Endogenous Growth Theory

Topics: Economic growth, Endogenous growth theory, Exogenous growth model Pages: 4 (1410 words) Published: April 3, 2006
Recall that in the Harrod-Domar, Kaldor-Robinson, Solow-Swan and the Cass-Koopmans growth models, we have maintained, either explicitly or implicitly, that technical change is "exogenous". In the Schumpeter version, this was not true: we had "swarms" of inventors arising under particular conditions. The Smithian and Ricardian models also had technical change arising from profit-squeezes or, in the particular case of Smith, arising because of previous technical conditions.

Allyn A. Young (1928) had argued for the resurrection of the Smithian concept in terms of increasing returns to scale: division of labor induces growth which enables further division of labor and thus even faster growth. The idea that technological change is induced by previous economic conditions one may term "endogenous growth theory".

The need for a theory of technical change was there: according to some rather famous calculations from Solow (1957), 87.5% of growth in output in the United States between the years 1909 and 1949 could be ascribed to technological improvements alone. Hence, what is called the "Solow Residual" - the g(A) term in the growth equation given earlier, is enormous. One of the first reactions was to argue that by reducing much of that influence to pure capital improvements, capital-intensity seem to play a larger role than imagined in these 1957 calculations - Solow does go on to argue, for instance, that increased capital-intensive investment embodies new machinery and new ideas as well as increased learning for even further economic progress (Solow, 1960).

However, Nicholas Kaldor was really the first post-war theorist to consider endogenous technical change. In a series of papers, including a famous 1962 one with J.A. Mirrlees, Kaldor posited the existence of a "technical progress" function. that per capita income was indeed an increasing function of per capita investment. Thus "learning" was regarded as a function of the rate of increase in investment....
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