Teaching Profit Seeking as the Source of Growth

This paper offers an alternative to the typical presentation of economic growth theory in standard introductory textbooks. The standard textbook presents neoclassical production functions with diminishing marginal returns and predictions of convergence. For many students, the incentives to learn this are weak since the theory is abstract and its initial predictions inaccurate. A few changes to the presentation can create clarity and believability. One change is to present both creative destruction and rent seeking as possible paths of the profit motive. In this case, not only can students find greater consistency with their own observations, whereby profits can be well-earned or ill-gotten, but students can find consistency with the cross-country data and the simultaneous existence of converging and diverging countries. Students will be more motivated to understand neoclassical production functions with diminishing returns, since they are relevant for all countries of the world, not just an abstract few.