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Endogenous Growth Theory

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Endogenous Growth Theory (EGT) is an economic growth theory pioneered in the 1980s that challenges the premises of neoclassical economics concerning economic growth. In neoclassical economics, economic growth is caused by exogenous factors, such as increases in population or technological advances that are not an output of the particular economic system being studied. On the contrary, EGT focuses on the potential of an economy to generate growth internally, through factors such as improved productivity, increased education, trade, and investment.

Unlike the traditional view of growth, the Endogenous Growth Theory (EGT) posits that economic growth is caused largely by factors that are endogenous to the economy, meaning those that are internal, rather than those that are external. Endogenous growth theory contends that growth comes primarily from investment in human capital and technological innovation. Endogenous growth emphasizes the importance of economic policies; government should form economic policies which focus on promoting economic growth. EGT also suggests that economic growth can be sustained over a long period of time and doesn't follow a one-time growth pattern like neoclassical economics suggests.

Examples of some policy suggestions include introducing capital-friendly taxation, promoting higher levels of education and research, encouraging new business start-ups and innovation, and ensuring affordability of housing, insurance and other basic services. These policies are thought to increase the productivity of an economy, thereby contributing to economic growth. The EGT also highlights the role of increasing returns to scale, which occurs when economies of scale exist in a market, making it more cost-effective to produce more goods or services.

Endogenous Growth Theory offers a more nuanced understanding of economic growth than neoclassical economics which assumes that all economies are driven by exogenous factors, with no internal dynamics influencing growth. While the EGT acknowledges the existence of external factors, it places emphasis on the internal dynamics of each economy, and seeks policies that can be tailored to stimulate growth. In particular, the EGT emphasizes the potential of human capital and technological innovation and the benefits that such investment can bring to an economy. As the globalized economy and technological advances continue to shape the global economic environment, the recognition of the endogenous growth model will become increasingly important in understanding economic realities.

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