Factor Replacement versus Factor Substitution, Mechanization and Asymptotic Harrod Neutrality

This paper views technical change as a labor-saving, but capital-using, mechanization process, whereby capital replaces labor; though within any given technique, factors have a limited ability to substitute one another. This is formalized by reinterpreting the “distribution-parameters” of a low substitution CES aggregate production function as time-varying weights, such that technical change corresponds to a decrease in labor’s weight, along with an increase in capital’s. This “direction” of shift is considered a natural outcome of the fact that ideas are embedded within capital. As capital’s weight tends to one, changes in it become increasingly negligible and balanced-growth is attained. Thus the proposed non-neutral mechanism is asymptotically equivalent to Harrod-neutrality. But during industrialization, when capital grows faster than output, its “dis-augmentation” is still significant; the result being constant factor-shares. This resolves a recent controversy regarding the measurement of TFP growth, specifically in East Asian NICs. The capital-using aspect of factors’ replacement, along with the limited degree of factor substitution, also lead to time-ranked “appropriate-technologies”, which are broadly consistent with under-development; despite the lack of non-convexities.