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Two puzzles regarding the replacement ratio in the context of renewal theory

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  • George Bitros

Abstract

The models Feldstein and Rothschild, on the hand, and Jorgenson on the other adopted in 1974 to highlight the replacement ratio are identical. Yet, the authors reached opposite conclusions and the latter's view prevailed, which is weaker in terms of theoretical and empirical foundations. This paper argues that both puzzles may be resolved by reference to the differences in the methodological preconceptions of the authors involved, the operational advantages of the theorem of proportionality, the accumulated data that facilitate research, the inertia of the status quo, the lack of a model leading to a more useful theorem, the lack of communication among economists and their aversion toward complex solutions and policy prescriptions. In this light it is concluded that the time has come for research efforts to be directed towards constructing and testing models in which the useful life of capital is determined endogenously in the presence of embodied technological change.

Suggested Citation

  • George Bitros, 2010. "Two puzzles regarding the replacement ratio in the context of renewal theory," Journal of Economic Methodology, Taylor & Francis Journals, vol. 17(4), pages 375-395.
    • Handle: RePEc:taf:jecmet:v:17:y:2010:i:4:p:375-395
    DOI: 10.1080/1350178X.2010.525354
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    Cited by:

    1. George Bitros, 2010. "The theorem of proportionality in contemporary capital theory: An assessment of its conceptual foundations," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(4), pages 367-401, December.

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