In economics, endogenous growth theory or new growth theory was developed in the 1980s as a response to criticism of the neo-classical growth model. Neo-classical growth model is a term used to sum up the contributions by various authors in the framework of neoclassical economics. ...

In neoclassical growth models, the long-run rate of growth is exogenously determined. In other words, it is determined outside of the model, generally by an assumed rate of technological progress and an assumed rate of labor force growth. This does not explain the origin of growth, which makes the neo-classical model appear very unrealistic. Endogenous growth theorists see this as an over-simplification.

Endogenous growth theory tries to overcome this shortcoming by endogenizing the rate of technological progress. Several competing models have been developed by various authors. Endogenous growth theories usually rely on virtuous cycles. Crucial importance is usually given to the "production" of new technologies and human capital. Firms and individuals have an incentive to invent in order to exploit an advantage over their competitors, thereby improving their own productivity. Some of the knowledge associated with the innovation "spills over" to other economic actors, which increases those actors' ability to innovate. The virtuous cycle arises through this mechanism. In many parts of economics there is an assumption that a complex system of determinants will tend to lead to a state of equilibrium. ... Human capital is a way of defining and categorizing peoples skills and abilities as used in employment and otherwise contribute to the economy. ...

In contrast to the older neoclassical growth theory, endogenous growth theory argues that policy measures can have an impact on the long-run growth rate of an economy, even if they do not change the aggregate savings rate. Subsidies on research and development or education increase the growth rate in some endogenous growth theory models by increasing the incentive to innovate. A subsidy is generally a monetary grant given by government in support of an activity regarded as being in the public interest. ... The phrase research and development (also R and D or R&D) has a special commercial significance apart from its conventional coupling of research and technological development. ...

The most significant theoretical differences to the neoclassical growth theory stem from discarding the neoclassical assumption of diminishing marginal returns to capital investments. This assumption would permit increasing returns to scale in aggegate production, and is frequently focusing on the role of externalities in determining the rate of return on capital investments.

Scottish Labour Party politician Gordon Brown once referred to post neo-classical endogenous growth theory in a speech. This was (humorously) commented on by Michael Heseltine as being the product of his special adviser Ed Balls showing off, by saying "It's not Brown, it's balls". To meet Wikipedias quality standards, this article or section may require cleanup. ... The Labour Party is the principal centre-left political party in the United Kingdom (see British politics). ... This article is about the British Chancellor of the Exchequer. ... Michael Heseltine walks out of the cabinet meeting having resigned, January 9, 1986 The Right Honourable Michael Ray Dibdin Heseltine, Baron Heseltine, CH, PC (born 21 March 1933), is a British Conservative politician and businessman. ... Edward Michael Balls (born February 25, 1967, Norwich, Norfolk) is a Labour and Co-operative Member of Parliament. ...

Critics

One of the main failings of this (group of) theories is the collective failure to explain non-convergence. That is, to explain why some countries are still much richer than others. It is widely felt^[1] that new growth theory has proven no more successful than exogenous growth theory in explaining the income divergence between the developing and developed worlds (despite usually being more complex). Exogenous growth model, also known as the Neo-classical model or Solow growth model is a term used to sum up the contributions of various authors to a model of long-run economic growth within the framework of neoclassical economics. ... A developing country is a country with low average income compared to the world average. ... A developed country is a country that is technologically advanced and that enjoys a relatively high standard of living. ...

External link

• Beyond Classical and Keynesian Macroeconomic Policy

Notes

^  See for instance, Professor Stephen Parente's 2001 review, The Failure of Endogenous Growth (Online at the University of Illinois). (Published in Knowledge Technology & Policy Volume XIII, Number 4.) 2001: A Space Odyssey. ... The University of Illinois is the set of three public universities in Illinois. ...