LOS d: Compare and contrast classical growth theory, neoclassical growth theory, and new growth theory.

The new growth theory holds that productivity growth is a function of society’s ability to discover new products and methods (i.e., the creation of knowledge capital), and real interest rates.

Knowledge capital is a special type of public good because it is not subject to the law of diminishing returns. This is a key element of new growth theory. The implication is that, unlike the classical or neoclassical growth theories, economic growth is not limited.

Neoclassical economists argue that the most important economic influence on population growth is the opportunity cost to women for entering the workplace. As real wages for women rise and their job opportunities expand, the opportunity cost of staying home and raising children increases. As the opportunity cost of having children increases, birth rates decline, and population growth slows.

Classical growth theory contends that there is a subsistence real wage, defined as the minimum real wage necessary to support life. Whenever real wages are greater than the subsistence real wage, the population will increase, leading to diminishing returns to labor, and eventually, decreased labor productivity. The key to classical growth theory is the population explosion that occurs whenever real GDP per labor hour increases above the subsistence level, which will eventually eliminate any gains from increased labor productivity.

Lenser’s statement is a decent layman’s description of the new growth theory, also known as the endogenous growth theory. This theory argues that economic growth can continue indefinitely as long as technological advances are made.