In summary, what are the similarities and differences between the two models?
I see that both emphasize on technological advancement
For Neoclassical, it stats that sustainable growth rate is a function of population growth, labor share of income, and technology. But at the same time it says that productivity growth (GDP per capital growth?) is driven only by improvement of technology. <=== is the “sustainable growth” different from “productivity growth”? how come population and labor share of income can affect sustainable growth but not “productivitiy growth” ?
For Endogenous , it also says that investment in technology (R&D) increases growth rate. Then how is it different from Neoclassical?
Thanks a lot pmond. Please excuse my stupidity, I still don’t get the essense of it…
“Neoclassical has a sustainable growth rate. Endogeneous does not. People invest more and growth increases.”
Endogeneous does not. -> if Endogenous’ growth rate is not sustainable, do you mean that the increase in growth by technology will drop back to a lower level? (Doesn’t investment in technology give permanent increase in growth?)
In Endogeneous the growth only increases, yes. What I meant by it not having a sustainable growth rate, I meant there is no equation that tells you where you should be in terms of labor productivity and capital.
IN Neoclassical you have an important equation MPK=r where MPK is the marginal product of capital and r is the cost of capital. If MPK increases through an increase in technology, capital is going to be invested to match it so that MPK = r. And that’s how you know where you are going to be on the curve as shown in the graph on that page.
In Endogeneous there is no equation, no formula. You just have to know that as capital increases, new technology comes along and boosts the GDP growth rate permanently. And I suppose theoretically this can go on forever.
(please don’t apologize, I’m trying to learn here on this forum, just as much if not more than you lol)
The main point you want to take away here is that with regards to Capital investment:
Under neoclassical theory, capital deepening has no effect on the long term growth of the economy.
Under Endogenous growth theory, it does.
This can be captured by understanding that in the neoclassical model, there are diminishing returns to capital, whereas in the endogenous model returns to capital can be constant.
Therefore in the endogenous growth theory, as savings increase (savings are closely tied to capital investment), the growth rate can keep increasing.
So if you had a question in the exam that said: “Under which theory would R&D expenditures have a long term impact on growth” it would be Endogenous. The idea being that this form of capital expenditure can actually have an impact on Total Factor Productivity.
Productivity drives living standards. The difference between a modern “first world” living standard, and that of 20,000 years ago, has to do with today’s tools that amplify what each human can accomplish in a day.
Neoclassical and endogenous say that productivity can increase, both from deploying more tools across the economy, and from inventing better tools. However, Neoclassical assumes the innovation part occurs in a magical innovation factory outside the economy (like a university – it doesn’t matter). Endogenous growth theory situations innovation endogenously – within the economy. It basically says that you discover useful things through economic activity, and these discoveries spill over into other areas of the economy. E.g., a programmer is making a video game for a niche market, and solves the problem of recognizing when game players’ eyes are looking directly into their web cams. He releases the game. One of the players has a day job at Samsung and reads the games computer code, then re-applies this solution in a different way in all Samsung consumer electronics to make them come to life when you look directly at them.
With endogenous growth theory, there is a compounding effect from discoveries that could continue forever (absent the inevitable genocide by a global network of billion-IQ AIs).