Classical and neoclassical growth models have become the main theoretical basis in economic studies. However, there are several limitations to these two models that affect their ability to explain complex economic growth phenomena. The classical growth model emphasizes that the level of investment and savings are the main factors in determining growth. On the other hand, the neoclassical model emphasizes the role of capital and technology in the growth process. However, both classical and neoclassical models only explain a small part of the economic growth process. One of the main limitations of classical and neoclassical growth models is their insensitivity to existing empirical data. In various circumstances, empirical data shows that investment significantly influences economic growth beyond the influence of capital and technology as explained by these models. Therefore, we need a model that is more in line with empirical findings, so that it can be a more accurate guide to how the economy grows over time.
This is what encouraged Paul Romer to develop a new growth model called the Romer or endogenous growth model. Paul Romer’s basic thought is the importance of knowledge in the process of economic growth. According to Romer, knowledge has a non-rival and non-exclusive nature, so it can produce a much greater effect on economic growth than the factors that have been recognized by classical and neoclassical growth models. In this model, knowledge is considered as the result of investments in research and development (R&D) as well as in education. In the Romer Growth Model, endogenous growth theory implies that the economic growth process can be influenced by government policies, especially those related to investment in R&D and education. This approach offers deeper insight into how economic growth can be achieved through the interaction between knowledge, innovation and public policy. By involving the role of knowledge as an important factor in the growth process, the Romer Growth Model offers a more solid theoretical basis and is compatible with empirical data, enabling researchers and policy makers to identify effective interventions in increasing a country’s economic growth. Additionally, this model also provides a more comprehensive view of how investments in knowledge infrastructure can generate long-term positive impacts on the economy.
Concepts and main components of the Romer Growth Model
The Romer Growth Model, developed by economist Paul Romer in the 1980s-1990s, is an important economic concept that explains the role of technology in economic growth. In this model, technology is considered the main engine driving economic growth. Technology can increase productivity and efficiency in the production of goods and services, thereby encouraging faster and more sustainable economic growth. One of the key concepts in the Romer Growth Model is knowledge as a non-rival and non-excludable good. Non-rival goods mean that consumption of a resource by one individual does not reduce the availability of that resource for other individuals. Non-exclusion means that a person cannot be prevented from accessing or using that knowledge once a public domain diagnostic is available. In the context of Romer’s growth model, this illustrates how knowledge can be the basis for innovation and technological development that spur economic growth.
Spillover effect is another important concept in the Romer Growth Model. Spillover effects refer to the spread of ideas, innovations, and knowledge among individuals or organizations within a sector or across all sectors of the economy. Spillover effects play an important role in this model because through spillover effects, economic actors can utilize existing knowledge to create new products and processes that are more effective and efficient, thereby accelerating economic growth. Finally, the Romer Growth Model also emphasizes the importance of increasing economies of scale. In this model, increased availability and dissemination of knowledge, combined with spillover effects, spurs faster technological progress. This technological progress then drives economic growth and increases in economic scale. Therefore, along with the growth of the economic scale, the growth of per capita income will also continue to increase, becoming something that is the main goal in sustainable economic development. Romer’s Growth Model emphasizes that technological development and the spread of knowledge, through spillover effects and increasing economic scale, will create a virtuoso circle that spurs faster and more sustainable economic growth, thereby improving the quality of life of society as a whole.
Mathematical formulas and the role of human capital in the Romer Growth Model
One of the main components in this model is a mathematical formula to describe the production function with research and development (R&D) technology. This production function includes variables such as the amount of capital, labor, and level of technology used in the production process. The role of human capital in the process of discovering new ideas is very crucial in the Romer Growth Model. Human capital here includes education, skills and experience possessed by individuals. Increased human capital will lead to more innovative ideas and advanced technologies that can be used to increase productivity. Indirectly, this will increase long-term economic growth.
One way to understand the role of human capital and R&D technology in economic growth is through the “AK” Model. The “AK” model is a simplification of the Romer model, where the output or welfare of a country only depends on the level of capital (A) multiplied by total capital (K). Although the “AK” model does not directly show the role of R&D and human capital, we can assume that both are contained in the level of capital (A). In its conclusion, the Romer Growth Model explains how the role of R&D technology and human capital is a major factor in economic growth. This model emphasizes the importance of investing in education, skills and research to create innovation that can drive growth. In addition, the “AK” Model can be used as a simple alternative to explain the relationship between capital, human capital, and economic growth.
Advantages, and disadvantages of the Romer Growth Model
Criticism of the Romer Growth Model often concerns its comparison to other endogenous growth models, such as the Schumpeterian model. Although these two models both explain the importance of endogenous factors in economic growth, there are fundamental differences in the mechanisms they use. The Schumpeterian model places more emphasis on the process of innovation and creative destruction as the main motor for sustainable growth, while the Romer Model emphasizes the accumulation of knowledge and human resources. One of the advantages of the Romer Growth Model is its ability to explain sustainable economic growth and advanced technological levels using the concept of knowledge spillover. In this model, increasing knowledge in one sector can help other sectors in the economy to increase their productivity through information exchange and collaboration. This creates a synergistic effect between various sectors in the economy, leading to sustainable growth and an increase in the overall level of technology.
However, there are several shortcomings in the Romer Growth Model, one of which is the aggregation of different sectors in the economy. This model uses an aggregate production function that does not distinguish detailed sectoral characteristics, so the analysis results tend to be general in nature and less precise in describing growth dynamics at the sector level. This becomes an obstacle in understanding how each sector specifically contributes to economic growth. Nevertheless, the Romer Growth Model remains an important theory in the analysis of economic growth. The advantages and disadvantages of this model can be used as material for further discussion in developing theories or other endogenous economic growth models that are more comprehensive and relevant to the current world economy. In addition, integration with other concepts, such as innovation and creative destruction from the Schumpeterian Model, can enrich our understanding of the factors that influence sustainable economic growth and drive technological progress in various sectors. Thus, further research regarding the development and integration of existing methods will help in providing effective policy solutions to support global economic growth.
