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Bias in the Measurement of Technical Change**

Published online by Cambridge University Press:  19 October 2009

Romesh K. Diwan
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Extract

Professor Solow's article, “Technical Change and the Aggregate Production Function,” now virtually classic, has made a great impact on economists generally and in the last few years the subject has received unprecedented attention in economic literature. The reason for this extraordinary emphasis on “Technical Change” has been the conclusion—in Solow's above-mentioned article—based on statistical evidence, that gross output per man-hour in the United States nonfarm economy doubled over the period 1909–1949, “with 87.5 percent of the increase attributable to technical change and the remaining 12.5 percent to increased use of capital.”

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 3 , Issue 4 , December 1968 , pp. 471 - 477
Copyright
Copyright © School of Business Administration, University of Washington 1968

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References

1 Solow, R. M., “Technical Change and the Aggregate Production Function,” Review of Economics and Statistics, 1957, pp. 312–320.Google Scholar

2 Ibid., page 320. Actually, Hogan, in his comments on this article, found some arithmetical mistakes. After correcting this mistake, the contribution of technical change came to 90 percent. See Hogan, W. P., “Technical Progress and Production Function,” Review of Economics and Statistics, 1958, pp. 407–411.Google Scholar

3 Massel, B. F., “Determinants of Productivity Change in the United States Manufacturing,” Yale Economic Essays, 1962, pp. 303–350Google Scholar, uses Solow's method for the manufacturing sector and finds the contribution of technical change for the period 1919–1958 to be 84 percent.

4 Edwards, H. R. and Drane, N. T., “The Australian Economy, July 1963,” Economic Record, Vol. 39, 1963, pp. 259–281CrossRefGoogle Scholar. They also studied the manufacturing sector of the Australian Economy for the period 1908–1960 and found that the contribution of technical change was 72 percent.

5 Dhar, P. N. and Seth, O. K., “The Rate of Technical Change in the Tata Iron and Steel Co. in 1913–1956,” Indian Economic Review, 1962, pp. 1–19.Google Scholar

6 Hahn, F. H. and Mathews, R. C. O., “The Theory of Economic Growth: A Survey,” Economic Journal, 1964, p. 833.Google Scholar

7 The derivation is as follows: .

8 One may employ different criteria to reject or accept any one of these hypotheses. Solow rejects the case of external economies because he considers it unlikely. “The unconstrained elasticities add up to 1.2 or 1.25; if they are taken at face value, then, the German economy was subject to substantial increasing returns to scale. Experience suggests that the same would have occurred if I had estimated similar unconstrained production functions for the United States. I have some reasons for not taking these results at face value.” Solow, R. M., “Capital Theory and Rate of Return,” (Rand McNally & Co., 1963), p. 83Google Scholar. However, these reasons are not spelled out anywhere. On the other hand, along with Schumpeter, we hold the opinion that linearity of the production function is a matter of fact and can be established or denied only by appeal to facts. 475

9 Walters, A. A., “A Note on the Economies of Scale,” Review of Economics and Statistics, 1963, pp. 425–427.Google Scholar

10 Bodkin, R. G., “A Test of the Specification of the Aggregate Production Function,”Cowles Foundation Discussion Paper No. 157,Yale University, 1963 (mimeo.).Google Scholar

11 Bodkin, R. G. and Klein, L. R., “Non-Linear Estimation of Aggregate Production Functions,” Review of Economics and Statistics, 1967, pp. 28–44.Google Scholar

12 Diwan, R. K., “Alternative Specifications of Economies of Scale,” Economica, 1966, pp. 442–454.Google Scholar

13 Brown, Murray and Popkin, Joel, “A Measure of Technological Change and Returns to Scale,” Review of Economic Statistics, 1962, pp. 402–411.Google Scholar

14 Diwan, R. K., “An Empirical Estimate of the Elasticity of Substitution Production Function,” Indian Economic Journal, 1965, pp. 347–366.Google Scholar

15 Stigler, J. G., “Economic Problems in Measuring Changes in Productivity.” Studies in Income and Wealth, 1961, pp. 47–63.Google Scholar

16 In case one does not agree with our hypothesis, one needs to provide an alternative explanation as to why the regression coefficients confirm our hypothesis.

17 I have used the man-hour series from Kendrick, J. W., “Productivity Trends in United States,” (New York: National Bureau of Economic Research, 1961).Google Scholar