Technical Progress – Disembodied & Embodied; Endogenous Growth | UGC NET Economics – Notes

Meaning of Technical Progress

Technical progress refers to an improvement in the state of knowledge, techniques, or methods of production, which enables an economy to produce a larger volume of output from the same quantity of factor inputs (capital and labour), or equivalently, to produce a given volume of output using a smaller quantity of inputs. Technical progress is conventionally represented in growth theory as an upward or leftward shift of the production function or the isoquant map, distinct from a mere movement along a given production function or isoquant, which instead reflects factor substitution in response to changes in relative factor prices. The theory of technical progress occupies a central place in modern growth theory, since, as demonstrated by the Solow model, in the absence of technical progress, an economy governed by diminishing returns to capital can experience no sustained growth in output per capita in the long run; technical progress is therefore frequently identified as the ultimate source of long-run improvement in living standards.

Classification of Technical Progress by Factor Bias

Before examining the disembodied-embodied distinction, it is useful to note the classification of technical progress according to its effect on the relative marginal products of capital and labour, a classification originally due to Sir John Hicks in The Theory of Wages (1932). Hicks-neutral technical progress is defined as technical progress that raises the marginal products of capital and labour in the same proportion, leaving the capital-labour ratio unchanged for any given ratio of factor prices; formally, if the production function is \(Y = A(t)F(K,L)\), the technical progress is Hicks-neutral, since the multiplicative factor \(A(t)\) scales output without altering the relative marginal productivities of \(K\) and \(L\). Labour-augmenting (Harrod-neutral) technical progress is defined as technical progress that operates so as to increase the effective supply of labour, and is represented as \(Y = F(K, A(t)L)\); this form of technical progress is of particular importance because it is the only form of technical progress consistent with the existence of a steady state in the Solow growth model, since it alone ensures that the capital-output ratio remains constant along the balanced growth path. Capital-augmenting (Solow-neutral) technical progress is defined as technical progress that increases the effective supply of capital, represented as \(Y = F(A(t)K, L)\).