Although the importance of the elasticity of substitution between capital and labour (σ) has been recognized in many areas in economics, this parameter has not received enough attention in economic growth. The purpose of this paper is to review the recent development in the importance of σ in economic growth.
This paper specifically reviews the possibility of perpetual growth and slowdown, and the asymptotic behaviour of the balanced growth path for different values of σ. It also reviews the determinants of the aggregate σ.
Based on the empirical evidence that the value of σ significantly departs from the Cobb‐Douglas value of unity, the paper recommends employing the constant elasticity of substitution (CES) production function in both theoretical and empirical growth research.
This paper offers a new perspective on the elasticity of substitution between capital and labour due to its evaluation of various factors, methods and approaches.
