(2c)P.1
New Growth: The Economics of Ideas
(Main reference: Jones ch.45.)
• Neoclassical growth modeling: Focus on capital accumulation
• New growth theory: Focus on technology, ideas, explaining
economic growth “endogenously”
rather than assuming
a growth trend.
 Targeted towards finding “engines of growth” = processes that do not suffer from the curse of declining
marginal returns
 Accepting increasing returns to scale a/o phenomena inconsistent with perfect competition—models
include imperfect competition
• Starting point: Neoclassical growth model with standard production function:
Output = F(capital, labor,...). Well described by a power function:
Y
=
K
!
(
AL
)
1
"
!
• New element: Theory of what “A” means, how and why it increases, and what determines if and how fast it
increases over time: Specific interpretation: A
t
=number of ideas/blueprints available at time t
• Key insight: Ideas/blueprints can be used repeatedly without additional cost: they have naturally increasing
returns to scale/zero marginal cost.
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(2c)P.2
Motivation: The Curse of Declining Marginal Returns
• Basic Solow model with constant A: Stagnant economy (preindustrial?)
Obstacle to growth: Declining MPK. Curved f(k) in the Solow diagram. Solutions:
• Approach #1 (Solow): Assume A grows. Then
!
!
)
/
(
1
/
L
K
A
L
Y
"
=
keeps shifting up.
• Approach #2 (AK model): Assume
K
A
Y
!
=
is linear, not curved. (As if
α
=1. Modified “A”)
Yields endogenous growth
w/o growth in scale factor A. Solves the problem by assumption.
• Approach #3 (Lucas’ model): Assume skills grow in proportion to education:
h
u
h
!
"
=
)
1
(
!
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 Fall '08
 Staff
 Economics

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