What is the New Growth Theory
The new growth theory is an economic growth theory that posits humans' desires and unlimited wants foster ever-increasing productivity and economic growth. The new growth theory argues that real GDP per person will perpetually increase because of people's pursuit of profits. As competition lowers the profit in one area, people have to constantly seek better ways to do things or invent new products in order to garner a higher profit. This main idea is one of the central tenets of the theory.
BREAKING DOWN New Growth Theory
The theory also argues that innovation and new technologies do not occur simply by random chance. Rather, it depends on the number of people seeking out new innovations or technologies and how hard they are looking for them. In addition, people also have control over their knowledge capital (i.e., what to study, how hard to study, etc.). If the profit incentive is great enough, people will choose to grow human capital and look harder for new innovations.
A significant aspect of the new growth theory is the concept that knowledge is treated as an asset for growth that is not subject to the finite restrictions or diminishing returns like other assets such as capital or real estate. In particular, knowledge is an intangible quality, rather than physical, and can be a resource grown within an organization or industry.
