Economic Principles Ch23. Endogenous growth theory and modern growth theory

Chapter 23. Endogenous Growth Theory and Modern Growth Theory

The Solow model assumed technological progress—the core of long-term growth—as given from the outside, failing to explain it. Paul Romer and Robert Lucas pioneered endogenous growth theory by investigating how knowledge and innovation are generated from within the economy.

1. The AK Model: Overcoming Diminishing Productivity

The biggest difference from the Solow model is the rejection of diminishing marginal productivity of capital.

Concept: Capital ( $K$ ) includes not only physical capital but also knowledge and learning by doing, so productivity does not decrease even with continuous investment.
Result: The savings rate ( $s$ ) can raise not only the short-term income level but also the long-term growth rate ( $g$ ) itself.

2. Human Capital Theory (Lucas)

This is the theory that the skill and education level of workers serve as the engine of growth.

Core: Investment in education generates external economic effects, dramatically increasing the productivity of the entire nation.
Implication: Building an education system is more important than mere aid for developing countries to leap into wealthy nations.

3. R&D and Technological Progress Model (Romer)

Technology is not discovered by chance, but is the result of for-profit firms intentionally creating it in pursuit of patent rights and other rewards.

Non-rivalry of Knowledge: Once developed, the value of technology does not diminish even when multiple firms use it simultaneously, maximizing economies of scale.
Policy Implication: Intellectual property rights must be protected to strengthen corporate incentives for innovation.

4. Convergence Hypothesis

Absolute Convergence: Poor countries grow faster than rich countries and eventually reach the same level (Solow’s prediction).
Conditional Convergence: Levels converge only among countries with similar fundamental conditions such as savings rates and education levels.
Reality: Endogenous growth theory warns that if gaps in education and technology widen, income disparities between nations can actually become more severe.

5. Conclusion: An Era Where Creativity Determines National Power

If past growth was an era of quantitative inputs such as capital and labor, modern growth is an era of qualitative inputs such as knowledge and ideas. Endogenous growth theory provides the strongest economic rationale for why governments must support R&D and nurture talent.

📖 References

[Macroeconomics] - Jeong Byeong-yeol: Mathematical comparison of endogenous growth models.
[Endogenous Technological Change] - Paul Romer: Theory that won the 2018 Nobel Prize in Economics.

Great work. In the next session, we will study fiscal policy and national debt, the specific actions of the government in managing the stability and growth of the national economy.