The Growth Conundrum: Paul Romer’s Endogenous Growth

Abstract

The explanation and causes of economic growth, the problem of convergence of per capita income among different economies, the low productivity growth in many advanced economies, and the presence of disrupting technological innovations remain at the center of the debate among economists. The present contribution analyzes the endogenous growth theory of Paul Romer and discusses its features and content through Romer’s main works on the topic. This study on Romer’s work highlights the existence and importance of increasing returns in the process of growth, the key role of knowledge, the ideas as non-rival goods, the existence of externalities, the endogeneity of technological change, and the primary role of human capital, especially in research activity. Institutions, such as property rights are important as well. The state also has a decisive role in education and the research sector. Another relevant aspect is that economic growth and technological change are closely interconnected; they cannot be separated. Romer’s theory of endogenous technological change ties the development of new ideas and economic growth to the number of people working in the knowledge sector. New ideas, being non-rival and partially excludable, are fundamental for growth since they make everyone producing physical goods and services more productive. Finally, Romer’s endogenous growth highlights the factors that provide incentives for knowledge creation; thus, his theory can also be considered a significant contribution to the theory of the knowledge-based economy.