1.1 Causes of Long-Run Economic Growth in Economic Theory

Economic thinking about the causes of long-run economic growth has changed considerably since Robert Solow (1956) published his article “A Contribution to the Theory of Economic Growth” which is widely regarded as the starting point of modern economic growth theory. Since then, successive strands of economic theory proposed differing causes of long-run growth. While not being mutually exclusive, these differing causes reveal marked differences in the understanding of successive theories about the crucial factors in an economic growth process.

The main insight of neoclassical growth theory (section 1.1.1) is that longrun growth cannot be sustained by a mere accumulation of the factor inputs labour and physical capital since the growth impact of, say, continued high levels of investment in the stock of physical capital is set to dwindle eventually. Instead, long-run economic growth ultimately depends on increases in productivity, or alternatively, technological change.

Building on this, endogenous growth theory (section 1.1.2) went further and explicitly examined the economic processes which impact productivity developments in an economy such as deliberate R&D efforts by companies or technology spillover effects across industries or countries. In contrast to neoclassical growth models, technological change in these models is determined endogenously by the decisions of economic agents in an economy. Here, endogenous growth theory has particularly focussed on the drivers of an endogenous technological change such as the level of human capital in an economy or a potential complementarity between human capital and technology.

Following, more recent strands of economic growth theory like the institutions view (section 1.1.3) elaborated the impact of socio-political factors on economic growth. In this view, the occurrence of an endogenous technological change depends on underlying fundamental causes of growth such as the institutional characteristics of an economy.

1.1.1 Increases in Productivity

Modern economic growth theory goes back to the contributions of Solow (1956) and Swan (1956) which by now have become known as neoclassical growth theory. The main conclusion of the neoclassical growth model is that sustained growth of per capita output is solely caused by technological change, i.e. increases in productivity but not by high levels of investment in the stock of physical capital.