poor will have nothing to lend, the rich will and will be able to wait. Roundabout methods of production will become practical. Again this doesn’t mean that less roundabout methods necessarily disappear from knowledge.

Technological development naturally happens around the interest rate that is prevailing in the long term. If that is low then technologies appropriate to low interest rates are built. Similarly if it is high. But technologies that are no longer appropriate at some interest rate don’t necessarily pass out of use.

In the comments of the Brad DeLong post that Statsguy and I mention someone discusses steam locomotives. He says that at one point in the 19th century horses became so cheap (due to the end of a war) that it became cheaper to use them to pull trains. Now, the first thing that this comment misses is that the rails of a railway are as important as the locomotives. A horse pulling a railway truck can pull much more than it can pulling a cart because of the low friction of the rails.

More importantly though this misses the point that the knowledge of steam engines would not have disappeared if locomotives became temporarily uneconomic. Stationary steam engines used for pumping were under no such threat. Also, it is not clear if such a change would have made the usage of existing steam engines uneconomic.

Suppose for example that the price that steam engines cost drops because of the competition from horses. The steam engine is a specific factor of production so its value can fall very far. It could fall all the way to its value as scrap metal for example. If that were to happen then the only cost of using an existing steam locomotive would be the maintanence and the coal. So, existing capital good may remain in service even when the conditions that brought them into being have ceased.

Current, I agree.

Does that mean that NH subsidizes Massachusetts though? That seems to me to be difficult to work out.