Growth economists had expanded the Two Neo models by adding two new forces which could create future economic growth. Economic growth now could result from adding to the two Two (awkward, but correct) Neo traditional sources of economic growth (capital accumulation and demand) and expanding to four (by adding technology and human capital) sources of economic growth.  As importantly, growth economists were also constructing a model which they intended to be a growth machine, capable of overcoming any reversion to the mean syndrome and even the business cycle itself. This growth machine was to be accomplished through diffusion of knowledge, which more or less leveled the competitive playing field, and accelerated technological, change, entrepreneurism and innovation. Presumably capital accumulation and demand creation would be positively affected and economic growth would follow. Technological change and knowledge, skills training and education prompt change, innovation, and productivity enhancements which cause sustained economic growth sufficient to overcome business cycles and the “lock in” effects of monopolistic capitalism (patents, proprietary knowledge or software and research for new applied technologies) and also reduce the gap (or inequality) between rich and poor nations or large and small firms. Say it another way, this is a perpetual Schumpeter creative destruction machine. [Editor's Note: A future article on creative destruction and innovation is already underway-a Christmas present] The mechanism for this diffusion of knowledge was governmental policy (chiefly regulatory, applied research, and educational and skills training).

What’s the Theory Behind Innovation and the Knowledge-Based Economy | Journal of Applied Research in Economic Development Saturday, April 26, 2014 @ 1:24pm | Modified