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What determines the direction of technological progress?

Li, Defu and Bental, Benjamin (2016): What determines the direction of technological progress?

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What are the key determinants of the direction of technological progress is of central importance for many problems in macroeconomics. In the existing literature, the changing relative production factor prices as suggested by Hicks (1932) and the relative market sizes as indicated by Acemoglu (2002) are considered as the two major determinants. However, by allowing for adjustment costs in factor accumulation processes to expand Acemoglu’s (2003) model, this paper argues that, at least in the steady-state equilibrium, the direction of technological progress may be due to neither of them, but to the relative size of material factor price elasticities, and is biased towards the factor with the relatively smaller elasticity. In addition, contrary to the Uzawa(1961) steady-state theorem, this paper demonstrates that along a steady-state equilibrium path, technological progress can simultaneously include labor- and capital-augmenting elements alongside with unchanged factor income shares. Furthermore, this paper identifies more general conditions for the existence of a steady-state equilibrium of which Uzawa’s theorem obtains as a special case. Based on these results, the paper argues that technological progress may have not included labor-augmentation during the preindustrial era because labor supply was infinitely elastic with respect to wages, and no capital-augmentation after the industrial revolution because of the high capital supply elasticity with respect to the interest rate.

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