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TECHNICAL CHANGE AND THE AGGREGATE
PRODUCTION FUNCTION *
Robert M. Solow
JN this day of rationally designed econometric draw some crude but useful conclusions from
studies and super-input-output tables, it the results.
takes something more than the usual "willing
TheoreticalBasis
suspension of disbelief" to talk seriously of the
aggregate production function. But the aggre- I will first explain what I have in mind
gate production function is only a little less mathematically and then give a diagrammatic
legitimate a concept than, say, the aggregate exposition. In this case the mathematics seems
consumption function, and for some kinds of simpler. If Q represents output and K and L
long-run macro-models it is almost as indis- representcapital and labor inputs in "physical"
pensable as the latter is for the short-run. As units, then fhe aggregate production function
long as we insist on practicing macro-economics can be written as:
we shall need aggregate relationships. Q = F(K,L;t). (I)
Even so, there would hardly be any justifica- The variable t for time appears in F to allow
tion for returning to this old-fashioned topic if for technical change. It will be seen that I am
I had no novelty to suggest. The new wrinkle using the phrase "technical change" as a short-
I want to describe is an elementary way of hand expression for any kind of shift in the
segregatingvariations in output per head due to production function. Thus slowdowns, speed-
technical change from those due to changes in ups, improvementsin the education of the labor
the availability of capital per head. Naturally, force, and all sorts of things will appear as
every additional bit of information has its "technical change."
price. In this case the price consists of one new It is convenient to begin with the special case
requiredtime series, the share of labor or prop- of neutral technical change. Shifts in the pro-
erty in total income, and one new assumption, duction function are defined as neutral if they
that factors are paid their marginal products. leave marginal rates of substitution untouched
Since the former is probably more respectable but simply increase or decrease the output at-
than the other data I shall use, and since the tainable from given inputs. In that case the
latter is an assumption often made, the price production function takes the special form
may not be unreasonably high. Q = A (t)f (K,L4) (ia)
Before going on, let me be explicit that I
would not try to justify what follows by calling and the multiplicative factor A (t) measures the
on fancy theorems on aggregation and index cumulated effect of shifts over time. Differenti-
numbers.' Either this kind of aggregate eco- ate (ia) totally with respect to time and divide
nomics appeals or it doesn't. Personally I be- by Q and one obtains
long to both schools. If it does, I think one can .K
? A DJa DIL
* I owe a debt of gratitude to Dr. Louis Lefeber for sta- =+ A - +A -
Q A DK Q DL Q
tistical and other assistance, and to Professors Fellner,
Leontief, and Schultz for stimulating suggestions. where dots indicate time derivatives. Now de-
1 Mrs. Robinson in particular has explored many of the
profound difficulties that stand in the way of giving any fine wk 3Q -K andWL= aQ L the rela-
precise meaning to the quantity of capital ("The Production DK Q DL Q
Function and the Theory of Capital," Review of Economic tive shares of capital and labor, and substitute
Studies, Vol. 2I, No. 2), and I have thrown up still further
obstacles (ibid., Vol. 23, No. 2). Were the data available, it in the above equation (note that DQ/DK=
would be better to apply the analysis to some precisely de- A Df/3K, etc.) and there results:
fined production function with many precisely defined in-
puts. One can at least hope that the aggregate analysis
gives some notion of the way a detailed analysis would -+WK-+WL ~~~~~(2)
lead. Q A K L
[ 3I2 ]
TECHNICAL CHANGE AND PRODUCTION FUNCTION 3I3
I Ik
q=-+WK- (2a)
q A k
q= F t + Wk
k (2b) The natural thing to do, for small changes,
q F Zt k is to approximatethe period 2 curve by its tan-
It can be shown, by integrating a partial dif- gent at P., (or the period i curve by its tangent
at P1). This yields an approximatelycorrected
ferential equation, that if F/F is independent
point P1,, and an estimate for A A/A, namely
of K and L (actually under constant returns to
scale only K/L matters) then (i) has the spe- P12P11qj * But k1P12 = q.>- q/3k A k and
cial form (ia) and shifts in the production hence P12PI = q2 - q1- 3q/3k A k = A q
- 3q/3k Ak and A A/A = P12P1/qj = A q/q -
function are neutral. If in addition F/F is con-
stant in time, say equal to a, then A(t) = el' 3q/3k (k/q) A k/k= A q/q-w, A k/k which
(I + a)'.
is exactly the content of (2a). The not-neces-
or in discrete approximationA (t)
sarily-neutral case is a bit more complicated,
The case of neutral shifts and constant re-
but basically similar.
turns to scale is now easily handled graphically.
2
The production function is completely repre- Professors Wassily Leontief and William Fellner inde-
pendently pointed out to me that this "first-order" approxi-
sented by a graph of q against k (analogously mation could in principle be improved. After estimating
to the fact that if we know the unit-output a production function corrected for technical change (see
below), one could go back and use it to provide a second
isoquant, we know the whole map). The approximation to the shift series, and on into further itera-
trouble is that this function is shifting in time, tions.
3I4 THE REVIEW OF ECONOMICS AND STATISTICS
An Applicationto the U.S.: 1909-1949 closer to the truth than making no correction
at all.3
In order to isolate shifts of the aggregatepro-
duction function from movements along it, by CHART 2
0.0
use of (2a) or (2b), three time series are
A
needed: output per unit of labor, capital per
unit of labor, and the share of capital. Some Q04
rough and ready figures, together with the obvi-
ous computations, are given in Table i. 0.02
but I have no doubt that refinementof this and on whether these relative shifts appear to be
the capital time-series would produce neater re- neutral or not. Such a calculation is made in
sults. Table i and shown in Chart 2. Thence, by arbi-
In any case, in (2a) or (2b) one can replace trarily setting A (I909) = i and using the fact
the time-derivatives by year-to-year changes that A (t + i) = A (t) (I + A A (t)/A(t)) one
and calculate A q/q - Wk A k/k. The result can successively reconstruct the A (t) time
is an estimate of A F/F or A A/A, depending series, which is shown in Chart 3.