Edited by Jeroen C.J.M. van den Bergh
Chapter 42: Endogenous Growth Theory and the Environment
Sjak Smuldersl 1. Introduction Economic growth and changes in the environment seem to be inseparable over most of the economic history of the world. The invention of agriculture and subsequent agricultural improvements not only dramatically altered land use but also freed part of the labour force to engage in a growing volume of non-agricultural production activities. Especially since the industrial revolution, an endless stream of product and process innovations stimulated the exploitation of more and more natural resources, thereby satisfying ever expanding new wants but also creating unknown pollution problems. Shortages of vital fuels or other natural resources during various periods in history made society aware of the fact that the economy depends on energy and ecological services provided by the natural environment. However, environmental and natural resource constraints did not turn the historical growth process into stagnation. Instead, accumulation of human knowledge (how to plough, forge, or build a combustion engine; how to grow crops, exploit other fuels) allowed the economy to expand within the fixed physical system of the earth. While no energy or material can be created by man, he continually creates new knowledge to derive more value from a given amount of physical resources. The new knowledge is embodied in new skills (human capital), tools, structures and public infrastructure (physical capital), as well as in institutions and norms (social capital). Therefore, from the most fundamental perspective, the study of the interaction between economic growth and environmental problems requires thinking about the creation of human knowledge. Until...
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