Endogenous growth theory
Also called: New growth theory · Topic: Economic Growth Theories and Business Cycles · NCERT: Beyond NCERT
Meaning
Endogenous growth theory says long-run growth comes from forces inside the economy. These include human capital (skills and education), research and development (R&D), innovation and knowledge spillovers. Because policy can shape all of these, governments can raise the long-run growth rate. Romer (1990) stressed that ideas are non-rival: one person using an idea does not stop others from using it, so ideas can give increasing returns. Lucas (1988) stressed human capital. In AK models (Y = AK) there are no diminishing returns, so a higher saving rate can raise growth permanently. Romer won the Nobel in 2018. Aghion and Howitt, whose work is on "creative destruction", shared half of the 2025 Nobel. Joel Mokyr received the other half.
Example
India's recent policy steps follow this logic. They include the Anusandhan National Research Foundation (Act of 2023) and a ₹1 lakh crore Research, Development and Innovation fund (2025). Both aim to raise R&D spending, which is low at about 0.6-0.7% of GDP.
Don't confuse with
- Solow growth model: in Solow, technical progress is exogenous (it comes from outside the model), and a higher saving rate raises only the level of income, not the long-run growth rate.
Related concepts
- Solow growth model
- Steady state
- Capital deepening
- Growth accounting
- Total factor productivity
- Convergence