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Augmentation or Elimination?

Author

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  • Pietro Peretto
  • John J. Seater

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. In our theory, 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 the factor shares endogenously by spending resources on R&D. Firms invest in physical capital, and they undertake R&D that alters the factor shares of the capital and labor used for production. 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 at shares that settle upon fixed final values, or it may evolve into one that uses only capital. The first outcome is the standard Solow model, and the second is the AK model. The latter produces perpetual endogenous growth, and it is itself an endogenous outcome of a rational maximizing process. In contrast to virtually all existing endogenous growth literature, neither monopoly power nor an externality is a necessary condition for perpetual endogenous 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 an equilibrium. An economy that starts at the state space origin (capital equal to zero, capital's share equal to zero: pure labor production) moves away from the origin, simultaneously accumulating capital and increasing capital's share 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. Finally, several aspects of the transition paths accord with the evidence, suggesting that the theory is reasonable.

Suggested Citation

  • Pietro Peretto & John J. Seater, 2006. "Augmentation or Elimination?," DEGIT Conference Papers c011_060, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c011_060
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    File URL: http://degit.sam.sdu.dk/papers/degit_11/C011_060.pdf
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    References listed on IDEAS

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    1. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
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    7. John Bound & George Johnson, 1995. "What are the causes of rising wage inequality in the United States?," Economic Policy Review, Federal Reserve Bank of New York, issue Jan, pages 9-17.
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    10. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
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    Cited by:

    1. Hernando Zuleta, 2008. "Energy Saving Innovations, Non-Exhaustible Sources of Energy and Long-Run: What Would Happen if we Run Out of Oil?," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO, November.
    2. Andrew T. Young & Hernando Zuleta, 2016. "Golden Rules of Wages," Southern Economic Journal, Southern Economic Association, vol. 83(1), pages 253-270, July.
    3. Zuleta, Hernando, 2009. "If factor shares are not constant then we have a measurment problem. can we solve it?," DOCUMENTOS DE TRABAJO 005744, UNIVERSIDAD DEL ROSARIO.
    4. Hernando Zuleta, 2008. "Seasons, savings and GDP," DOCUMENTOS DE TRABAJO 004592, UNIVERSIDAD DEL ROSARIO.
    5. Zuleta, Hernando, 2012. "Variable factor shares, measurement and growth accounting," Economics Letters, Elsevier, vol. 114(1), pages 91-93.
    6. Hernando Zuleta, 2007. "Biased technological change, human capital and factor shares," DOCUMENTOS DE TRABAJO 004380, UNIVERSIDAD DEL ROSARIO.
    7. Bental, Benjamin & Demougin, Dominique, 2010. "Declining labor shares and bargaining power: An institutional explanation," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 443-456, March.
    8. Hernando Zuleta, 2008. "Factor Saving Innovations and Factor Income Shares," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 836-851, October.
    9. Francesc Dilme, 2007. "Technological Change and Immigration," Working Papers in Economics 186, Universitat de Barcelona. Espai de Recerca en Economia.
    10. Alisher Aldashev, 2011. "Converging Wages, Diverging GRP: Directed Technical Change and Endogenous Growth. Empirical Analysis of Growth Patterns across Kazakh regions," Working Papers 307, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).

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