‘Not Even Wrong’
Chapter 9: Is capital special? The role of the growth of capital and its externality effect in economic growth
‘Not Even Wrong’
One of the weaknesses of the Solow growth model is the fact that it treats the rate of technical change as exogenous and as a public good. The endogenous growth models, as their name suggests, attempted to provide an explanation of the rate of technical progress while remaining within the neoclassical framework, including the use of the aggregate production function. The earliest form of the endogenous growth theory emphasised the particular role of capital accumulation in the growth process. One of the first new growth models, the so-called ‘linear-in- K’ model or Q = _K model (where _ is a constant) assumed that the externalities associated with capital accumulation were so strong that the aggregate output elasticity of K (sometimes interpreted as broad capital) was unity. While this assumption is now generally accepted as being too heroic, it is still hypothesised that capital is special, in that its aggregate output elasticity is greater than its factor share. This is because capital accumulation induces technical change.
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