Increasing returns to scale in affluent knowledge-rich economies

This paper departs from the existing growth literature in not assuming a pr iori a specific production technology and offering instead a theory of prod uction technology that captures the effects of changes in the level, compos ition, and forces of accumulation of capital on the productivity of an econ omy. The theory of production technology shows that an affluent knowledge-r ich economy violates the Inada second condition because of its high level o f knowledge, human, and social capital. Substitution of knowledge capital f or physical capital and the self-reinforcing nature of the process of accum ulation of knowledge, human, and social capital are the engines of growth i n such economies. Poor economies, on the other hand, may exhibit neoclassic al production technology of diminishing returns to capital and get trapped into a low-level steady state owing to their ever-growing need for physical capital and also to unfavorable supply conditions for knowledge capital, l ower levels of knowledge, human, and social capital in these economies bein g inadequate to trigger the self-reinforcing dynamics. The mechanics of end ogenous growth are essentially different in rich and poor economies because the production possibility surface is non-convex in the former, and this d ifference explains the sustained divergence of their growth rates.