Soviet Postwar Economic Growth and Capital-Labor Substitution: Comment
In a recent article in this Review, Martin Weitzman argued that the observable slowdown in the of output (gy) of the Soviet economy in the 1960's need not be associated with a fall in the of total factor productivity (ga), as is usually suggested, but rather can be better shown to be a manifestation of diminishing returns to capital. By directly estimating a Constant Elasticity of Substitution (CES) production function' for the two decades following World War II, he found an elasticity of substitution of capital for labor (o-) significantly less than one. From this he concluded that the slowdown in the of that economy could largely be explained in terms of the diminishing returns to capital which resulted from the small substitutability between capital and labor and rapidly increasing overall capital deepening in the economy. Weitzman concluded that Instead of capital, labor and technical change will have to be increasingly relied upon as alternative sources of future economic growth (p. 685); and [that due to demographic trends] This rests the spotlight finally on technical change .. the way of raising g, is now to increase ga because gL iS more or less fixed .. . (p. 686). We should like to advance the proposition that the record of of the Soviet economy during the 1950's and 1960's (as presented in Weitzman's Table 1, p. 677) points to aspects of the underlying Soviet macro-production process other than the small elasticity of substitution as possibly the kev culprits effecting the noted slowdown in g,. Furthermore it is suggested that perhaps the most appealing way of raising g, may after all be not through the overall productivity relationship A (or ga), but rather through the term slighted by Weitzmanthe rate of the labor force gL. We fit the data in Weitzman's Table 1 to a maximum likelihood, non-linear regression program,2 similar to that used by Weitzman. A more general model was employed which imposed neither a geometric time trend, nor unitary returns to scale on the data. The specification used was:
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