Growth Theory – Definition

Cite this article as:"Growth Theory – Definition," in The Business Professor, updated January 10, 2020, last accessed October 25, 2020, https://thebusinessprofessor.com/lesson/growth-theory-definition/.

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Growth Theory Definition

In economics, new growth theory is a theory that economists use to try and explain the long-run economic growth process, through an endogenous force like knowledge spillover, human capital, and information technology. The theory asserts that the actual GDP per person increases perpetually as a result of the quest people have for making profits. Any time there is a drop in earnings in a particular area, people will continue to search for better ways to work out the problem to ensure that they maximize profits.

A Little More on What is New Growth Theory

According to new growth theory, new technologies and innovations do not happen by chance, instead, it depends on the number of people seriously looking for them. Also, people have control over the knowledge capital they want to have.

For instance, they choose what to study and how serious they want to study. So, if the profit incentive is good enough, people will go for human capital growth as they seriously lookout for innovations that can help them realize this.

A critical aspect of the new growth theory is that unlike capital and land, economists see knowledge as an asset of growth that has no diminishing return or restrictions. According to them, it is an intangible quality and a great resource that organizations and industries grow from the inside.

How does New Growth Theory Value Innovation and Knowledge?

The reason why most organizations invest in human capital is that they want to nurture innovation from within their organization. According to the new growth theory, when you avail resources and create opportunities within the organization, there is an expectation that people will be motivated to come up with new technology and concepts for the consumer market.

Example

Let’s assume that a large enterprise is likely to allow a section of its staff to independently on internal projects. And, there is a likelihood of these projects developing into new companies or projects.

So, the enterprise allows them to operate as a startup that is nurtured within the organization. The desire for employees to invent a new technology is inspired by the possibility that it will generate additional profits for the organization as well as for themselves.

The new growth theory can be practical in the United States, where service-type companies drive commerce. For instance, software or app development may happen within companies as a result of the new growth theory.

Note that to be able to achieve knowledge-driven growth like that, you have to invest in human capital and sustain it. Such as move can ensure an environment with skilled professionals, that besides fulfilling their primary jobs, they can also provide an opportunity to explore and create new service that can benefit the public.

Generally, during the period of the post-Second World War, the relationship between development economics and growth economics was uneasy. So, the emergence of new growth economics has opened up the likelihood of a more productive dialogue between the sub-disciplines.

The Bottom Line

The fact that there have been recent advances, especially in terms of human capital, there’s is still the need to understand the differences in growth rates, as well as income levels, cross countries. What this means is that growth economists need to expand on their research agenda to accommodate several concepts that happen to be conventional as far as development economics is concerned.

Key Takeaways

  • New growth theory is a theory that explains the long-run economic growth process, through an endogenous force like knowledge spillover, human capital, and information technology.
  • New technologies and innovations do not happen by chance but depend on the number of people seriously looking for them.
  • A critical aspect of the new growth theory is that economists see knowledge as an asset of growth that has no diminishing return or restrictions. It is an intangible quality and a great resource that organizations and industries grow from the inside.
  • When you provide resources and create opportunities within the organization, people will be motivated to come up with new technology and concepts for the consumer market.

References for “New Growth Theory

https://www.investopedia.com/terms/n/new-growth-theory.asp

https://www.economicsonline.co.uk/Global_economics/New_growth_theory.html

https://www.e-elgar.com/shop/new-growth-theory

https://www.quora.com/What-is-new-growth-theory

https://www.tandfonline.com/doi/pdf/10.1080/00220389808422562

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