Technological Advance With Depletion of Innovation Possibilities- Implications for the Dynamics of Factor Shares

William D. Nordhaus, using US data from 1948-73, has provided evidence that a falling cost of capital combined with a low elasticity of substitution has caused capital's relative share of national product to decline and labor's share to increase.An alternative explanation is provided that...

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Bibliographic Details
Published in:The Economic journal (London) 1979-09, Vol.89 (355), p.614-623
Main Author: Magat, Wesley A.
Format: Article
Language:English
Subjects:
Capital
Capital costs
Capital goods
Economic models
Economic theory
Emerging technology
Factor prices
Innovations
Labor
National
Paper profit
Prices
Product
Ratios
Relative prices
Stock shares
Technological change
Technological development
Technological innovation
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Summary:William D. Nordhaus, using US data from 1948-73, has provided evidence that a falling cost of capital combined with a low elasticity of substitution has caused capital's relative share of national product to decline and labor's share to increase.An alternative explanation is provided that is based upon the effect of a falling exogenous capital-labor price ratio on the rates at which technological advance depletes the possibilities for labor-saving and capital-saving innovations by the individual firm. Neither explanation is inconsistent with the other. No matter what the cause of a fall in the relative price of capital, it is shown that this relative price change leads to a labor-saving bias to the character of innovation which results in a rise in labor's share. A model is presented of production and innovation that explains the modification of the innovation-possibilities frontier to allow for technology depletion.
ISSN:0013-0133
1468-0297
DOI:10.2307/2231871