Technical Change in New Growth Theory

New Growth Theory seeks to provide endogenous explanations of technical change. The most prominent contributions came from Romer (1986, 1990) and Lucas (1988). Their models are neoclassical in spirit and developed on the basis of the following concepts: a macro production function, representative agents and maximizing behaviour (represent­ing rationality).

In these endogenous growth models economic change is driven by the production and accumulation of technological and scientific knowledge. Lucas (1988) introduced human capital in the macro production function. Since the presence of human capital makes both physical capital and simple labour more productive, the growth rate depends on how workers allocate their time between work and studying. Romer (1990) highlights the specific nature of knowledge and its impact on the economy: The non-rivalry of ideas implies spillovers and increasing returns, whereas the partial excludability of new designs (for example, by patenting) gives market power to the inventor and leads to monopolistic competition among innovating firms. It is these characteristics that distinguish knowl­edge from other goods and essentially drive sustained economic expansion: owing to its partial excludability, each design generates a new intermediate good for the production of the output, while non-rivalry leads to a rise in the total stock of knowledge and an increase in the productivity of human capital in the R&D sector. Thus, the (endog­enously) expanding variety of products as the outcome of innovation processes prevents growth from vanishing (see also Grossman and Helpman 1991).