Two Models of Growth

In order to devise an appropriate policy to boost growth it is essential to understand its causes, which in Solow’s accounting framework depend on changes in capital, labour, and technology. Both the model discussed here and the standard consensus interpretation follow Solow, but differ significantly with regard to their results and the appropriate policies they indicate. The one set out here is more optimistic: it shows that growth can be advanced through additional investment not just from changes in technology. This chapter argues that the consensus approach is unscientific because untestable and that, in, contrast, the model set out here is testable and robust when tested and should therefore be preferred. The two key differences in the models which produce this divergence are the way in which capital volumes are calculated and the influences other than technology which determine the level of investment and the volume of the capital stock.