Endogenous Growth: Breaking Free from the Steady State
Distinguish between exogenous and endogenous growth models and explain how feedback mechanisms sustain long-run growth.
The neoclassical model assumes technology improves exogenously—it falls from the sky, unaffected by economic choices. But in reality, societies choose to invest in research and development, education, and innovation. Endogenous growth models treat technological progress as an economic choice, creating feedback loops: wealthier societies invest more in R&D, which produces innovations, which boost productivity, enabling further growth. This transforms growth from an external accident into a choice variable. Models incorporating R&D, knowledge spillovers, or increasing returns to scale can generate perpetual per capita growth without external shocks. This framework explains why policy and institutions matter for growth—they shape incentives for…
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