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The Minimum complexity of endogenous growth models: the role of physical resource flows and technology (RV of 98/63/EPS)

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Conventionam economic growth assumes that technological progress is exogenous and that resource consumption is a consequence, not a cause, of growth. This assumption is built into most, if not all of the large-scale models used for policy guidance by governments. The reality is more complex. A "growth engine" is a positive feedback loop involving decling costs and increasing demand. The neoclassical theory was based on population growth and the traditional savings-investment-capital accumulationmechanism. Solow added an exogenous residual called "technical progress". But the most important growtn engines of the first industrial revolution were dependent on decling fossil fuel and mechanical power costs, and their relationship with scale on the one hand and demand, on the other. In this picture energy consumption is as much a driver of growth as a consequence thereof. Thus, based on both qualitative and quantitative evidence, physical resource flows have been, and still remain, a major factor of production. Including asufficiently large rresource proxy in the production function accounts for economic growth quite accurately without any exogenous time-dependent term. Yet doubts remain because of the small share of direct payments to natural resource owners in the national accounts. The paper shows that the apparent inconsistency between [small] factor payments and high correlation between physical resource (energy] inputs and outputs can be traced to one often forgotten simplification in the traditional theory, namely that the economy produces final products directly from labor and capital, without allowing any role for consumable intermediates. Correcting for the omission of intermediates by introducing a two-sector or multi-sector production process, can multiply the impact of resource inputs and account for the apparent inconsistency.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp1999/99-37.pdf

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