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Factor-Eliminating Technical Change

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  • John J. Seater

    (Econ Dept., NC State U.)

  • Pietro Peretto

    (Econ Dept., Duke U.)

Abstract

Endogenous growth requires that non-reproducible factors of production be either augmented or eliminated. Attention heretofore has focused almost exclusively on augmentation. In contrast, we study factor elimination. Maximizing agents decide when to reduce the importance of non-reproducible factors. We use a Cobb-Douglas production function with labor and capital as factors of production. There is no augmenting progress of any kind, whether Hicks, Harrod, or Solow neutral, thus excluding the standard engine of growth. What is new is the possibility of changing factor intensities endogenously by spending resources on R&D. The model allows derivation not only of the balanced growth solution but also of the full transition dynamics. There are two possible ultimate outcomes, depending on parameters and initial conditions. The economy may evolve into one that uses both labor and capital, or it may evolve into one that uses only capital. The first outcome is the standard Solow model; the second is the AK model of endogenous growth. The model thus provides a theory of the endogenous emergence of a production technology with constant returns to the reproducible factors, that is, one that is capable of supporting perpetual economic growth. The transition paths are interesting, allowing non-monotonic behavior of both the capital/labor ratio and the factor shares. An aspect of the transition path that is unique for a Cobb-Douglas economy is that the origin is not a steady state. An economy that starts with pure labor production simultaneously accumulates capital and increases its capital intensity to make the capital useful. The theory thus offers a purely endogenous explanation for the transition from a primitive to a developed economy, in contrast to other existing theories. Several aspects of the transition paths accord with the evidence, suggesting that the theory is reasonable. In contrast to almost all the existing endogenous growth literature, neither monopoly power nor an externality is a necessary condition for endogenous growth. It is sufficient that firms be able to appropriate the results of their research and development efforts.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 272.

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Date of creation: 2007
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Handle: RePEc:red:sed007:272

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  1. Sturgill, Brad, 2012. "The relationship between factor shares and economic development," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1044-1062.
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Cited by:
  1. Alberto Dalmazzo & Antonio Accetturo & Guido de Blasio, 2011. "Skill-Biased Share-Altering Technical Change in Spatial General Equilibrium," ERSA conference papers ersa11p83, European Regional Science Association.
  2. Laura Liliana Moreno Herrera & Jorge Eduardo Pérez Pérez, 2009. "Biased Technological Change, Impatience and Welfare," DEGIT Conference Papers c014_046, DEGIT, Dynamics, Economic Growth, and International Trade.
  3. Brad Sturgill, 2010. "Cross-country Variation in Factor Shares and its Implications for Development Accounting," 2010 Meeting Papers 152, Society for Economic Dynamics.
  4. Jakob B. Madsen & James B. Ang & Rajabrata Banerjee, 2010. "Four Centuries of British Economic Growth: The Roles of Technology and Population," CAMA Working Papers 2010-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Nazrullaeva, Eugenia, 2010. "Modeling the relationship between investment processes and costs structure applied to Russian economic activities in 2005-2009," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 19(3), pages 38-61.
  6. Julián David Parada, 2008. "Tasa de depreciación endógena y crecimiento económico," DOCUMENTOS DE TRABAJO 004594, UNIVERSIDAD DEL ROSARIO.

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