ENDOGENOUS GROWTH THEORY In economics, endogenous growth theory or new growth theory was developed in the 1980s [Paul

Romer] [Philippe Aghion and Peter Howitt] as a response to criticism of the neoclassical growth model. In neoclassical growth models, the long-run rate of growth is exogenously determined by either assuming a savings rate (the Solow model) or a rate of technical progress. However, this begs the question as the savings rate and rate of technological progress remain unexplained. Endogenous growth theory tries to overcome this shortcoming by building macroeconomic models out of microeconomic foundations. Households are assumed to maximize utility subject to budget constraints while firms maximize profits. Crucial importance is usually given to the production of new technologies and human capital. The engine for growth can be as simple as a constant return to scale production function (the AK model) or more complicated set ups with spillover effects, increasing numbers of goods, increasing qualities, etc. Endogenous growth theory demonstrates that policy measures can have an impact on the longrun growth rate of an economy. For example, subsidies on research and development or education increase the growth rate in some endogenous growth models by increasing the incentive to innovate. Often endogenous growth theory assumes constant marginal product of capital at the aggregate level, or at least that the limit of the marginal product of capital does not tend towards zero. This does not imply that larger firms will be more productive than small ones, because at the firm level the marginal product of capital is still diminishing. Therefore, it is possible to construct endogenous growth models with perfect competition. However, in many endogenous growth models the assumption of perfect competition is relaxed, and some degree of monopoly power is thought to exist. Generally monopoly power in these models comes from the holding of patents. These are models with two sectors, producers of final output and an R&D sector. The R&D sector develops ideas that they are granted a monopoly over. R&D firms are assumed to be able to make monopoly profits selling ideas to production firms, but the free entry condition means that these profits are dissipated on R&D spending. Critics One of the main failings of endogenous growth theories is the collective failure to explain conditional convergence reported in the empirical literature.Fact|date=June 2008 Another frequent critique concerns the cornerstone assumption of diminishing returns to capital. Some contend [See for instance, Professor Stephen Parente's 2001 review, "The Failure of Endogenous Growth"

[https://netfiles.uiuc.edu/parente/The%20Failure%20of%20Endogenous%20Growth.pdf Online] at the University of Illinois at Urbana-Champaign). (Published in [http://www.metapress.com/(gqdg4dzadovmv5fnfj5jki2x)/home/main.mpx Knowledge echnology & Policy] Volume XIII, Number 4.)] that "new growth theory" has proven no more successful than exogenous growth theory in explaining the income divergence between the developing and developed worlds (despite usually being more complex).

NEW GROWTH THEORY CREATIVITY SUMMARY According to the new growth theory, creativity is the main driver for economic development. This new theory must prevent the return of wrong ideologies. For example, Marxism, dominated 20th century economic thought: It was applied by the Soviet system, by its European satellites and in the third world. It was professed by all Communist parties. It influenced a large number of intellectuals in the Western world. As we have just seen, this theory had given everywhere catastrophic results an had driven to death about 80 millions people. Obviously, we need a new economic theory adapted to the modern world in order to prevent the return of such events. The new growth theory is based on the following golden rule: FREEDOM- CREATIVITY-TECHNICAL PROGRESS- DEVELOPMENT Creativity is today the most important factor of production because it improves labor and capital and extends resources. What is more, creativity increases the quantity of final goods and some of them in turn enlarge the creativity! Finally, creativity tends to abundance. Along this survey, we shall meet a lot of new and fascinating concepts such as the law of increasing returns, the artificial resource base, the distinction between spiritual and material goods, the magic goods and so on. 1-INTRODUCTION The classic growth model is out dated. It's largely based on scarcity of resources. It was adapted to describe the past. It does not fit to the modern world. The main feature of todays economical development is technical progress and creativity. The very aim of creativity is to produce abundance. We need therefore a new growth theory based on knowledge and creativity.

2-NEW GROWTH THEORY AND CLASSIC MODEL The new growth theory shows how creativity reduces scarcity to satisfy requirements. It means that creativity will replace scarcity as a new paradigm in economics. First, we have to recall the main features of the classic model. 21-The classic model The classic model is out dated. More precisely, the description of the factors of production such as labor and capital is a legacy of the former centuries and its explanation of growth does not apply any more to the modern world characterized by creativity. 211-Labor The conception of labor is inherited of the history of economic thought: Labor has been mainly conceived as a physical labor. Thanks to physical labor, you extract goods from resources but in counterpart labor requires energy i.e. food. As we have seen in the historical module, the production of a man deprived of tools equals to the food he needs to live. The "iron law" results from this empirical observation: The amount of food produced in a working day is equal to the amount of food the laborer consumes to be able to work along a day

It means that exploitation is the condition of progress and profit: let's suppose that a laborer needs 1 kg of bread to carry out 1 day of work, so that he can reconstitute his working strength. Let 'suppose that he produces 1 kilo of bread in a working day. To get a profit you have to pay him with a salary lower than 1 kg of bread. It means that the profit comes by exploiting the laborer. This labor value and the notion of exploitation provide a good description of the past. Today, they no longer apply. 212-Capital The conception about the capital is also out dated and unclear. For classic economists and notably for Marx, a tool is just a quantity of labor integrated in a thing. Marxists call it dead labor: Whatever the level of economy, tools always require labor to be fabricated: For

example, you spend 10 working days to make up a tool. As any output implies a labor, it is therefore assumed that the tool can only provide an output of goods equal to the integrated dead labor. Consequently the tool can only produce an amount of good equivalent to 10 working days. Knowing that a working day produces 1 kilo of bread, our tool will produce 10 kilos of bread!

213-Growth The explanation of growth which results of this analysis does not apply any more to the modern world. According to this model, economic growth results in first by adding more labor to get more goods. As resources are limited, labor suffers diminishing returns and the additional amount of food decreases. As population grows, you get less and less food despite the increase in labor. Along the history, capital (tools and machines) appears but it's mainly conceived as dead labor. As dead labor cannot be exploited like active labor, more the machines are implemented and more the profits are expected to diminish: That is the marxist law of the decreasing profits! Finally, growth is determined by the production possibility frontier. For a given limited resource, the optimum of goods and service depends only on the precedent factors of production both affected by the law of diminishing returns. Growth must halt when the marginal value of goods produced equals the cost of labor and capital used to produce them.

What is more, this model is unable to explain the economic growth experienced since the beginning of the century! Using the classical tools of the model, R. Solow calculated the rates of growth between 1909 and 1949 in the USA. He concluded that average growth was 1.5. However, the actual GDP increased by an average of 3% during this period, i.e. a difference of 1.5%. This difference called the "residue" is very important relating to the evolution of the well being. Assuming that the population growth rate is 0.8, we find for the growth rates of the GDP per capita 0.7 (1.5-0,8) according to classical calculations and 2.2 (3-0.8) according to the reality. In the first case, GDP per capita would have doubled in 100 years. In reality it has doubled in 30 years! This illustrates the importance of the "residue"! it means that the current model cannot explain the economic growth. Of course, economists give a role to technology or human capital but it's quite unclear: Globally, the academic model remains largely based on the scarcity of resources and is inspired by a thought inherited from the past. 22-New growth theory We shall therefore propose a new growth theory based on ideas and creativity. Mankind is better defined by its mind power than by its physical strenght.Then, mind power must come in first before the physical labor in the hierarchy of production factors. In economics, creativity is the expression of mind power: It is the capacity to produce new ideas such as inventions and innovations. An invention is a discovery while an innovation is the application of the invention to produce new goods and services. We claim that reativity is today the most important factor of production because it integrates ideas in labor and capital. As a result, ideas increase the amount of goods produced through labor and capital.