Harrod-Neutral Economic Growth with Hicks-Biased Technological Progress

Abstract

The most useful concept of neutrality of technological progress for models of economic growth has proved to be that of R. F. [4, 82]. According to this view technological progress is neutral if the capital-output ratio remains unchanged for a constant rate of return on capital. In an alternative concept of neutrality provided by J. R. Hicks [5, 121], technological progress is neutral if the capital-labor ratio remains unchanged at a constant factor-price ratio. These two concepts are equivalent in a onesector model only if the elasticity of factor substitution is unity. In a two-sector model the relationship is more complex. Here, the concept of neutrality can be applied in two ways: (1) with respect to constancy of the aggregate capital-output ratio, or (2) with respect to constancy of a single sector's capital-output ratio. In either case, the value of the relevant capital-output ratio for a constant rate of return on capital depends in part upon the relative price of investment goods. It is the purpose of this article to examine the conditions of Hicksian bias in technological progress that are necessary for the existence of an aggregate Harrodneutral equilibrium growth path in the twosector model. The concern here is then with the first of the two alternative approaches to neutrality given above. The second, alternative, approach has been well investigated by Ronald Jones and Peter Diamond. Jones has presented a graphical exposition of the relationship between single sector Harrod neutrality and the relative price of investment goods that sets forth some of the conditions for this second type of neutrality [6, 848]. These conditions have been more extensively analysed in a mathematical framew rk by Diamond [3, 161]. In his article, Diamond concludes that, in effect, since the rate of return is in part a function of a decision variable s as well as given technology and resources, the concept of neutrality cannot be applied to the entire economy but, instead, only to the singl sectors separately. This conclusion is true only for a restricted sense of neutrality that defines a purely technological elationship with no economic adjustments included. But Harrod's original definition of neutral change does not imply any such restricti n. In fact, one of the reasons for the success of the definition of neutrality is that it defines neutrality with reference to a sta e of macro-economic equilibrium. In his article Harrod-neutral technological progress will be progress that leads to an equilibrium state where the aggregate capitalutput ratio is constant for a constant rate of return.