What is the 'New Growth Theory'

The new growth theory is an economic growth theory that posits humans' desires and unlimited wants foster ever-increasing productivity and economic growth. The new growth theory argues that real GDP per person will perpetually increase because of people's pursuit of profits. As competition lowers the profit in one area, people have to constantly seek better ways to do things or invent new products in order to garner a higher profit. This main idea is one of the central tenets of the theory.

BREAKING DOWN 'New Growth Theory'

The theory also argues that innovation and new technologies don't occur simply by random chance. Rather, it depends of the number of people seeking out new innovations or technologies and how hard they are looking for them. In addition, people also have control over their knowledge capital, ie: what to study, how hard to study. If the profit incentive is great enough, people will choose to grow human capital and look harder for new innovations.

RELATED TERMS
  1. Endogenous Growth Theory

    An economic theory which argues that economic growth is generated ...
  2. Classical Growth Theory

    A theory on economic growth that argues that economic growth ...
  3. Accelerator Theory

    An economic theory that suggests that as demand or income increases ...
  4. Biased Expectations Theory

    A theory that the future value of interest rates is equal to ...
  5. Demand Theory

    A theory relating to the relationship between consumer demand ...
  6. Dow Theory

    A theory which says the market is in an upward trend if one of ...
Related Articles
  1. Investing

    7 Controversial Investing Theories

    We take a closer look at the theories that attempt to explain and influence the market.
  2. Investing

    Modern Portfolio Theory vs. Behavioral Finance

    Modern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ...
  3. Investing

    Understanding the Random Walk Theory

    The random walk theory states stock prices are independent of other factors, so their past movements cannot predict their future.
  4. Financial Advisor

    What's Behind the Decline in Productivity Numbers? 

    There are several theories and hypotheses about low productivity numbers in the American economy. This article examines some of them.
  5. Insights

    Economic Growth

    Economic growth happens when the market value of the goods and services in an economy increase in one time period as compared to a prior time period.
  6. Trading

    Manipulating Facts to Fit a Theory: A Dangerous Trading Practice

    This practice is common with experienced and new traders, and it can lead to huge losses. Find out how to avoid it.
  7. Investing

    Interest Rate Predictions With Expectations Theory

    The expectations theory uses long-term interest rates to predict future short-term interest rates.
  8. Insights

    Understanding Conflict Theory

    Karl Marx advanced conflict theory, which claims society is in a state of perpetual conflict due to the competition for limited resources.
  9. Investing

    Efficient Market Hypothesis

    An investment theory that states it is impossible to "beat the market".
RELATED FAQS
  1. What is the relationship between human capital and economic growth?

    Learn what human capital and economic growth are and how human capital is related to economic growth, and see examples of ... Read Answer >>
  2. What is the chaos theory?

    The chaos theory is a complicated and disputed mathematical theory that seeks to explain the effect of seemingly insignificant ... Read Answer >>
  3. What's the difference between agency theory and stakeholder theory?

    Learn how agency theory and stakeholder theory are used in business to understand common business communication problems ... Read Answer >>
  4. Is a good's production cost related to its value?

    Learn about the history and debate regarding the metrics used to determine the value of a good and which theories place emphasis ... Read Answer >>
  5. Which of the following statements is least accurate with respect to the various ...

    The correct answer is: b) The tax preference theory simply argues that capital gain return results in a higher after tax ... Read Answer >>
  6. How does the neoclassical growth theory predict real GDP?

    Understand what neoclassical growth theory is and how the ideology come about. Learn how the neoclassical growth theory predict ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center