Since the 1960s, growth models have been guided by Uzawa’s Growth Theorem. Uzawa famously showed that, in a neoclassical environment, if an economy experiences balanced growth and the production function is not Cobb-Douglas, there can be no investment-specific technical change or capital-augmenting technical change. But more recent empirical work suggests that neither of Uzawa’s conditions holds: the relative price of capital has been declining steadily for decades and most estimates indicate that capital and labor are complements.
In this talk, Ezra Oberfield discusses work showing how the puzzle of balanced growth can be resolved and illustrate firm and labor effects stemming from a slowdown in the decline in the relative price of capital.