What is 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 do not occur simply by random chance. Rather, it depends on 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 (i.e., what to study, how hard to study, etc.). If the profit incentive is great enough, people will choose to grow human capital and look harder for new innovations.

A significant aspect of the new growth theory is the concept that knowledge is treated as an asset for growth that is not subject to the finite restrictions or diminishing returns like other assets such as capital or real estate. In particular, knowledge is an intangible quality, rather than physical, and can be a resource grown within an organization or industry.

How the New Growth Theory Values Knowledge and Innovation

Under the new growth theory, nurturing innovation internally is one of the reasons for organizations to invest in human capital. By creating opportunities and making resources available within an organization, the expectation is that individuals will be encouraged to develop new concepts and technology for the consumer market.

For example, a large enterprise might allow part of its staff to work on independent, internal projects that might develop into new innovations or companies. In some ways, the enterprise lets them function like startups being incubated inside the organization. The desire of the employees to launch a new innovation is spurred by the possibility of generating more profits for themselves and the enterprise.

This can be especially true in the United States, as commerce is increasingly driven by service-type companies. Software and app development may take place within companies, following the new growth theory. Achieving such knowledge-driven growth requires a sustained investment in human capital. This can create an environment for skilled professionals to have an opportunity to not only fulfill their primary jobs but also explore the creation of new services that can be of benefit and use to the broader public.