Endogenous growth theory holds that economic growth is primarily the result of endogenous and not external forces. Endogenous growth theory holds that investment in human capital, innovation, and knowledge are significant contributors to economic growth. The theory also focuses on positive externalities and spillover effects of a knowledge-based economy which will lead to economic development. The endogenous growth theory primarily holds that the long run growth rate of an economy depends on policy measures. For example, subsidies for research and development or education increase the growth rate in some endogenous growth models by increasing the incentive for innovation.

Models

In the mid-1980s, a group of growth theorists became increasingly dissatisfied with common accounts of exogenous factors determining long-run growth, such as the Solow–Swan model. They favored a model that replaced the exogenous growth variable (unexplained technical progress) with a model in which the key determinants of growth were explicit in the model. The work of Kenneth Arrow (1962), , and Miguel Sidrauski (1967) formed the basis for this research. Paul Romer (1986), , and omitted technological change; instead, growth in these models is due to indefinite investment in human capital which had a spillover effect on the economy and reduces the diminishing return to capital accumulation.

The AK model, which is the simplest endogenous model, gives a constant-savings rate of endogenous growth and assumes a constant, exogenous, saving rate. It models technological progress with a single parameter (usually A). The model is based on the assumption that the production function does not exhibit diminishing returns to scale. Various rationales for this assumption have been given, such as positive spillovers from capital investment to the economy as a whole or improvements in technology leading to further improvements. However, the endogenous growth theory is further supported with models in which agents optimally determined the consumption and saving, optimizing the resources allocation to research and development leading to technological progress. Paul Romer (1986, 1990) and significant contributions by Philippe Aghion and Peter Howitt (1992) and Gene Grossman and Elhanan Helpman (1991), incorporated imperfect markets and R&D to the growth model.

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== Criticisms ==<!-- This section is linked from Economics -->

One of the main failings of endogenous growth theories is the collective failure to explain conditional convergence reported in empirical literature.

Another frequent critique concerns the cornerstone assumption of diminishing returns to capital. Stephen Parente contends that new growth theory has proved to be no more successful than exogenous growth theory in explaining the income divergence between the developing and developed worlds (despite usually being more complex).

Paul Krugman criticized endogenous growth theory as nearly impossible to check by empirical evidence; "too much of it involved making assumptions about how unmeasurable things affected other unmeasurable things."

See also

  • Democracy and economic growth
  • Economic growth
  • Human capital
  • Feldman–Mahalanobis model
  • Solow–Swan model, "the" exogenous growth model
  • Ramsey–Cass–Koopmans model, a microfounded growth model with infinite horizon

Notes

References

Further reading

  • Akcigit, Ufuk; Ates, Sina T. (2021/01). "Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory". American Economic Journal: Macroeconomics 13(1): 257–298.