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Feedback and endogenous economic growth

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This paper discusses the role of feedback mechanisms in economic growth theory. A set of conditions is derived for perpetual growth at a constant rate, based on the feedbackbetween expereince-related cost reduction and price elasticity of demand. Constant growth requires continuous structural change as reflected by these two variables, and by the effiency of physical resource (and energy) consumption/utilization. Technical progress and structural change can be interpreted in terms of these related variables. Perpetual growth is consistent with negative depreciation of capital (i.e. knowledge spillovers), increasing 'commoditization' of the composite output, and monotonically decling physical resource consumption (and declining waste output) but not consistent with an unchanging composite product. This strong result means that the single-sector neoclassical model of productivity-based income allocation used to justify the selection constant output elasticities in the standard neoclassical production approach is not applicable to a growing economy. Hence physcial resource (energy) inputs can be much more productive than the simpel model suggsts. On the other hand, there is no a priori reason not to use a production function model with econometrically determined elasticities for all factors.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp1999/99-66.pdf

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Copyright INSEAD. All rights reserved