Background and early models
In the Solow model, long-run per capita growth is set by an exogenous rate of technological progress, so the model cannot explain why some countries grow persistently while others stagnate. Endogenous growth theory, or "new growth theory," emerged in the late 1980s to explain technological progress within the model. Paul Romer (1986) built on Kenneth Arrow's (1962) "learning by doing" to show that knowledge created by one firm's investment spills over to others as an externality, producing increasing returns at the aggregate level and sustaining growth. Robert Lucas (1988) proposed human capital accumulated through education and skills, along with its externalities, as the engine of growth. Rebelo's (1991) AK model showed simply that without diminishing returns to broad capital, saving rates and policies can change the long-run growth rate itself.
Romer's economics of ideas and R&D; models
Romer's (1990) "Endogenous Technological Change" is the theory's core paper. He emphasized that ideas are "nonrival": one person's use does not prevent another's. A blueprint or formula, once created, can be copied endlessly, so production including ideas exhibits increasing returns. Because firms must also capture returns on R&D; through partial excludability such as patents, monopolistic competition and research labor determine the growth rate. Grossman and Helpman (1991) combined this with international trade, and Aghion and Howitt (1992) built a creative destruction model in which new innovations replace old technologies. In this view, education, R&D; support, intellectual property regimes and openness can affect long-run growth. Romer shared the 2018 Nobel Prize in Economics with climate economist William Nordhaus for this work.
Critiques and recent debates
Charles Jones (1995) noted that early R&D; models predict "scale effects," with growth rising in the number of researchers, yet U.S. research employment surged without faster growth. He proposed a "semi-endogenous" model in which ideas become harder to produce as knowledge grows, tying long-run growth to population growth. Bloom, Jones, Van Reenen and Webb (2020) documented in semiconductors, agriculture and medicine that the research effort needed for the same productivity gains has risen many times over, asking "Are ideas getting harder to find?" Critics also note that increasing returns and spillovers are hard to measure and that institutions and culture receive limited attention. Still, endogenous growth theory brought knowledge and innovation to the center of economics and underpins debates on innovation diffusion and industrial policy.
FAQ
- What is endogenous growth theory in simple terms?
- It says that technological progress, the key to growth, does not fall from the sky but comes from choices within the economy, such as firms' R&D; and people's investment in education.
- What does it mean that ideas are nonrival?
- One person's use of an idea does not stop others from using it, so ideas can be reused endlessly, allowing increasing returns and sustained growth.
Sources reviewed: 2026-10-26
References
- Romer, P. M. (1986). Increasing returns and long-run growth. Journal of Political Economy, 94(5), 1002–1037.
- Lucas, R. E., Jr. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3–42.
- Romer, P. M. (1990). Endogenous technological change. Journal of Political Economy, 98(5, Part 2), S71–S102.
- Arrow, K. J. (1962). The economic implications of learning by doing. Review of Economic Studies, 29(3), 155–173.
- Grossman, G. M., & Helpman, E. (1991). Innovation and Growth in the Global Economy. Cambridge, MA: MIT Press.
- Aghion, P., & Howitt, P. (1992). A model of growth through creative destruction. Econometrica, 60(2), 323–351.
- Rebelo, S. (1991). Long-run policy analysis and long-run growth. Journal of Political Economy, 99(3), 500–521.
- Jones, C. I. (1995). R&D-based; models of economic growth. Journal of Political Economy, 103(4), 759–784.
- Romer, P. M. (1994). The origins of endogenous growth. Journal of Economic Perspectives, 8(1), 3–22.
- Bloom, N., Jones, C. I., Van Reenen, J., & Webb, M. (2020). Are ideas getting harder to find? American Economic Review, 110(4), 1104–1144.
- Jones, C. I. (2019). Paul Romer: Ideas, nonrivalry, and endogenous growth. Scandinavian Journal of Economics, 121(3), 859–883.
- Aghion, P., & Howitt, P. (1998). Endogenous Growth Theory. Cambridge, MA: MIT Press.
- Nordhaus, W. D. (2019). Climate change: The ultimate challenge for economics. American Economic Review, 109(6), 1991–2014.