The consequences of private reproduction and capital (physical and human) accumulation decisions to long-run economic development have been the focus 9f recent research. The earlier literature on the rate of growth of population,". labour force and human capital were assumed to be exogenous. The recent literature, in contrast, explicitly recognizes their endogeneity. In addition, greater emphasis is placed on human as contrasted with physical capital in the growth process.
Another strand of recent literature, labeled as “new” growth theory, is based on a misleading characterization of traditional neoclassical growth theory, namely, that it shows the steady state growth rate of income to be exogenous, and will equal the rate of growth of the labour force in the absence of exogenous technical change. Thus in the steady state per worker output and consumption are constant. A goal of ’new’ theory is essentially to endogenize growth and to obtain sustained growth in per worker output and consumption, primarily by generating increasing scale economies in aggregate production. The resulting nonconvexities lead to multiple equilbria and hysteresis in some models.
The perceived problems with the neo-classical growth model are not inherent features of the model, but the consequences of assuming that the marginal product of capital diminishes to zero as the input of capital is increased indefinitely relative to labour. Instead of directly relaxing this assumption, the ’new’ growth theorists in effect introduce a factor other than physical capital which is not subject to such inexorable diminishing returns. We take a different approach: we assume fertility and savings to be endogenous so that the rate of growth, labour and capital, and hence aggregate growth, to be endogenous. Second, we assume that population density has an external effect (not perceived by individual agents) on the production process either through negative congestion effect or through positive effect in stimulating innovation and technical change, so that the change in production possibilities is endogenous determined by fertility decisions of individual agents. Our model is not necessarily geared to generating balanced growth steady states and its non -linear dynamics generate a plethora of outcomes that include not only the steady state of the neo-classical model, but also growth paths not only without a steady state but are even chaotic. Per capita output grows exponentially (and super exponentially) in some of the examples.