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FACTOR AUGMENTATION, FACTOR ELIMINATION, AND ECONOMIC GROWTH

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Economic growth theory distinguishes between reproducible and nonreproducible factors of production. In traditional growth models based on factor‐augmenting technical change, perpetual economic growth requires that each essential nonreproducible factor, such as labor, be augmented by a reproducible factor, such as human capital. Recent models of factor‐eliminating technical change deliver perpetual growth by eliminating the nonreproducible factors. Heretofore, the literature has kept factor augmentation and factor elimination separate. We analyze a model with both. The model generalizes the traditional factor augmentation approach by relaxing the usual restriction that factor elimination is absent. We obtain the striking result that factor‐augmenting technical change is a misspecification when factor‐eliminating technical change is present. The result raises several questions about technical change and endogenous growth. (JEL O41, O31, O33)
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Document Type: Research Article

Publication date: January 1, 2019

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