Econometrica: Apr, 1959, Volume 27, Issue 2

Substitution versus Fixed Production Coefficients in the Theory of Economic Growth: A Synthesis

https://doi.org/0012-9682(195904)27:2<157:SVFPCI>2.0.CO;2-K
p. 157-176

Leif Johansen

Most growth models are based either on the assumption of fixed production coefficients for labour and capital or on the assumption of substitutability between factors. The present paper proposes a hypothesis which is a compromise between these extremes, viz., that any increment in production can be obtained by different combinations of increments in labour and capital inputs, whereas any piece of capital which is already installed will continue to be operated by a constant amount of labour throughout its life span. First, a "general model" is presented. Next, the model is solved in different special cases. In conclusion it is suggested that the proposed hypothesis would be particularly appropriate in studying the introduction of new techniques and the relationship between population growth, the rate of saving and "structural" unemployment.