Factor Supply Elasticities, Returns to Scale, and the Direction of Technological Progress

This paper finds that the steady-state direction of technological progress is determined by the relative size of factor supply elasticities and the returns to scale of the production function, which have so far been ignored. However, the relative price (Hicks, 1932) and relative market size (Acemoglu, 2002) emphasized in the existing literature have only short-term effects. This conclusion is obtained by introducing generalized factor accumulation processes that do not restrict factor supply elasticities, and a generalized production function that does not restrict the returns to scale. It emanates solely from the characterizations of production function, steady-state growth, direction of technological progress and factor supply elasticities. The paper also analyzes a particular micro-founded growth model and uses it to exemplify the conclusions. The findings of this paper provide new explanations to the Uzawa (1961) steady-state theorem puzzle as well as to the Kaldor facts characterization of modern economic growth. It also suggests a way to reconcile falling investment good prices with the Kaldor facts. In addition, it may help explain why technological progress did not increase per capita income before the industrial revolution and what might have led to the modern pattern of economic growth.