ABSTRACT
Endogenous growth theory (or also called the ‘new’ growth theory) (inter alia, Arrow 1962; Romer 1986; Lucas 1988; Grossman and Helpman 1991) has recently revitalised the field of economic development. This new growth theory treats a number of growthinducing factors, such as ‘learning by doing’, ‘human capital formation via education and training’, ‘R&D’, ‘public goods and infrastructure’, and ‘knowledge spillovers’, as endogenous variables. All these growth factors are related to the generation and flows of knowledge. Knowledge is self-augmenting (cumulative and path-dependent) and its use is characterised by the law of increasing returns. As Alfred Marshall observed,
the part of nature in production may show a tendency to diminishing returns, but the part of man shows a tendency to increasing returns…Knowledge is our most powerful engine of production: it enables us to subdue nature and satisfy our wants.
