Factor Replacement versus Factor Substitution, Mechanization and Asymptotic Harrod Neutrality

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Factor Replacement versus Factor Substitution, Mechanization and Asymptotic Harrod Neutrality

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Danny Givon

Abstract

This paper views technical change as a labor-saving, but capital-using, mechanization process, whereby capital replaces labor; though within any given technique, factors have a limited ability to substitute one another. This is formalized by reinterpreting the “distribution-parameters” of a low substitution CES aggregate production function as time-varying weights, such that technical change corresponds to a decrease in labor’s weight, along with an increase in capital’s. This “direction” of shift is considered a natural outcome of the fact that ideas are embedded within capital. As capital’s weight tends to one, changes in it become increasingly negligible and balanced-growth is attained. Thus the proposed non-neutral mechanism is asymptotically equivalent to Harrod-neutrality. But during industrialization, when capital grows faster than output, its “dis-augmentation” is still significant; the result being constant factor-shares. This resolves a recent controversy regarding the measurement of TFP growth, specifically in East Asian NICs. The capital-using aspect of factors’ replacement, along with the limited degree of factor substitution, also lead to time-ranked “appropriate-technologies”, which are broadly consistent with under-development; despite the lack of non-convexities.

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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c011_028.

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Length: 41 pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:deg:conpap:c011_028

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Find related papers by JEL classification:
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
E25 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-12-01 (All new papers)
NEP-DEV-2006-12-01 (Development)
NEP-MAC-2006-12-01 (Macroeconomics)
NEP-SEA-2006-12-01 (South East Asia)

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