Creative Destruction with Fixed Factor-Augmenting Technical Change: Lego World

By resolving the knife-edge condition in Solow’s neoclassical growth model as interpreted by Uzawa, in which a production technology with a non-unitary substitution elasticity is unable to accommodate capital-augmenting technical change, this paper offers a transformative approach to the analysis of economic growth and technical change. With nature fixing the exogenous supplies of both capital and labor, consistent with the Law of the Conservation of Matter, investment in both physical and human capital becomes constrained to equal quantities of creation and destruction; that is, Hicks invention-neutral technical change creates new vintages that replace obsolete vintages of physical matter. Contrasted with the Solow model in which the steady-state rate of growth is unaffected by the savings rate, in this model the exogenous savings rate drives every dimension of the Schumpeterian creative-destruction process – rates of innovation, depreciation, and investment. Rising living standards result entirely from technology deepening; capital deepening becomes a misnomer. The model is a literal implementation of Shumpeterian growth in which creation and destruction are precisely balanced in the steady state, driven by the warranted rates of savings, technology development, and investment. The steady state is that in which savings, technical change, depreciation, and investment are aligned, so that creation and destruction are precisely balanced consistent with nature’s fixed endowment.