We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is an Endogenous Growth Theory?

By M. K. McDonald
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

An endogenous growth theory is the type of theory developed primarily by economist Paul Romer and his doctoral advisor at the University of Chicago, Robert E. Lucas. It is a response to criticisms of neoclassical models of economic growth that assumed that technological change was exogenously determined, leading to the pessimistic conclusion that government and market policies could do nothing to increase economic growth in the long term. An endogenous growth theory suggests that technological change is a response to economic incentives in the market that can be created and/or affected by government or private sector institutions.

Neoclassical models of growth could not answer some very basic economic questions, particularly about the differences in economic growth and the quality of life between developed and developing countries. If technological change was indeed exogenous and freely available to everyone, then the only way that rich countries should have such dramatically higher standards of living is if poor countries have significantly less capital and a huge rate of return to additional investment. If that were the case, there should be massive flows of capital from rich countries to poor countries and an equalization of standards of living, but in fact, there is not.

In endogenous growth theory, technological change is a function of the production of ideas. New ideas lead to new and better goods as well as better production techniques and higher-quality older goods. Technological change thus can be increased by providing monopoly power through patents and copyrights to speed the pace of innovation.

The second way technological change can be increased is through investment in human capital, which is the sum of all of a nation's human knowledge. Through education, training and other investments in human capital, a country can increase worker productivity and increase economic growth. Endogenous growth theory also predicts that spillovers from investment in value-added products and knowledge will itself be a form of technological progress and lead to increased growth.

There are several policy implications of endogenous growth theory. First and foremost is the conclusion that policy and institutions do matter and can have an effect on growth. Rather than countries having to wait for exogenous technological progress to occur or being limited to short-term increases in growth that result from policy-induced increases in the savings rate, endogenous growth theory suggests that government and private sector policies can have an effect on long-term growth.

A poor country with little human capital cannot become rich simply by acquiring more physical capital, so investment in human knowledge through education and worker training programs is one key to achieving growth. Likewise, government policies that increase the incentive to innovate also can lead to higher rates of growth. These policies might include things such as subsidies for research and development and the strengthening of intellectual property protections.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.