Augmentation or Elimination?
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.
|Date of creation:||Jun 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +45 6550 2233
Fax: +45 6550 1090
Web page: http://degit.sam.sdu.dk/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alan Krueger, 1999.
"Measuring Labor's Share,"
792, Princeton University, Department of Economics, Industrial Relations Section..
- 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.
- Douglas Gollin, 2001.
"Getting Income Shares Right,"
Department of Economics Working Papers
2001-11, Department of Economics, Williams College.
- Robert E. Hall & Charles I. Jones, 1999.
"Why Do Some Countries Produce So Much More Output per Worker than Others?,"
NBER Working Papers
6564, National Bureau of Economic Research, Inc.
- 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, MIT Press, vol. 114(1), pages 83-116, February.
- Charles I. Jones, 2003. "Growth, capital shares, and a new perspective on production functions," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
- 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.
- Robert M. Solow, 1994. "Perspectives on Growth Theory," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 45-54, Winter.
- Olivier Blanchard, 1998.
"Revisiting European Unemployment: Unemployment, Capital Accumulation, and Factor Prices,"
NBER Working Papers
6566, National Bureau of Economic Research, Inc.
- Blanchard, Olivier, 1998. "Revisiting European Unemployment : Unemployment, Capital Accumulation and Factor Prices," Research Series, Economic and Social Research Institute (ESRI), number GL28.
When requesting a correction, please mention this item's handle: RePEc:deg:conpap:c011_060. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Pedersen)
If references are entirely missing, you can add them using this form.