FACTOR AUGMENTATION, FACTOR ELIMINATION, AND ECONOMIC GROWTH

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)