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CHAPTER 15

Directed Technological Change
The previous two chapters introduced the basic models of endogenous technological change. These models provide us with a tractable framework for the analysis of
aggregate technological change, but focus on a single type of technological change.
Even when there are multiple types of machines, these all play the same role in increasing aggregate productivity. Consequently, technological change in these models
is always “neutral”. There are two important respects in which these models are
incomplete. First, technological change in practice is often not neutral: it benefits some factors of production and some agents in the economy more than others.
Only in special cases, such as in economies with Cobb-Douglas aggregate production functions, these types of biases can be ignored. The study of why technological
change is sometimes biased towards certain factors or sectors is both important for
understanding the nature of endogenous technology and also because it clarifies the
distributional effects of technological change, which determine which groups will embrace new technologies and which will oppose them. Second, limiting the analysis to
only one type of technological change potentially obscures the different competing
effects that determine the nature of technological change.
The purpose of this chapter is to extend the models of the last two chapters to
consider directed technological change, which endogenizes the direction and bias of
new technologies that are developed and adopted. Models of directed technological
change not only generate new insights about the nature of endogenous technological
progress, but also enable us to ask and answer new questions about recent and
historical technological developments.
We start with a brief discussion of a range of economic problems in which considering the endogenous bias of technology is important and also present some of the
general economic insights that will be important in models of directed technological
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