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Factor-Eliminating Technical Change

Author

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  • John J. Seater

    (Econ Dept., NC State U.)

  • Pietro Peretto

    (Econ Dept., Duke U.)

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. 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 factor intensities endogenously by spending resources on R&D. 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, or it may evolve into one that uses only capital. The first outcome is the standard Solow model; the second is the AK model of endogenous growth. 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 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 a steady state. An economy that starts with pure labor production simultaneously accumulates capital and increases its capital intensity 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. 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 sufficient that firms be able to appropriate the results of their research and development efforts.

Suggested Citation

  • John J. Seater & Pietro Peretto, 2007. "Factor-Eliminating Technical Change," 2007 Meeting Papers 272, Society for Economic Dynamics.
  • Handle: RePEc:red:sed007:272
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    References listed on IDEAS

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    Cited by:

    1. Prettner, Klaus & Strulik, Holger, 2017. "The lost race against the machine: Automation, education and inequality in an R&D-based growth model," Hohenheim Discussion Papers in Business, Economics and Social Sciences 08-2017, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    2. Gersbach, Hans & Schneider, Maik T., 2015. "On the global supply of basic research," Journal of Monetary Economics, Elsevier, pages 123-137.
    3. Hemous, David & Olsen, Morten, 2014. "The Rise of the Machines: Automation, Horizontal Innovation and Income Inequality," CEPR Discussion Papers 10244, C.E.P.R. Discussion Papers.
    4. Hernando Zuleta, 2015. "Getting Growth Accounting Right," DOCUMENTOS CEDE 013814, UNIVERSIDAD DE LOS ANDES-CEDE.
    5. Seth G. Benzell & Laurence J. Kotlikoff & Guillermo LaGarda & Jeffrey D. Sachs, 2015. "Robots Are Us: Some Economics of Human Replacement," NBER Working Papers 20941, National Bureau of Economic Research, Inc.
    6. Goren, Amir, 2016. "Inequality, Technical Change or Leverage?," MPRA Paper 72983, University Library of Munich, Germany.
    7. Abeliansky, Ana Lucia & Prettner, Klaus, 2017. "Automation and demographic change," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168215, Verein für Socialpolitik / German Economic Association.
    8. repec:eee:jmacro:v:52:y:2017:i:c:p:23-38 is not listed on IDEAS
    9. Jakob Brochner Madsen, 2016. "Wealth And Inequality In Eight Centuries Of British Capitalism," Monash Economics Working Papers 20-16, Monash University, Department of Economics.
    10. Sturgill, Brad, 2014. "Back to the basics: Revisiting the development accounting methodology," Journal of Macroeconomics, Elsevier, pages 52-68.
    11. Brad Sturgill, 2010. "Cross-country Variation in Factor Shares and its Implications for Development Accounting," DEGIT Conference Papers c015_014, DEGIT, Dynamics, Economic Growth, and International Trade.
    12. Hernando Zuleta, 2015. "Factor shares, inequality, and capital flows," Southern Economic Journal, Southern Economic Association, vol. 82(2), pages 647-667, October.
    13. Laureys, Lien, 2014. "Optimal monetary policy in the presence of human capital depreciation during unemployment," LSE Research Online Documents on Economics 58006, London School of Economics and Political Science, LSE Library.
    14. Prettner, Klaus, 2016. "The implications of automation for economic growth and the labor share," Hohenheim Discussion Papers in Business, Economics and Social Sciences 18-2016, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    15. Abeliansky, Ana Lucia & Prettner, Klaus, 2017. "Automation and demographic change," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168215, Verein für Socialpolitik / German Economic Association.
    16. McAdam, Peter & Muck, Jakub & Growiec, Jakub, 2015. "Endogenous labor share cycles: theory and evidence," Working Paper Series 1765, European Central Bank.
    17. Laura Liliana Moreno Herrera & Jorge Eduardo Pérez Pérez, 2009. "Biased Technological Change, Impatience and Welfare," DEGIT Conference Papers c014_046, DEGIT, Dynamics, Economic Growth, and International Trade.
    18. Julián David Parada, 2008. "Tasa de depreciación endógena y crecimiento económico," DOCUMENTOS DE TRABAJO 004594, UNIVERSIDAD DEL ROSARIO.
    19. Nazrullaeva, Eugenia, 2010. "Modeling the relationship between investment processes and costs structure applied to Russian economic activities in 2005-2009," Applied Econometrics, Publishing House "SINERGIA PRESS", pages 38-61.
    20. Jakob Madsen & James Ang & Rajabrata Banerjee, 2010. "Four centuries of British economic growth: the roles of technology and population," Journal of Economic Growth, Springer, vol. 15(4), pages 263-290, December.
    21. Brad Sturgill, 2009. "Cross-country Variation in Factor Shares and its Implications for Development Accounting," Working Papers 09-07, Department of Economics, Appalachian State University.
    22. Alberto Dalmazzo & Antonio Accetturo & Guido de Blasio, 2011. "Skill-Biased Share-Altering Technical Change in Spatial General Equilibrium," ERSA conference papers ersa11p83, European Regional Science Association.
    23. Yuki, Kazuhiro, 2016. "Mechanization, Task Assignment, and Inequality," MPRA Paper 75752, University Library of Munich, Germany.
    24. Peter McAdam & Jakub Muck & Jakub Growiec, 2015. "Endogenous Labor Share Cycles: Theory and Evidence," 2015 Meeting Papers 62, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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