Abstract
Instead of focusing on the case of neutral technological progress as in conventional growth models, we investigate the role of biased technological progress in economic growth and income distribution, using the neoclassical growth model. It is shown that Piketty’s (Capital in the twenty-first century. Belknap Press of Harvard University Press, Cambridge, 2014) empirical results regarding the long-run trends of the capital/income ratio and capital share of income are consistently explained by biased technological progress with the elasticity of substitution between labor and capital less than unity. The “productivity paradox” pointed out by Solow is also shown to be explained as a case of labor-saving technological progress. The conditions under which firms have incentives to introduce labor-saving (or capital-saving) technological progress are also investigated. If firms choose a technology type to increase the rate of return on capital, labor-saving (or capital-saving) technological progress is introduced when the labor share of income exceeds (or falls short of) the elasticity of substitution between labor and capital. The introduction of labor-saving (or capital-saving) technological progress lowers (or raises) the labor share of income, which as a result is adjusted towards the value of the elasticity of substitution between labor and capital.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsNotes
- 1.
See Solow (1956).
- 2.
See Kaldor (1961).
- 3.
See Piketty (2014), Part Two: The Dynamics of the Capital/Income Ratio, pp. 113–234.
- 4.
See Piketty (2014), pp. 220–222.
- 5.
The empirical studies by Chirinko (2008), Oberfield and Raval (2014), Chirinko and Mallick (2017), and Lawrence (2015) have all provided results showing that the elasticity of substitution is less than unity. In his comments on Piketty’s book, Summers (2014) points out that Piketty’s argument that factor substitution elasticity is above 1 may stem from confusion between gross and net returns to capital. Since the return net of depreciation is relevant, he argues, output should be measured in net terms, and then the elasticity of substitution is likely below 1.
- 6.
See Kuznets (1955).
- 7.
See Kaldor (1961), pp. 177–222.
- 8.
See Piketty (2014), pp. 164–234.
- 9.
Jones (2016) reports that the ratio of physical capital to output in the US has remained nearly constant since 1945, while the shares of capital and labor in total factor payments were quite stable between 1948 and 2000. Since around 2000, however, “there has been a marked decline in labor share and a corresponding rise in capital income.” Homburg (2015) criticizes Piketty for equating wealth with capital. He argues that Piketty’s wealth includes not only capital goods in the sense of produced means of production, but also land and other natural resources, and that the observed increase in the wealth-income ratio reflects rising prices of land and natural resources. Similar criticism is made by Blume and Durlauf (2015). In the theoretical model we present, capital means capital goods in the sense of produced means of production.
- 10.
See Summers (2014).
- 11.
By incorporating endogenous schooling, Grossman et al. (2017) present a growth model that converges to a balanced growth path even in the presence of capital-augmenting technological progress. Their argument assumes that capital-augmenting technological progress must be positive. However, we will show in this chapter that negative capital-augmenting technological progress could be chosen by firms because it is profitable. Moreover, the empirical study in Chap. 4 shows that negative capital-augmenting technology normally happens.
- 12.
See Piketty (2014), pp. 212–227.
- 13.
A growth model in which both labor-augmenting progress α and capital-augmenting progress β are considered has been studied by Vanek (1966). However, he focuses on the dynamics of the growth rates of capital and output and does not examine the dynamics of factor prices and income distribution. Moreover, he assumes that α ≥ 0 and β ≥ 0. He does not consider the case β < 0, which is classified as labor-saving technological progress due to Harrod’s criterion as seen below.
- 14.
See Harrod (1948). Besides Harrod’s criterion, Hicks’ criterion is also well-known. Hicks defines neutral technological progress as that which raises the marginal productivity of labor and capital equally with any given capital/labor ratio. However, this neutrality is built within the framework of static analysis and is not suitable for analyzing a growth process in which the capital/labor ratio is constantly changing.
- 15.
While labor-saving technological progress causes labor cost per unit of output to relatively decline, it causes capital cost per unit of output to rise, so it can also be called capital-using technological progress. Robinson (1956) employed the term capital-using technological progress instead of labor-saving technological progress. Similarly, capital-saving technological progress can also be called labor-using technological progress. In this book, the terms labor-saving technological progress and capital-saving technological progress are used.
- 16.
As definition (1.14) shows, the elasticity of substitution σ is a function of the capital/labor ratio k. In the following discussion, however, we assume it to be constant, which implies that the production function is assumed to be CES.
- 17.
The relationship between the growth rate of capital g and the growth rate of national income \( g_{Y} \) is \( g_{Y} = (1 - \theta_{K} )(\alpha + \lambda ) + \theta_{K} (g + \beta ) \). If \( \alpha + \lambda \) and β are taken as given, \( g_{Y} \) also rises (falls) when g rises (falls). Particularly, if technological progress is neutral, \( g_{Y} = g = \alpha + \lambda \) at equilibrium. Therefore, in the following discussion, “growth rate” may be understood as the growth rate of national income as well as the growth rate of capital.
- 18.
See Piketty (2014), p. 221.
- 19.
The productivity paradox, which refers to the slowdown in productivity growth in the US in the 1970s and 80s despite rapid development in information technology, is sometimes called the Solow computer paradox in reference to his comment on computers in his article (1987): “You can see the computer age everywhere but in the productivity statistics.” There are some arguments that the IT-related productivity jump occurred with delay in the 1990s, and Solow’s paradox was resolved. However, Acemoglu et al. (2014) provide some evidence that criticizes the proposed resolutions of Solow’s paradox.
- 20.
The trade-off relationship between the rate of labor-augmenting technological progress α and the rate of capital-augmenting technological progress β is called the innovation possibility frontier, and the growth model that incorporates this hypothesis is the induced invention model. We will develop that model in the next chapter.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2019 The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd.
About this chapter
Cite this chapter
Adachi, H., Inagaki, K., Nakamura, T., Osumi, Y. (2019). Growth and Income Distribution Under Biased Technological Progress. In: Technological Progress, Income Distribution, and Unemployment. SpringerBriefs in Economics(). Springer, Singapore. https://doi.org/10.1007/978-981-13-3726-0_1
Download citation
DOI: https://doi.org/10.1007/978-981-13-3726-0_1
Published:
Publisher Name: Springer, Singapore
Print ISBN: 978-981-13-3725-3
Online ISBN: 978-981-13-3726-0
eBook Packages: Economics and FinanceEconomics and Finance (R0)