Introduction

As we noted briefly in Chapter 2, an important potential difficulty associated with endogenous growth models is that they may exhibit “scale effects,” meaning that variations in the levels of key variables pertaining to the size of the economy, such as the population, number of people employed in the research sector, or the capital stock, exert permanent influences on national growth rates. In addition, they also suggest that policy variables, most notably tax rates, may have a profound effect on the equilibrium growth rate. These theoretical predictions run counter to recent empirical evidence obtained from studies based on the USA and other OECD countries. This has led to the development of a new class of so-called “non-scale” growth models, in which technology and capital accumulation are still endogenous, but long-run growth rates are now independent of changes in policy and other scale variables. Instead, long-run growth rates are determined by the exogenous growth rate of labor in conjunction with production elasticities. In this respect these new models are closer in spirit to the traditional Solow–Swan neoclassical growth model, which in fact emerges as a special case.

The non-scale specification has both advantages and disadvantages. One attractive feature is that a balanced growth equilibrium obtains with few restrictions on returns to scale. This is in contrast to endogenous growth models, which require constant returns to scale in the accumulated factors of production for balanced growth to prevail.