Why the concept of Hicks, Harrod, Solow neutral and even non-neutral augmented technical progress is flawed in principle in any economic model

Marcel R. de la Fonteijne

MPRA Paper from University Library of Munich, Germany

Abstract: It is already known for several decades that the implementation of capital augmented technical progress, as is done to date, leads to the conclusion that the CES production has to be Cobb-Douglas or there exists labor augmented technical progress only. This is the so-called Cobb-Douglas labor augmented only paradox. Institutions keep on using this way of thinking in their models in spite of the theoretical inconsistency. We reject the old concept, i.e., all kind of neutral and non-neutral capital and labor augmented technical progress and introduce a new implementation of technical progress to avoid this theoretical problem. We explain the term labor saving technical progress, showing that technical progress is always relatively labor saving. We also analyze the problem on how to estimate the coefficient of elasticity of substitution. Economic growth is presented as partly exogenous, due to technical progress, and partly endogenous, due to capital growth. We introduce formulas to convert total factor productivity into economic growth to show the connection. This new theory is not limited to growth models but can be used also in DSGE models and possibly also in other areas where CES functions are useful. It will give you a different angle of view on the Solow model. And last but not least we will show the connection between Solow’s growth accounting and neo-classical growth theory.

Keywords: Capital and Labor Augmented Technical Progress; Growth Model; Maximum Profit Condition; Production Functions; General Technological Progress; Capital-Labor-mix; Estimation of the Elasticity of Substitution; DSGE; Total Factor Productivity; Solow model; Hicks; Harris; Labor Saving (search for similar items in EconPapers)
JEL-codes: E00 E20 E23 E24 (search for similar items in EconPapers)
Date: 2018-05
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