Romer’s “Endogenous Growth” Idea

The Solow Growth Model is a prominent example of the exogenous model of economic growth. Obviously quite different from endogenous growth models; still, the Solow Growth Model is not inherently opposed to them. The main difference between the exogenous model and endogenous model lies in different approaches to the achievement of economic growth. Solow states that without technological progress, there can be no economic growth; there is always this external factor of technical innovation. The endogenous model, on the other hand, does not directly dispute the effects of innovation on economic growth, but it states that economic growth can also be achieved without it simply by investing in human capital. In fact, according to Hodge:

“Investment in technology offsets diminishing marginal productivity of private capital, allowing for perpetual growth in output per capita.”

The Solow Growth Model and various exogenous models are still discussed extensively while being used as a basis for further theorizing.

That is why Mankiw’s interpretation of the Solow Growth Model is in conflict with Paul Romer’s idea of endogenous growth. To explain why international investments can’t reach the poor countries, Mankiw expanded on the Solow Growth Model, adding human capital into the equation. It didn’t bring the Solow Growth Model closer to endogenous growth models because Mankiw expansion still ties the growth of human capital to technological progress. Paul Romer’s take on the endogenous growth model, on the contrary, is more radical. He omits technological change completely, stating that economic growth is achieved only through indefinite investment in human capital. This position may be viewed as overly idealized and simplified. As stated by Fischer, such an interpretation of endogenous growth lacks empirical evidence and fails to explain income differences between the developing and developed countries.