The new growth theory is an economic concept positing that human desires and unlimited wants foster ever-increasing productivity and economic growth. It argues that real gross domestic product (GDP) per person will perpetually increase because of people’s pursuit of profits.
Key Takeaways
- The new growth theory presumes that the desires and wants of the populace will drive ongoing productivity and economic growth.
- A central tenet of new growth theory is that competition squeezes profit, forcing people to constantly seek better ways to do things or invent new products to maximize profitability.
- The theory emphasizes the importance of entrepreneurship, knowledge, innovation, and technology, rejecting the popular view that economic growth is determined by external, uncontrollable forces.
- Knowledge is treated as an asset for growth that is not subject to finite restrictions or diminishing returns like other assets, such as capital or real estate.
The Heart of New Growth Theory
The new growth theory offers a fresh take on what drives economic prosperity. It highlights the significance of entrepreneurship, knowledge, innovation, and technology while challenging traditional economic views that emphasize external, uncontrollable forces in determining growth.
Competition squeezes profit, so people must continually seek better ways to operate or invent new products to maximize profitability. This concept is one of the central tenets of the new growth theory.
The theory argues that innovation and new technologies do not occur simply by random chance. Instead, the number of people seeking new innovations or technologies and their efforts determine the growth. People also have control over their knowledge capital—what to study, how hard to study, etc. If the profit incentive is significant enough, people will choose to grow human capital and search harder for new innovations.
A vital aspect of the new growth theory is the idea that knowledge is treated as an asset for growth that is not subject to finite restrictions or diminishing returns like other assets, such as capital or real estate. Knowledge is an intangible quality, unlike physical assets, and can be nurtured within an organization or industry.
Real-World Application: A Blueprint for Innovation
Under the new growth theory, nurturing innovation internally is a key reason for organizations to invest in human capital. By creating opportunities and making resources available within an organization, the expectation is that individuals will be encouraged to develop new concepts and technologies for the consumer market.
For example, a large enterprise might allow part of its staff to work on independent, internal projects, which may evolve into new innovations or companies. Essentially, the enterprise facilitates an incubation environment where employees can operate like startups within the organization.
The drive to launch new innovations is spurred by the possibility of generating greater profits for employees and the enterprise. This is particularly evident in the United States, where commerce is increasingly propelled by service-oriented companies. Software and app development are prime examples of where this theory thrives within companies.
Achieving such knowledge-driven growth requires sustained investment in human capital. This creates an environment where skilled professionals have the opportunity not only to perform their primary jobs but also to explore new services that benefit the public.
Essential Considerations
New growth theorists believe that companies generally undervalue the usefulness of knowledge. Therefore, they argue that it is mainly up to governments to invest in human capital. Governments are encouraged to facilitate access to better education and provide support and incentives for private-sector research and development (R&D).
Embracing new growth theory may reshape how enterprises and governments view economic development, focusing more on fostering knowledge and innovation to drive continuous growth.
Related Terms: productivity, real GDP, exogenous growth, neoclassical economics, knowledge capital, human capital, assets, startups, R&D.
