TECHNICAL CHANGE, CAPITAL LONGEVITY AND ECONOMIC GROWTH,
Abstract
The specification of a criterion which may be used to determine the optimum longevity of capital has been the subject of some controversy in the literature. The contributions to this problem fall into two distinct categories. One approach to the problem emphasizes micro-economic criteria based on profit maximization or cost minimization. A second approach is concerned with the impact of changes in the longevity of capital on the level and rate of growth of aggregate output and consumption. In this paper these two approaches are compared within the context of a relatively simple macroeconomic growth model. Within the context of this model of economic growth, it is found that these two criteria coincide if and only if the rate of interest, which is determined by a zero-pure-profit condition, is equal to the equilibrium rate of growth of output. Two alternative but equivalent conditions for the two criteria to coincide are also described. The analysis suggests that in designing policies oriented toward increasing the level or rate of growth of output and consumption, it is necessary to consider explicitly the relationship between the investment-income ratio and the longevity of capital. Focussing attention on only one or the other of these magnitudes may be misleading within the context of policy formulation. (Author)
Document Details
- Document Type
- Technical Report
- Publication Date
- Dec 16, 1964
- Accession Number
- AD0610206
Entities
People
- E. Philip Howrey
Organizations
- Princeton University