Policy Implications of Endogenous Growth Models

Up to the mid-eighties in traditional macroeconomic neoclassical growth theory exogenous technological development was presupposed. It was assumed that economic actors behaviour barely influenced technological renewal. Classical growth theory treated technology like manna from heaven, positively influencing per capita income growth in countries. The unexplained residual in traditional growth accounting estimates was attributed to exogenous technological progress. In other words, a statistical ‘measure of our ignorance,’ has been interpreted as an indicator of the impact of technology on growth. This kind of reasoning leaves little room for an analysis of the question how firms’ strategic behaviour as well as government intervention may affect long-run growth through its impact on technological progress apart from exogenously stimulating general technology development. Also the influence of profit motivated R&D within firms could not be explained by this growth theory. From this traditional perspective technology policy primarily concentrates on enhancing competition (competition policy) and on stimulating fundamental scientific research (science policy). The actual measurement of the effectiveness of such policies is quite difficult. As a consequence, in economic theory the role of the government was underestimated. In this traditional view the influence of investment in fysical and technological infrastructure on growth is absent.