Neoclassical endogenous growth theory

The Classical economists were the founding fathers, defining thought up to the Great Depression. Smith, Ricardo and Mill spoke of economic freedom, competition and laissez-faire.

Reacting to the Keynesian and Marxian challenge, neoclassical economics emerged as a body of thought to engulf almost all of the subject. It centres around assumptions of individuals; holding rational preferences, full information and maximising utility. Such assumptions are easily manipulated mathematically, paving the way for a modelling era in macroeconomics, and some of the earliest models concerned growth.

The Solow Growth model used four variables: output (Y), capital (K), labour (L), and the effectiveness of labour (A).
A simple production function would be Y= f (K, AL), or output is a function of the amount or capital, labour, and it's effectiveness. But the results were surprising: capital accumulation can't account for long-run growth, or cross-country differences. The mysterious 'A', which could also be called 'knowledge', was a catch all variable that contained everything that might affect Y, other than K or L. And it was the critical componant.
New Growth Theory had to therefore analyze 'A', instead of merely assuming it.

Consequently 'A' became an endogenous variable (something originating from within the model) and took the crude form of research and development. Now, instead of a natural steady state of growth that it's impossible to deviate from in the long-run, under a certain set of assumptions it was possible for governments to invest in research and stimulate ever increasing growth.

Hence, neoclassical endogenous growth theory. So not at all Balls!

Comments

[James M]

Fair enough point with Tom Watson, he quite clearly had no idea what he was talking about. I just ran through your Labour MP "Balls" test... can't really agree with you about Solow devising the first growth model - it's the first explicit growth model in a neoclassical framework; the classical economists obsessed about growth (cf Smith, Ricardo, Mills).

[AJE]

Good point, although I don't think anyone before Solow developed a model, in the modern macroeconomic sense of the term. Thanks for stopping by.

[James M]

Racking my brains a bit here... the Harrod-Domar model was cobbled together in the 1940s/early 1950s (or thereabouts), some time before Solow (which could be seen as a derivative of their basic framework) - though you might argue that, though mathematically fairly rigorous, it lacked the solid (neoclassical) microfoundations of Solow.

[rev.]

There were plenty of attempts at growth, but the best model prior to Solow was the truly neoclassical Ramsey model by the Cambridge mathematician of the same name.

[Cheap Jordan 1]

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