Two-Sector Growth with Endogeneous Technical Change: A Marxian Simulation Model

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Abstract
Conventional growth literature fails to incorporate technical change and investment as endogenous variables; Marxian growth literature is bedeviled by indeterminacies surrounding technical change and the rate of profit. Both sets of problems are addressed using a two-sector (capital good, consumer good) model, in which capitalists accumulate coexisting vintages of techniques. The parameters of the latest technique are determined by maximizing the innovator's profit, constrained by diminishing returns to mechanization. The model describes the differential impact of goods-, capital-, and labor-market equilibrium on the sectors, as the economy converges to a proportional-growth path. Conditions are identified under which prices approach labor values over time; and under which Marx's “rising composition” and “falling profit rate” tendencies are realized.

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