Shares and Growth under Factor-Augmenting Technical Change

Abstract

IT IS WELL KNOWN that in a neoclassical growth model the Hicksian neutral technical progress by itself or in combination with Harrod neutral technical change (factor augmenting technical progress) is not in general consistent with the stable long-run growth equilibrium in the sense that under this type of technical progress there exists, in general, no balanced growth. This implies that technical progress of the Hicks neutral tpye is inconsistent with a golden age where capital, labor (measured in efficiency units) and output all grow at the same rate and the relative shares of capital and labor remain constant (see [51). However, estimates of technical progress in various countries seem to show that inventions are essentially either Hicks neutral or factor augmenting ([3], [4], [6]). One remedy frequently suggested to correct the apparent inconsistency is to postulate an underlying production function of the Cobb-Douglas form where factor shares are independent of technological bias (unitary elasticity of substitution). This paper, which deals with factor augmenting technical change in general, intends to show that there is a large family of production functions that behave asymptotically in the same way as the Cobb-Douglas function, although having a very different functional form, and, hence, would not be inconsistent. These production functions belong to the same class as the Cobb-Douglas function in the sense that they exhibit factor shares which are asymptotically independent of technological bias. 1. By factor augmenting technical change we mean that the production function-assumed as usual to be homogeneous of degree one-can be written