Entropy, Substitution and Sustainable Economic Growth

For many problems in macroeconomics, development economics, labour economics, and international trade, whether technical change is biased towards particular factors is of central importance. This paper develops a simple framework to analyse the forces that shape these biases. There are two major forces affecting equilibrium bias: the price effect and the market size effect. While the former encourages innovations directed at scarce factors, the latter leads to technical change favouring abundant factors. The elasticity of substitution between different factors regulates how powerful these effects are, determining how technical change and factor prices respond to changes in relative supplies. If the elasticity of substitution is sufficiently large, the long run relative demand for a factor can slope up.I apply this framework to develop possible explanations to the following questions: why technical change over the past 60 years was skill biased, and why the skill bias may have accelerated over the past 25 years? Why new technologies introduced during the late eighteenth and early nineteenth centuries were unskill biased? What is the effect of biased technical change on the income gap between rich and poor countries? Does international trade affect the skill bias of technical change? What are the implications of wage push for technical change? Why is technical change generally labour augmenting rather than capital augmenting? Copyright 2002, Wiley-Blackwell.

For many problems in macroeconomics, development economics, labor economics, and international trade, whether technical change is biased towards particular factors is of central importance. This paper develops a simple framework to analyze the forces that shape these biases. There are two major forces affecting equilibrium bias: the price effect and the market size effect. While the former encourages innovations directed at scarce factors, the latter leads to technical change favoring abundant factors. The elasticity of substitution between different factors regulates how powerful these effects are, and this has implications about how technical change and factor prices respond to changes in relative supplies. If the elasticity of substitution is sufficiently large, the long-run relative demand for a factor can slope up. I apply this framework to discuss a range of issues including: Why technical change over the past 60 years was skill-biased, and why the skill bias may have accelerated over the past twenty-five years. Why new technologies introduced during the late eighteenth and early nineteenth centuries were unskill-biased. Why biased technical change may increase the income gap between rich and poor countries. Why international trade may induce skill-biased technical change. Why a large wage-push, as in continental Europe during the 1970s, may cause capital-biased technical change. Why technical change may be generally labor-augmenting rather than capital-augmenting.

On Technical Change in the Elasticities of Resource Inputs

On technical change in the elasticities of resource inputs

There is considerable concern and debate about the economic impacts of environmental regulations. Jonathan Fisher, former Economics Manager at the Environment Agency in England and Wales, reviews the available evidence on this subject. Section 2 presents estimates of the costs and benefits of environmental regulations. Section 3 examines the impacts of environmental regulations on economic growth, innovation and technical change as well as impacts on competitiveness and any movement of businesses to less pollution havens. He questions call for greater certainty regarding future environmental regulations, whereas in fact there should be calls for less uncertainty. This section then suggests how this could be achieved. This section then finishes with an overview of the available evidence. This includes an examination of the Porter Hypothesis that environmental regulations can trigger greater innovation that may partially or more than fully offset the compliance costs. Section 4 then sets out principles for how better environmental regulation can improve its impacts on sustainable economic growth and illustrates how the European Union (EU) Water Framework Directive is a good example of the application of these principles in practice. Section 5 reviews current and recent political perspectives regarding developments in environmental regulations across the EU and shows how the United Kingdom (UK) has successfully positively managed to influence such developments so that EU environmental regulations now incorporate many of these principles to improve their impacts on economic growth. Section 5.1 then examines the implications of Brexit for UK environmental regulations. Finally, Section 6 sets out some best practice principles to improve the impacts of environmental regulation on sustainable economic growth, innovation and technical change.

How does technical change affect real factor prices? This paper gives a comprehensive answer for the most important benchmark used in the modern debate: technical change is factor-augmenting and materializes in a neoclassical economy with competitive firms equipped with a constant elasticity of substitution (CES) production function. I establish that the effect of labor-augmenting technical change crucially hinges on whether the economy’s capital endowment exceeds or falls short of its amount of efficient labor. This distinction determines the sign of the effect for sufficiently small values of the elasticity of substitution. In the former case, labor-augmenting technical progress must increase the equilibrium wage. In the latter case the equilibrium wage is reduced. In both cases, technical progress increases the price of capital. Overall, the analysis stresses that not only the elasticity of substitution but also the degree of diminishing returns, the distribution parameters of the CES, and the level of the efficient capital intensity matter for the effect of labor-augmenting technical change on real factor prices. Mutatis mutandis, these considerations carry over to the case of capital-augmenting technical change.

In this paper an attempt is made to give precise expression to the conditions under which a profit maximizing firm with fixed research budget will choose each type of technical change (i.e., neutral and nonneutral). It was found that the optimal choice depends on the initial technology, relative factor prices, and relative costs of acquiring different types of technical change. The preferred technical change need not be exclusively of one sort (e.g., neutral chanige). Once neutral technical change becomes optimal, however, it remains so until there is a change in relative factor prices. On the other hand, adoption of a biased technical change may eventually cause neutral advance to become desired even in the absence of relative factor price changes. Examination of the firm's decision criterion under the assumption that it is a monopsonistic buyer of factors of production, discloses that under identical initial conditions (i.e., relative factor prices and relative costs of alternative forms of technical change) the firm will prefer more biased technical change relative to the situation in which it purchases factors competitively. In particular, the firm will, under these conditions, seek those biased technical changes which economize on the factor whose elasticity of supply is relatively smaller. Finally, it was also discovered that, contrary to previous suppositions, changes in the elasticity of substitution do affect the optimal capital-labor ratio for each factor price combination in all cases but one.

This paper estimates factor-specific technical change and input substitution using a structural approach. It contributes to the existing literature by introducing various technology drivers for factor productivities and by assessing the impact of endogenous technical change on the elasticity of substitution. The empirical results suggest that factor productivities are indeed endogenous. In addition, technology drivers are factor-specific. Whereas the R&D stock and machinery imports are important determinants of energy and capital productivity, the education stock is statistically related to labour productivity. The rate of energy-augmenting technical change is larger than that of either labour or capital. By contrast, the productivity of these two factors grows at similar rates. Estimates of the elasticity of substitution are within the range identified by previous literature. In addition, we show that endogenous technical change reduces substitution. Because the elasticity of substitution is lower than one, knowledge and human capital can ultimately have an energy-using effect. The estimated structure of endogenous technical change suggests that Integrated Assessment models focusing on energy-saving technical change might underestimate climate policy costs.

The production structure of the South African agricultural sector is analyzed using duality theory in production and cost. An unrestricted translog cost function is estimated, and a number of model restrictions (homothetic, homogenous, unitary elasticity of substitution, Hick’s neutral technical change, and no technical change) are tested for, but none of them was found to be statistically significant. The Allen Elasticity of Substitution (AES) and the Morishima Elasticity of Substitution (MES) are calculated to analyze factor substitution, and found that the AES may give erroneous results in the case of number of factors exceeding two. The substitution of land is found to be easiest while that of fuel to be hardest. Furthermore, technical change is found to have a negative impact on agriculture, but there are increasing returns to scale in South African agriculture. However, technical change dominates over scale effect, and results in negative total factor productivity growth. When these results are combined with the finding that, it is easier to substitute machinery by labor than vice-versa, it appears that labor-intensive technologies may be useful for agriculture growth.

The many possible applications of twosector models of economic growth to other fields in Economics indicate a need for generalizing the stability conditions of the models to less restrictive terms. The purpose of this paper is to generalize the existing conditions imposed on the elasticities of factor substitution for causality and stability.' The work in this area has been done mainly by Drandakis [6], Amano [1], and also by Sato [10]. Using aggregate elasticities of factor substitution and the properties of its components, we are able to extend the causality region (Causality Theorem II(c)) and prove the existing results in a very simple and systematic way. Similarly, all the stability conditions which hitherto required that the elasticity of substitution be no less than unity have been extended to conditions that it merely be no less than certain fraction of unity. Such extension thus conforms with the recent empirical studies [9] on the estimation of the elasticities of substitution. Other conditions are also given in this paper. These conditions are derived for the general proportional saving function (Stability Theorem II), the general classical saving function (SIII), and the general Keynesian saving functions (SIV). They are again proved by using simple arguments and synthesized with the existing conditions through the use of aggregate elasticities of factor substitution and its components. Five causality conditions and fifteen stability conditions are then classified in a table in accordance with technical conditions (elasticities of substitution), behavioral conditions (saving and capital intensity assumptions), and mixtures of these conditions. We then derive the necessary and sufficient conditions for causality and stability of the two-sector growth model. By these conditions, the effectiveness of the causality and stability theorems, all of which are sufficient conditions, can be illustrated. Lastly, it is also shown that all the stability conditions imposed directly on the aggregate elasticity of factor substitution can be resolved into at least one of the more specific existing conditions. Instead of the usual approaches, the equations in this paper are expressed in terms of distributive shares of factors of production in each industry. Since the values of these shares are restricted to the unit interval, the range of the value of the variables expressed in this way is more easily determined. The approach generally yields more familiar economic interpretations and lends itself to further manipulations as well as symmetric expressions.

This study investigated the impact of the people category of the Sustainable Development Goals (SDGs) on sustainable and conventional economic growth in Asia and the Pacific region, using a sample of 52 selected countries between 2000 and 2023. Employing two distinct models, model A1 for conventional economic growth and model A2 for sustainable economic growth, we explained the relationships between five SDG indicators: employed poverty rate, stunted children, expenditure on health, expenditure of education, and % of women MNAs on economic growth. This study employed a fixed-effect model and random-effect model to investigate the impact of the people category SDGs on traditional and sustainable economic growth. The comparative analysis of each SDG in both models revealed valuable insights. SDG 1, “employed poverty rate”, has a positive impact on economic growth in both models, while SDG 2, “percentage of stunted child”, did not significantly influence economic growth in either model. Moreover, SDG 3 and SDG 4, relating to “government’s health expenditure per capita” and “government’s Education education expenditure per capita”, respectively, exhibited a positive impact on traditional and sustainable economic growth. Conversely, SDG 5, “percentage of women members of national parliament”, displayed an insignificant impact on traditional and sustainable economic growth models. In conclusion, this study suggests that policymakers should prioritize targeted interventions to alleviate employed poverty, enhance healthcare, and boost education spending. Moreover, promoting women’s representation in national parliaments should be approached with context-specific strategies to maximize its impact on economic growth.

Technical change is usually biased and benefits some factors more than others; however, the literature on the effect of technical progress is limited to the direction of technical change. For developing countries, whether technical change is biased towards particular factors is of central importance. We apply the framework of Acemoglu, D. (2002, ‘Directed technical change’, The Review of Economic Studies, 69, 781–809) to develop explanations for the following questions: What kind of production function is appropriate to special economies? If and to what degree technical change is biased towards particular factors? Based on inter-provincial panel data of China, this paper shows that: First, biased production functions are more appropriate than neutral ones. Second, the elasticity of substitution between labour and capital is less than a unity within the interval of 0.50 to 0.70, which indicates the asymmetric effect of technical progress on the productivity of capital and labour (a bias clearly in favour of capital). Third, the extents of bias in CES, VES, and CEEDx are 0.424, 0.108, and 0.213, and more biased towards capital at 3.6%, 1.3%, and 2.2% (from 1978 to 2010). This paper indicates that a crucial issue in China is how to change the direction of technical change and promote the productivity of labour.

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Technical change has been considered as one of the most important determinants of economic growth. In developed economies, a proportionately higher percentage of GDP growth is attributable to technological progress and technical efficiency. However, technical change in developing countries is in its early stages and increased use of factor inputs is still the dominant source of economic growth. An attempt has been made in this paper to analyse technological progress and technical efficiency and their contribution to economic growth along with other factors of production by using more efficient methods in the manufacturing and agriculture sectors of Pakistan. There are a few studies on technological growth and technical efficiency change in Pakistan but they suffer from certain limitations. Most of them use the terms of technical change and productivity synonymously. Further, all of them use Hicks’s formula of neutral technical change and assume that technical change is happening at a constant rate. We have attempted to measure technical change, technical efficiency, and productivity in the form of the Hicks neutral technical change as well as in the form of variable and continuous and discrete technical change. Besides, this paper also analyses the impact of technical change on input demand (i.e., its impact on labour and capital demand) and examines the issue of technical change being either labour-saving or capital-saving. We found that technical change was taking place at a continuous and variable rate. The major contributor to the growth of output and value-added in both sectors was capital, contributing over 50 percent. Labour share was about 20 percent in the agriculture sector and about 10 percent in the manufacturing sector. Technical change share was very significant in manufacturing but not so in agriculture. The manufacturing sector in Pakistan has grown at an annual rate of about 6 percent during 1970s and at 8.7 percent during 1980s, and its share in GDP has increased from 16.5 percent to about 19 percent, but it has failed to generate new employment opportunities for the labour force. The employment growth rate is only about 2 percent.

The purpose of this paper is to explore the hypothesis that a common basis for rapid growth in agricultural output and productivity lies in a remarkable adaptation of agricultural technology to the sharply contrasting factor proportions in the two countries. It is hypothesized that an important aspect of this adaptation was the ability to generate a continuous sequence of induced innovations in agricultural technology biased towards saving the limiting factors. In Japan these innovations were primarily biological and chemical. In the United States they were primarily mechanical.