Within the context of the Solow model, list and explain the problems with neo-classical growth theory. How does endogenous growth theory address these problems? Is endogenous growth theory problem-free?

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Neoclassical growth theory , or also known as the Solow growth theory or exogenous growth theory , posits that long term , sustained economic growth is only possible through technological progress and innovation which increases the efficiency of labor . Changes in the saving and /or investment rate only induces short term growth , in which diminishing returns to capital force the economy to return to a steady state

level However , it does not explains how or why technological progress is determined or created it is assumed that this technological progress is exogenous that is , determined by factors outside the consideration of the model

Critics of the Solow growth model say that this is an unrealistic assumption that does not reflect the underlying economic reality . Their answer to the Solow growth model of exogenous technological growth is a model of endogenous growth , in which technological progress is explained and determined by factors within the scope of the model . More specifically , according to Roberts and Setterfield , endogenous growth theory , in their own words , have 2 major variants , namely

An endogenous growth theory is one in which the rate of growth is determined by the equilibrium solution of the growth model itself rather than being imposed upon the model from without (exogenously or

An endogenous growth theory is one in which technical progress is explicitly modeled , rather than being treated as exogenously given manna from heaven ' 2

Attempts to explain the rate of technological progress has created a model of endogenous growth , in which constant returns to capital are the underlying assumption , compared to diminishing returns to capital in the Solow model . 2 This is made possible by the broad assumption that human knowledge and skills are also a form of capital , and once accumulated they do not exhibit the properties of diminishing returns since more of it does not crowd out ' other primary factors of capital , relative to other traditional forms of capital . 3 In addition , new knowledge begets further knowledge , which might have a virtuous cycle effect at best and reduce knowledge depreciation at worst . Knowledge can also be viewed as a public good which benefits society as a whole . This makes it a more plausible of long term economic growth

One of the key results of the endogenous growth model is that government policy decisions can permanently raise a country 's growth rate if they lead to more technological progress and innovation , hence making growth endogenous , as its name suggests . This also emphasize the role of private investment in research and development as the central source of technical progress and innovation , since most research and development is driven by a profit motive in to capture a short term monopoly or patent , under which more profits can be made . This suggests that the protection of property rights and patents can increase the incentives for private organizations...