Economic Policy Review

What Drives Productivity Growth?

March 2001Volume 7, Number 1
JEL classification: O3, O4

Author: Kevin J. Stiroh

Economists have long debated the best way to explain the sources of productivity growth. Neoclassical theory and 'new growth' theory both regard investment—broadly defined to include purchases of tangible assets, human capital expenditures, and research and development efforts—as a critical source of productivity growth, but they differ in fundamental ways. Most notably, the neoclassical framework focuses on diminishing and internal returns to aggregate capital, while new growth models emphasize constant returns to capital that may yield external benefits. This article finds that despite their differences, both theories help explain productivity growth. The methodological tools of the neoclassical economists allow one to measure the rate of technical change, and the models of the new growth theorists provide an internal explanation for technical progress.

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