Hicks- and Harrod-Neutral Technical Progress and the Relative Stability of a Two-Sector Growth Model with Fixed Coefficients

Abstract

Relative stability in a two-sector, two-factor model of economic growth requires that, if capital stock is growing faster (slower) than labor, the system should operate in such a way as to reduce (increase) the rate of growth of capital, so that it may approach, in the limit, the given rate of growth of labor. Assuming full utilization of capacity, full employment of the exogenously growing labor force, and fixed production coefficients in both sectors, Shinkai (1960) has shown that an economy is relatively stable only if the consumption-goods sector is capital intensive relative to the capital-goods sector. If the consumption-goods sector is labor intensive relative to the capital-goods sector, the capital stock grows (declines) exponentially along with a cumulative decline (rise) in the output of the consumption-goods sector, so that, eventually, the condition of full employment of factors breaks down (see Corden 1966). Introducing Hicks-neutral technical progress, Findlay (1967) has shown that the condition for relative stability remains unscathed only if technical progress occurs in the consumption-goods sector. Findlay, however, does not explore the consequences of technical progress when capital goods are capital intensive relative to consumption goods. Moreover, he considers only the effects of Hicks-neutral technical progress. The purpose of this paper is to examine the implications for relative stability of both Hicksand Harrod-neutral technical progress. Furthermore, the consequences of technical progress are determined for both the case in which capital goods are capital intensive and the case in which they are labor intensive.