Factor Inputs, Capital-Labour Substitution, Technical Progress and Economic Growth

In Part II, we shall analyse the causes of rapid economic growth in the five economies under study. The present and the next chapters are devoted to the causes of growth in connection with the structure of production. Specifically, we shall examine such questions as the role of returns to scale, growth of factor inputs, the ease of factor substitution, and the rate of technical progress. These are the kind of questions that may be answered by the study of production functions. The production function is supposedly a purely technological relationship independent of economic and behavioural factors such as prices, structure of industry, institutional and historical relationships. Of course, production function studies can answer the above questions only if we can identify the production function. The identification problem would of course have implications on the method of estimation to be used. A production function may or may not be identified; if identified, there is still the problem of obtaining unbiased and consistent estimates of the parameters in the production function. For our purpose of studying economic growth, there is an additional problem of aggregation. Our study in this and the next chapter depends very much on the legitimate use of the notion of an aggregate production function with aggregate labour and capital inputs and an aggregate output.1 Even if microeconomic production functions can be identified, there is no guarantee that such production functions retain their identifiability when aggregated over firms and industries.