Neo Classical Growth Theory

2.1.1 Neo-classical growth theory

It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity, commonly referred to as technological progress. At its core it is a neoclassical aggregate production function, usually of a Cobb–Douglas type, which enables the model "to make contact with microeconomics"(Daron, 2009). The model was developed independently by Robert Solow and Trevor Swan in 1956, Solow (1956) and superseded the post-Keynesian Harrod–Domar model. Due to its particularly attractive mathematical characteristics, Solow–Swan proved to be a convenient starting point for various extensions. For instance, in 1965, David Cass and Tjalling Koopmans integrated

The theory states that by varying the amounts of labor and capital in the production function, an equilibrium state can be accomplished. The theory also argues that technological change has a major influence on an economy, and that economic growth cannot continue without advances in technology.

The neo-classical model was an extension to the 1946 Harrod–Domar model that included a new term: productivity growth. Important contributions to the model came from the work done by Solow and by Swan in 1956, who independently developed relatively simple growth models. Swan (1956) Solow 's model fitted available data on US economic growth with some success. In 1987 Solow was awarded the Nobel Prize in Economics for his work. Today, economists use Solow 's sources-of-growth accounting to estimate the separate effects on economic growth of technological change, capital, and labor (Nawaz, 2006).

2.1.2 Assumptions

The key assumption of the neoclassical growth model is that capital is subject to diminishing returns in a closed

However, in this case, per-capita output grows at the rate of technological progress in the "steady-state" (that is, the rate of productivity growth) Swan (1956).

2.1.3 Criticisms of the theory

Neoclassical economics is sometimes criticized for having a normative bias. In this view, it does not focus on explaining actual economies but instead on describing a "utopia" in which Pareto optimality applies. In the opinion of some developers of an alternative approach, the purpose of neoclassical economics is "to demonstrate the social optimality if the real world were to resemble the model", not "to explain the real world as observed empirically"(Kregel et al, 1975).

Neoclassical economics assumes a person to be, “a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift about the area, but leave him intact" (Thorstein,