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The Endogenous Growth Theory

 Endogenous Growth Theory


The endogenous growth thesis was developed as a reaction to omissions and insufficiencies in the Solow Swan neo-classical growth model. It is a new thesis which describes the long run growth rate of a fiscal system on the basis of endogenous aspects as against exogenous aspects of the neo classical growth theory.

The Solow swan neoclassical growth model explains the long run growth rate of productivity based on two exogenous variables: the rate of population growth and the rate of technological progress and that is at liberty of the saving rate.

Romer has defined as “In models with exogenous technical variation and exogenous population growth it never really bothered what the government did.” The new growth thesis does not merely criticise the neo classical development thesis.

The Endogenous Growth Models

The endogenous development models highlight technical improvement consequents from the rate of investment, the dimension of the capital stock and the inventory of human capital.


The new growth theses are based on the following postulations.

  1. There are many industries in a market
  1. Acquaintance or technical sophistication is a non-competitive commodity
  1. There are enhancing returns to scale to all factors taken mutually and constant returns to a single aspect at least for one
  1. Technological advance comes from things people do. This means that technological advance depends on the creation of new ideas
  1. Many individuals and firms have market power and earn profits from their discoveries. This postulation arises from increasing returns to scale in production that tends to imperfect rivalry
  1. As a matter of fact, these are the requirements of an endogenous growth thesis.

Based on the postulations we can explain three main models of endogenous growth.

  1. Arrow’s Learning by Doing
  2. Arrow was the first economist to introduce the concept of learning. His assumptions was that at any moment of time new capital goods integrate all the information then accessible depends on collected practice but once constructed their productive insufficiencies cannot be varied by consequent learning. Arrow’s model in a basic form can be written as

                                        Yi        =          A(K) F(Ki,Li)

    Where Yi indicates productivity of firm i, Ki signifies its stock of capital, Li indicates its stock of labour, K devoid of a subscript indicates the aggregated stock of capital and A is the expertise aspect.

    He represented that if the inventory of labour is held invariable, development eventually comes to a standstill socially very little is invested and produced. Hence, arrow did not explain that his model could tend to sustain endogenous growth.

  1. The Lucas Model
  2. Uzawa developed an endogenous development model depending on the investment in human capital which was used by Lucas. Lucas presumes that investment on education tends to the production of human capital which is the critical ascertainment on literacy tends to the production of human capital which is the critical ascertainment in the development procedure.

    He makes a disparity among the internal effects of human capital where the individual worker undergoing training becomes more industrious and external belongings which spillover enhancement in human capital somewhat than physical capital that has spillover belongings that enhance the level of skill. Therefore the productivity for firm i take the form
                            Yi        =          A(Ki).(Hi).H

                      Where A is the technical coefficient, Ki and Hi are the inputs of physical and human capital used by firms to produce goods Yi. The variable H is the financial systems’ average level of human capital to every industry’s efficiency.

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