Book contents
- Frontmatter
- Contents
- Introduction
- PART I POSITIVE GROWTH THEORY
- 1 The welfare of society and economic growth
- 2 The growth process
- 3 A production function of central importance
- 4 The CES production function as a general mean
- 5 Capital–labour substitution and economic growth (in collaboration with Robert M. Solow)
- 6 The long-term growth rate as a random variable, with an application to the US economy
- PART II OPTIMAL GROWTH THEORY
- PART III A UNIFIED APPROACH
- In conclusion: on the convergence of ideas and values through civilizations
- Further reading, data on growth and references
- Index
5 - Capital–labour substitution and economic growth (in collaboration with Robert M. Solow)
Published online by Cambridge University Press: 01 February 2010
- Frontmatter
- Contents
- Introduction
- PART I POSITIVE GROWTH THEORY
- 1 The welfare of society and economic growth
- 2 The growth process
- 3 A production function of central importance
- 4 The CES production function as a general mean
- 5 Capital–labour substitution and economic growth (in collaboration with Robert M. Solow)
- 6 The long-term growth rate as a random variable, with an application to the US economy
- PART II OPTIMAL GROWTH THEORY
- PART III A UNIFIED APPROACH
- In conclusion: on the convergence of ideas and values through civilizations
- Further reading, data on growth and references
- Index
Summary
Ever since its emergence in John Hicks's Theory of Wages (1932), the elasticity of substitution has figured primarily in the theory of distribution. The standard proposition states that, with two factors, constant returns to scale and cost minimization, the faster-growing factor increases or decreases its share in income accordingly as this parameter is larger or smaller than one.
However, the elasticity of substitution is by definition a technological fact, a characteristic of a production function which would turn out to play an important role. Indeed, as shown in La Grandville (1989) and extended in this chapter, a higher value of the elasticity of substitution ceteris paribus does more than merely alter production possibilities, it expands them. Naturally, then, the elasticity of substitution should have significance in all branches of economics where technology matters. And it does. The purpose of this chapter is to explore the role of the elasticity of substitution in the aggregative theory of economic growth.
There are historical overtones to this technical theme. Broadly speaking, the capital–labour ratio has probably been rising since the beginning of sedentary agriculture made large-scale accumulation of capital possible. The ratio of thewage to the rental rate of capital has presumably also increased through history, though less regularly than the factor ratio. In the tradition of economics, accounting for these characteristics of the long-term growth path involves an interplay between technical progress and the evolution of capital–labour substitution possibilities (along with possible non-market forces that are not our concern here).
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- Economic GrowthA Unified Approach, pp. 114 - 155Publisher: Cambridge University PressPrint publication year: 2009
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