Chapter 9: Why Endogeneity is Not Enough to Explain Technological Change – A Critique of Paul Romer
Malcolm H. Dunn1 For ten years now, we have been experiencing a renaissance of growth theories in the form of so-called ‘endogenous growth theories’. These claim to supply us with an empirically substantial explanation of the driving forces behind the growth-rate of an economy. On the one hand, proponents argue that, in contrast to the older neoclassical growth theory of the Solow-type, technological change is no longer treated as a residual value, calculated by determining the diﬀerence between the growth of inputs to the empirically observed national growth of outputs, i.e. to the social product. Instead of an assumed exogenous rate of technological change, i.e. a rate that is not explicitly explained, we have a rate which is attributed to the intentional actions of proﬁt-maximising agents of an economy, i.e. an endogenous rate. Another advance, proponents argue, is that endogenous growth theory coincides better with the observable facts than does the older theory. While the older neoclassical theory still concluded that per-capita growth rates had a tendency to converge, explaining this among other things with the public goods character of technical advances, newer theories assume that technical knowledge is not ubiquitous. This is why a stable gap in per-capita growth rates can occur, the closure of which gives rise to the need for economic policy. At least some proponents of endogenous growth theory view their reasoning as a justiﬁcation for extensive state intervention in the form of industrial and technological policy measures. There is no doubt that...
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