Capital Accumulation, Factor Prices and Endogenous Labor-Saving Technical Change
The process of capital accumulation understood as a rise in the capitallabor ratio steadily raises the scarcity of labor with respect to capital. This movement in relative factor prices may act as an incentive for profit-maximizing firms to direct innovations towards labor saving technologies. We make this point in a model of endogenous technical change that relates the neoclassical growth paradigm to the concept of induced innovation. These ingredients suggest an economic development of economies characterized by an endogenous "run through stages". In early stages, the driving force of economic growth is capital accumulation because the return of physical capital is high and labor is cheap. In mature stages, however, labor is expensive so that firms invest in new technologies that economize on labor. Thus economies may evolve from a regime of pure capital accumulation into one with capital accumulation and endogenous technical change.
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