CAPITAL AND GROWTH

Abstract

  This paper develops and discusses a neoclassical growth model with two inputs: physical capital stock and combined stock of human and intellectual capital.  The production process is subject to diminishing returns to capital in perfect markets, in sharp contrast to new endogenous growth models that assume increasing returns to capital in imperfect markets.  The model finds that a high saving rate raises both transitional and steady state growth rates of output through increases in physical, human, and intellectual investments that augment labor productivity—a key extension of the Solow (1956)-Swan (1956) growth model.  Additionally, the paper derives an optimal rule for choosing the saving rate that maximizes consumer welfare.  Implications for growth policies are drawn.