Munich Personal RePEc Archive

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

de la Fonteijne, Marcel R. (2018): Why the concept of Hicks, Harrod, Solow neutral and even non-neutral augmented technical progress is flawed in principle in any economic model.

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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.

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