Capital Aggregation In The Presence Of Obsolescence‐Inducing Technical Change

The major question addressed is the treatment of capital embodied technical progress. Should Obsolescence be deducted to calculate a net stock, or should quality adjustments be made in each vintage of new capital, or both, or neither? In order to estimate the contribution of new investment to growth it is necessary to use a capital stock where different vintages are weighted in proportion to their marginal products. The commonly used gross capital measures do not do this, because they do not allow for the higher marginal product of more modern capital. Such an allowance for capital embodied technical progress can be made either by quality adjusting new capital or by incorporating obsolescence into the valuation of the old capital (but not both). However, even if new capital incorporates an allowance for improved quality, it will still be necessary to revalue the old capital. Frequently, a reasonable approximation to the net capital stock results from a linear decline in quasi‐rents and can be approximated by published estimates of the stock of capital net of straight line depreciation. Steady technical progress will not lead to the commonly used exponential service decline functions. To avoid overestimating the return to investment when technology changes it will be necessary to use information on capital embodied technical change to revalue old capital, rather than to change the price indices for new capital.