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Copyright © The Authors 2007. Published by Oxford University Press.
Capital, innovation, and growth accounting
* Harvard University, e-mail: paghion{at}fas.harvard.edu
** Brown University, e-mail: Peter_Howitt{at}brown.edu
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Abstract |
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In this paper we show how moving from the neoclassical model to the more recent endogenous growth paradigm can lead to markedly different interpretations of the same growth accounting data. In neoclassical theory, even if between 30 and 70 per cent of the growth of output per worker in OECD countries can be ‘accounted for’ by capital accumulation, yet inhe long run all of the growth in output per worker is caused by technological progress. Next, we develop a hybrid model in which capital accumulation takes place as in the neoclassical model, but productivity growth arises endogenously, as in the Schumpeterian model. The hybrid model is consistent with the empirical evidence on growth accounting, as is the neoclassical model. But the causal explanation that it provides for economic growth is quite different from that of the neoclassical model.
Key Words: capital • innovation • growth
1Taking natural logs of both sides of (2) we get:
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by definition.
2That is, R = 
Y/K = 
BK–1L1– = BKL1–/K = Y/K.
3We thank Diego Comin of NYU for his help in compiling the capital stock estimates underlying this table.
4Their Table 5 indicates that on average output grew at a 2.93 per cent rate and labour input (hours times quality) grew at a 2.20 per cent rate. It also indicates that 58.1 per cent of the contribution of labour input came from hours, implying an average growth rate in hours of (0.581·2.20 =) 1.28 per cent and an average growth rate in output per hour worked of (2.93–1.28 =) 1.65 per cent. Their estimate of the residual was 0.50 per cent, which is 30.3 per cent of the growth rate of output per hour worked.
5And also, as we shall see later in this article, in the Schumpeterian framework once capital has been introduced.
6In general, the return to an asset ought to include a continuous capital-gain term 
that will accrue if no innovation occurs. But in this case the free-entry condition (12) guarantees that vt is a constant, so that 
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