Technical Progress and Returns to Scale
IN their audit of the sources of economic growth a number of writers have, in recent years, focussed on technical and improvements in the quality of capital and labor rather than increases in the quantity of factors of production. Implicitly, if not explicitly, this work has generated new theoretical propositions about aggregative production functions and has led to the revival of efforts to estimate them. This research has been pursued on a number of fronts, but much of it is centered in its applications on the United States economy. This paper reports the results of some experiments with a model that postulates technical progress together with possible nonconstant returns to scale using data relating to the United States economy. Though the assumption of embodiment of technical in factors of production is one of the latest fashions in growth models, the conventional trim is constant returns to scale. Models allowing for scale economies or diseconomies may even seem somewhat old-fashioned, although a number of studies have, in fact, emphasized the combination of improvements in factor qualities and increasing returns in explaining United States growth.' R. M. Solow, observed by A. Smithies 2 to be the Pied Piper of research on technical change, though consistently assuming constant returns for the United States economy whether he is leading us in the direction of disembodied or embodied change, has recently reported some statistical calculations for the German economy without the constant returns restriction.3 The relationship of economic to the size of the economy has been the subject of speculation for as long as there have been economists.4 Contemporary attempts at measurement, however, may not only have failed to give sufficient emphasis to the role of scale economies or diseconomies, but may have made, as a consequence, faulty assessments of the role played by other influences on the growyth process. A model that postulates constant returns to scale, one suspects, would overstate the growth resulting from technical when confronted with data generated by a generally growing economic system subject to increasing returns and, vice versa. The model would understate the growth due to technical change when the data are generated by a growing economy subject to decreasing returns. A. A. Walters [13], for example, obtains sharply increasing returns to scale for the Cobb-Douglas model of disembodied technical change applied to 1909-1949 data for the United States economy and finds a much lower rate of shift (i.e., technical progress) of the production function than Solow [9] with the same model applied to the same time period but with the restriction of constant returns.5 One should also recognize that for some models which assume constant returns, identification of both growth and scale parameters may not even be possible.
- DOI
- 10.2307/1924622
- Volume
- 48 (4)
- Pages
- 432
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