What Is New Growth Theory?
Let me tell you about new growth theory—it's an economic idea that says our endless desires and wants as humans push us toward ever-higher productivity and economic growth. This theory claims that real GDP per person will keep rising forever because people are always chasing profits.
Key Takeaways
- New growth theory assumes that people's desires and wants will keep driving productivity and economic growth.
- A core idea is that competition cuts into profits, so people must always find better methods or create new products to boost profitability.
- The theory stresses entrepreneurship, knowledge, innovation, and technology, dismissing the notion that growth comes from external, uncontrollable forces.
- It treats knowledge as a growth asset that's not limited by finite constraints or diminishing returns, unlike capital or real estate.
Understanding New Growth Theory
New growth theory gives a new perspective on what drives economic prosperity. It puts a spotlight on entrepreneurship, knowledge, innovation, and technology, pushing back against neoclassical economics' idea of exogenous growth where progress depends on outside forces you can't control.
Competition tightens profits, so you have to keep looking for better ways to operate or invent new products to maximize earnings. That's a key principle here in new growth theory.
The theory says innovations and new tech don't just happen by luck. They depend on how many people are hunting for them and how intensely they're searching. You control your own knowledge capital—like what you study and how hard you work at it. If the profit reward is big enough, you'll invest in building human capital and push harder for innovations.
A big part of this theory is viewing knowledge as an asset for growth that isn't bound by limits or diminishing returns like other assets such as capital or land. Knowledge is intangible, not physical, and you can build it up inside an organization or industry.
New Growth Theory Example
In new growth theory, companies nurture innovation from within by investing in human capital. You create chances and provide resources inside your organization to encourage people to come up with new ideas and tech for the market.
Take a large company that lets some employees work on their own internal projects—these could turn into new innovations or even spin-off companies. It's like incubating startups right inside the enterprise.
Employees get motivated to innovate because they see the chance for bigger profits for themselves and the company. This is especially relevant in the U.S., where service-based businesses like software and app development are growing, often following this theory.
To achieve growth driven by knowledge, you need ongoing investment in human capital. This sets up an environment where skilled workers can do their main jobs and also develop new services that help the public.
Special Considerations
Those who support new growth theory think companies often undervalue knowledge's potential, so they say governments should step in to invest in human capital. Governments need to make better education accessible and offer support and incentives for private R&D.
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