New growth theory

New Growth Theory (NGT) is a macroeconomic theory that explains economic growth and development in terms of the accumulation of knowledge and technological progress. It was developed in the 1980s by economists Paul Romer and Robert Lucas, and has since become a dominant framework for understanding economic growth.

Key Assumptions:

  1. Knowledge is a key driver of growth: NGT assumes that knowledge and technological progress are the primary drivers of economic growth, rather than traditional factors such as capital and labor.
  2. Endogenous growth: NGT posits that economic growth is endogenous, meaning that it is driven by internal factors within the economy, rather than external shocks or exogenous factors.
  3. Increasing returns to scale: NGT assumes that there are increasing returns to scale in the production of knowledge and technology, meaning that the more knowledge and technology that is produced, the more productive it becomes.
  4. Spillovers and externalities: NGT assumes that knowledge and technology can spill over from one firm or industry to another, creating externalities that benefit the entire economy.

Key Components:

  1. Research and Development (R&D): NGT emphasizes the importance of R&D in generating new knowledge and technological progress.
  2. Human capital: NGT recognizes the importance of human capital, including education and training, in generating new knowledge and technological progress.
  3. Innovation: NGT emphasizes the role of innovation in generating new products, processes, and services that drive economic growth.
  4. Network effects: NGT recognizes the importance of network effects, where the value of a product or service increases as more people use it.

Implications:

  1. Government policy: NGT suggests that government policy should focus on promoting R&D, education, and innovation, rather than simply trying to stimulate aggregate demand.
  2. Inequality: NGT suggests that economic growth may not necessarily reduce income inequality, as those who are already well-educated and well-connected may have an advantage in generating new knowledge and technological progress.
  3. Globalization: NGT suggests that globalization can lead to increased economic growth, as it allows for the diffusion of knowledge and technology across borders.

Criticisms:

  1. Overemphasis on R&D: Some critics argue that NGT overemphasizes the role of R&D in driving economic growth, and neglects other important factors such as institutional quality and macroeconomic stability.
  2. Lack of empirical evidence: Some critics argue that there is limited empirical evidence to support the claims of NGT, and that other theories may be more effective in explaining economic growth.
  3. Inequality and distribution: Some critics argue that NGT neglects the issue of income inequality and distribution, and that economic growth may not necessarily benefit all members of society.

Overall, New Growth Theory provides a framework for understanding the role of knowledge and technological progress in driving economic growth and development. While it has been influential in shaping economic policy, it is not without its criticisms and limitations.