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New Growth Theory, or endogenous growth theory, provides economists with a more complete way to systematically investigate economic growth, as it focuses on the endogenous nature of growth due to positive externalities in knowledge (Romer, 1986; and Solow, 1994). Although a greater understanding of the importance of technology utilization in growth theory is kudable, New Growth theorists can provide intellectual ammunition to those willing to misuse the theory as a public-interest veneer over their rent-seeking activities.
Broadband providers, NASA, software companies, educators, and even stem-cell researchers have asked for and received government benefits under the auspices of New Growth Theory. Although New Growth Theory may present a theoretical reason for government interference in the technology sector, government agents may kck the knowledge or the incentives to deal with these externalities. Policy-oriented economists must be cautious when recommending government intervention, regardless of how reasonable intervention may seem. New Growth Theory, like many other reasonable sounding arguments, can be used to obscure rent seeking from semi-informed voters.
Differences between Classical and New Growth Theory
Classical Growth Theory
Classical Growth Theory suggests that capital is the answer to economic growth, but empirical evidence has found this theory wanting. In particular, classical growth theory suggested that the wealth of countries should converge to the same per capita GDP over time. Growth in rich countries should slow as the marginal productivity of capital diminishes, while capital inflows should speed the growth of poor countries. The real world shows little evidence of convergence, however, so economists have sought new theories (Easterly, 2002).
New Growth Theory
New Growth Theory focuses on a country's ability to utilize technology, which the theory posits is characterized by numerous positive externalities. When someone creates a new product or process, others not only copy it, but also use it as a springboard for other ideas (Easterly, 2002). Innovators often fail to see all the benefits of their ideas. Increased productivity raises wages in the long run, and higher wages lead to increased demand, which results in more capital and more R&D. Hence, in New Growth Theory, more capital is the result, not the cause, of increased growth.
The theoretical ammunition that New Growth Theory provides appears especially applicable to the technology sector. New technology and knowledge...