CHAPTER 3 - A THEORY OF ENDOGENOUS TECHNICAL PROGRESS

Abstract

This chapter explains a theory of endogenous technical progress. The study of technical change takes it for granted that there is a factor affecting the technology and that this factor is given exogenously to the economic system. The fact remains, however, that practically all types of technical change are determined within the economic system as the result of meaningful rational economic behavior of economic agents. That is to say, technical change is endogenous. The chapter also describes this process of endogenously determined technical progress as a process partly because of dynamic market forces of supply and demand, and partly because of dynamic technological forces of inventions and innovations. Technical progress is regarded as the result of dynamic processes of efficient allocation of limited resources under technological and market constraints. In the theory of the firm behavior, the firm postpones a fraction of profits in the form of research and development (R&D) investment for the purpose of enjoying future cost-saving benefits. Viewing technological change in an intertemporal context affords many possibilities to understand better the relationship between R&D and the efficiency increase in production of goods and services. Economists discovered long ago that a significant increase of productivity is largely because of R&D activities of the firm, industry, and economy as a whole.