The Technology of the Economy

Abstract

In a macro-economic analysis of a one-sector model, the technology of the economy is expressed in terms of three factors (land, labour, and capital) and specifies the outputs obtainable from various combinations of the factors. We can simplify by ignoring land as a factor in an advanced technology. One way would be to take land as a fixed factor and to face the consequence that there are (generally) decreasing returns to scale in production; proportionate increases in labour and capital, employed with fixed land, give a less than proportionate increase in output. On the other hand, to make it possible to retain the very convenient case of constant returns, we must assume that there are influences making for increasing returns to offset the decreasing returns from fixed land. An alternative way of treating land, and the one followed here, is to assume that land imposes no restrictions on production. Land is simply dropped as a factor of production and we are free to take the case of constant returns to scale as labour and capital increase in proportion, unless there is some reason to assume that returns are increasing or decreasing.