A STOCHASTIC MODEL OF TECHNICAL CHANGE: AN APPLICATION TO THE US ECONOMY (1869–1989)

Abstract

ABSTRACT A stochastic model of technical change is presented that accounts for the profiles of important macroeconomic variables observed in the US economy since the Civil War: labor productivity, the productivity of capital, and the profit rate. No production function exists, and the viewpoint is that of evolutionary economics. Innovation is described as a random, non‐biased process, controlled by two parameters. The techniques of production used are selected according to their profitability. Under the assumptions of a rising labor cost and a temporary variation in the profile of innovation, it is possible to reproduce the historical trends of each variable over the three subperiods, 1869‐1920, 1920‐1960, and 1960‐1989. For example, the model explains why the productivity of capital and the profit rate displayed first a downward, then an upward, and again a downward trend. The treatment of a deterministic approximation of the model permits a thoroughly analytical discussion of the various configurations of the variables depending on the values of the parameters.