Through Scarcity to Prosperity: A Theory of the Transition to Sustainable Growth

Abstract

This paper integrates fertility choice and exhaustible resource dynamics in a tractable model of endogenous technological change. The analysis shows that, under the right conditions, the interdependence of population, resources and technology produces a transition from unsustainable resource-based growth to sustainable knowledge-based growth that consists of three phases: (1) an initial phase where agents build up the economy by exploiting exhaustible natural resources to support population growth; (2) an intermediate phase where agents turn on the Schumpeterian engine of endogenous innovation in response to population-led market expansion; (3) a terminal phase where growth becomes fully driven by knowledge accumulation and no longer requires growth of physical inputs. The last phase is crucial: not only economic growth no longer requires growth of physical inputs, but technological change also compensates for the exhaustion of the natural resource stock.