ABSTRACT
In Part I of this research I started with a number of purely economic questions and investigated the state of the art in economic growth and development theory. I concluded that modern economics was in a rather sorry state, not being able to shed much light on the stylised empirical facts of growth. The explanatory value of the neo-classical Solow (1957) growth model, that has dominated macro-economic growth theory for the past half-century, is rather poor. That model accounts for embodied forms of knowledge only-capital and labour-but not the source of these embodiments, knowledge. As a result, the Solow model has a hard time tracking the role of knowledge accumulation, or innovation, in economic growth. More recent models that explicitly account for unembodied knowledge as an explanatory variable, such as the Augmented Solow and Endogenous Growth models, perform better in empirical terms. However, they quickly run into incompatibilities with the neo-classical competitive markets paradigm, because of their insistence on increasing returns, caused by the non-rivalry and partial excludability properties of knowledge. We traced all these problems back to the history of economic thought, and found out how economics had lost track of the role of knowledge, and especially distributed knowledge. While Adam Smith (1776) gave a pivotal role to the division of labour when he kick-started the modern economics literature, that concept disappeared rapidly in the wake of neo-classical thinking.
