theories of economic growth - endogenous

Introduction

Endogenous growth economists believe that improvements in productivity can be linked to a faster pace of innovation and extra investment in human capital.

Endogenous growth theorists stress the need for government and private sector institutions and markets which nurture innovation, and provide incentives for individuals to be inventive.

There is also a central role for knowledge as a determinant of economic growth.

Endogenous growth theory predicts positive externalities and spill-over effects from development of a high valued-added knowledge economy which is able to develop and maintain a competitive advantage in growth industries in the global economy.

The main points of the endogenous growth theory are as follows:

1. The rate of technological progress should not be taken as a given in a growth model – appropriate government policies can permanently raise a country’s growth rate particularly if they lead to a higher level of competition in markets and a higher rate of innovation

2. There are potential increasing returns from higher levels of capital investment

3. Theory emphasizes that private investment in R&D is the central source of technical progress

4. Protection of property rights and patents can provide the incentive to engage in R&D

5. Investment in human capital (education and training of the workforce) is an essential ingredient of growth

What is Human Capital?

The basis of human capital lies in the theories of Theodore Schultz, an economist at the University of Chicago who was awarded the Nobel Prize in economic sciences in 1979. Schultz, an agricultural economist, produced his ideas of human capital in the early 1960s as a way of explaining the advantages of investing in education to improve agricultural output.

The logical next step was to expand this linkage between better education and improved productivity as a benefit for the economy as a whole. Schultz demonstrated that the yield on human capital in the US economy was larger than that based on physical capital such as new plant and machinery.

Gary Becker, the 1992 Nobel Prize winner for economics, built on the idea, explaining that expenditure on education, training and medical care could all be considered as investments in human capital. "They are called human capital," he wrote, "because people cannot be separated from their knowledge, skills, health or values in the way they can be separated from their financial and physical assets."

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