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Factor-Eliminating Technical Change

  • JOhn Seater
  • Pietro Peretto

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 two factors of production, one reproducible ("capital") and one not ("labor"). There is no augmenting progress of any kind, 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 economy starts with no capital and no knowledge of how to use it. By conducting R&D, the economy learns new technologies that use capital, which then is built. There are two possible ultimate outcomes: the economy may achieve perpetual growth, or it may stagnate with no growth. The rst outcome is an asymptotic version of the AK model of endogenous growth, and the second outcome is the standard Solow model in the absence of any exogenous sources of growth. Which outcome is achieved depends on parameter values of saving and production, and there always is a feasible saving rate that will give the perpetual growth outcome. 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 model also allows derivation of the full transition dynamics, which have interesting properties. One especially notable feature is that the origin is not a steady state. An economy that starts with pure labor production becomes industrialized through its own e¤orts. The theory thus o¤ers a purely endogenous explanation for the transition from a primitive to a developed economy, in contrast to several well-known 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 su¢ cient that rms be able to appropriate the results of their research and development e¤orts.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 10-67.

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Length: 37
Date of creation: 2010
Date of revision:
Handle: RePEc:duk:dukeec:10-67
Contact details of provider: Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
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  1. Zeira, Joseph, 2005. "Machines as Engines of Growth," CEPR Discussion Papers 5429, C.E.P.R. Discussion Papers.
  2. Peretto, Pietro F., 1996. "Technological Change and Population Growth," Working Papers 96-28, Duke University, Department of Economics.
  3. Michael Bar & Oksana Leukhina, 2009. "Supplemental Notes to "Demographic transition and industrial revolution: A macroeconomic investigation"," Technical Appendices 08-85, Review of Economic Dynamics.
  4. Peretto, Pietro F., 1999. "Cost reduction, entry, and the interdependence of market structure and economic growth," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 173-195, February.
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  8. Alan Krueger, 1999. "Measuring Labor's Share," NBER Working Papers 7006, National Bureau of Economic Research, Inc.
  9. Francesco Caselli & James Feyrer, 2005. "The Marginal Product of Capital," NBER Working Papers 11551, National Bureau of Economic Research, Inc.
  10. 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.
  11. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc.
  12. Sturgill, Brad, 2012. "The relationship between factor shares and economic development," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1044-1062.
  13. Oliver J. Blanchard, 1997. "The Medium Run," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 89-158.
  14. Blanchard, Olivier, 1998. "Revisiting European Unemployment : Unemployment, Capital Accumulation and Factor Prices," Research Series, Economic and Social Research Institute (ESRI), number GL28.
  15. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
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  17. Robert M. Solow, 1994. "Perspectives on Growth Theory," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 45-54, Winter.
  18. Zeira, Joseph, 1995. "Workers, Machines and Economic Growth," CEPR Discussion Papers 1139, C.E.P.R. Discussion Papers.
  19. Hernando Zuleta, 2007. "An empirical note on factor shares," DOCUMENTOS DE TRABAJO 004363, UNIVERSIDAD DEL ROSARIO.
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