Why do economies grow at all?


This topic is concerned with theory. What are the conditions under which an economy will grow? Does it require accumulation of factors like capital, or innovation of new ways of using those factors? As innovation and productivity tend to be seen as the main empirical drivers of growth, under what conditions will there be innovation? This gets into the question of what market conditions provide the incentives to innovate, and it turns out that competition - free entry, zero profits, price-taking - is not the best way to draw out innovations, even if it is the most efficient way to organize production given a set of technologies on hand. Thinking about this really gets to the heart of what drives growth: non-rival ideas combined with some excludability.

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References

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