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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.

Suggested Citation

  • Danny Givon, 2006. "Factor Replacement versus Factor Substitution, Mechanization and Asymptotic Harrod Neutrality," DEGIT Conference Papers c011_028, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c011_028
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    File URL: http://degit.sam.sdu.dk/papers/degit_11/C011_028.pdf
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    Cited by:

    1. Sturgill, Brad, 2012. "The relationship between factor shares and economic development," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1044-1062.
    2. Peter Howitt, 2007. "Edmund Phelps: Macroeconomist and Social Scientist," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 203-224, June.
    3. Peretto, Pietro F. & Seater, John J., 2013. "Factor-eliminating technical change," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 459-473.
    4. Daniel Cardona & Fernando Sanchez Losada, 2007. "Cost-Based Models of Economic Growth," Working Papers in Economics 179, Universitat de Barcelona. Espai de Recerca en Economia.
    5. Perera-Tallo, Fernando, 2017. "Growing income inequality due to biased technological change," Journal of Macroeconomics, Elsevier, vol. 52(C), pages 23-38.
    6. Yuki, Kazuhiro, 2012. "Mechanization, task assignment, and inequality," MPRA Paper 37754, University Library of Munich, Germany.
    7. Joseph Zeira, 2009. "Why and How Education Affects Economic Growth," Review of International Economics, Wiley Blackwell, vol. 17(3), pages 602-614, August.

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    More about this item

    Keywords

    Mechanization; Non-Neutral Technical Change; Dis-Augmentation; CES;
    All these keywords.

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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