Growth Theory and Growth Accounting: Reformulating Our Understanding of Growth

Abstract

This paper seeks to address shortcomings in the growth literature – neoclassical growth theory and growth accounting. Specifically, the paper reformulates our understanding of the process of technical change, so that we view Hicks- and Harrod-neutral technical change as consistent, inseparable phenomena within a unified growth process. With this integrated Hicks-Harrod paradigm, the paper then: (i) reinterprets the steady state condition thereby clarifying the circumstances under which s, n, and δ are admissible, whereas g should be excluded, (ii) introduces the technology multiplier, which helps to restore technical change to its place as a public good, while creating new country-specific avenues for endogenous growth, (iii) opens a window for examining historic turning points in the growth experience, and (iv) introduces the Harrod-based accounting function thereby enabling the reconciliation and integration of growth theory and growth accounting. These reformulations substantially expand the boundaries of the neoclassical growth model to explore new avenues of growth that may be sufficient to explain the observed disparities in living standards across nations.