Economic growth and economic development 706

Introduction to Modern Economic Growth from labor-augmenting technologies and thus encourage further labor-augmenting technological change These strong price effects are responsible for the stability of the constant growth path allocation in Proposition 15.14 Consequently, an elasticity of substitution less than forces the economy to strive towards a balanced allocation of effective capital and labor units (where “effective” here refers to capital and labor units augmented with their complementary technologies) Since capital accumulates at a constant rate, a balanced allocation implies that the productivity of labor should increase faster, in particular, the economy should converge to an equilibrium path with purely labor-augmenting technological progress The results in Proposition 15.14 are potentially important, since they provide a justification for the assumption in the Solow and neoclassical growth models that long-run technological change is purely labor augmenting Naturally, whether or not this is the case in practice is an empirical matter and is an interesting topic of future empirical research 15.7 Other Applications Models of directed technological change have a range of other applications To save space, these are not discussed in the text and are left as exercises for the reader In particular, Exercise 15.20 shows how this model can be used to shed light on the famous Habakkuk hypothesis in economic history, which relates the rapid technological progress in 19th-century United States to relative labor scarcity Despite the importance of this hypothesis in economic history, there have been no compelling models of this process This exercise shows why neoclassical models may have a difficulty in explaining these patterns and how a model of directed technological change can account for this phenomenon as long as the elasticity of substitution is less than Exercise 15.21 shows the effects of international trade on the direction of technological change It highlights that international trade will often affect the direction in which new technologies are developed, and this often works through the price effect emphasized above Exercise 15.27 returns to the discussion of the technological change and unemployment experiences of continental European countries we started with It shows 692