What this means, of course, is that in the long run, the economy will enter
a so-called steady state in which capital deepening
ceases as the capital labor ratio stops rising.
This is because even as capital deepening is driving real wages up, the returns to
capital are falling, so that at some
point, further investments in capital deepening become unprofitable.
At this point, the economy enters a steady state in which, without
technological change, both capital incomes and wages end up stagnating.
Now this is certainly a far better outcome than the
nasty and brutish world of subsistence wages predicted by Malthus.
Nonetheless, the long run equilibrium of the neoclassical
growth model, makes it clear that if economic
growth consists only of accumulating capital through replicating
factories with existing methods of production, then people's standard
of living will eventually stop rising.
And that's why we must come to understand the importance of technological change in
averting this fate, as modern economies in this century have so obviously done.
This leads to the third major insight of the neoclassical growth model.
It is ultimately only through technological change that we can avoid the
trap of economic stagnation.