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The Puzzle of the Replacement Ratio in the Context of Renewal Theory

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  • Bitros, George C.

Abstract

The models Feldstein and Rothschild (1974) and Jorgenson (1974) adopted to highlight the nature of the replacement ratio were identical. Yet, even though the theorems they derived from them were complementary and reinforced each other, the authors reached diametrically opposite conclusions. Digging deeper into the controversy that erupted, it emerges that the staying power of the theorem, according to which replacement is a constant propor-tion of the outstanding capital stock, may be attributed to the following reasons. The discernible shift from realism to instrumentalism in the methodology of economics; Its operational advantages; The data that accumulated, thus facilitating research without having to compute capital stock series from scratch; The inertia of the status quo, which is sustained by the absence of a process to decide when a theorem is in conflict with experience and should be set aside, and lastly the lack of a model leading to a more useful theorem than the one un-der consideration. In this light it is concluded that the time has come for research efforts to be directed towards constructing and testing models in which the useful life of capital is deter-mined endogenously in the presence of embodied technological change.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19871.

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Date of creation: 07 Jan 2010
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Handle: RePEc:pra:mprapa:19871

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Keywords: Proportional replacement hypothesis; renewal theory; durability; aggregation;

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  1. Bitros, George C., 2009. "The Theorem of Proportionality in Mainstream Capital Theory: An Assessment of its Conceptual Foundations," MPRA Paper 17436, University Library of Munich, Germany.
  2. Eisner, Robert, 1972. "Components of Capital Expenditures: Replacement and Modernization Versus Expansion," The Review of Economics and Statistics, MIT Press, vol. 54(3), pages 297-305, August.
  3. George Bitros, 2008. "Why the structure of capital and the useful lives of its components matter: A test based on a model of Austrian descent," The Review of Austrian Economics, Springer, vol. 21(4), pages 301-328, December.
  4. Brown, Murray & Chang, Winston W, 1976. "Capital Aggregation in a General Equilibrium Model of Production," Econometrica, Econometric Society, vol. 44(6), pages 1179-1200, November.
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