Economic growth is driven by the accumulation of knowledge. While any given technological breakthrough may seem to be random, Romer considers that new technological developments, rather than having one-off impact, can create technical platforms for further innovations, and that this technical platform effect is a key driver of economic growth. Technology can raise the return on investment, which explains why developed countries can sustain growth and why developing economies, even those with unlimited labour and ample capital, cannot attain growth. Traditional economics predicts that there are diminishing returns on investment. New Growth theorists argue that the non-rivalry and technical platform effects of new technology can lead to increasing rather than diminishing returns on technological investment.
Investment can make technology more valuable and vice versa.
According to Romer, the virtuous circle that results can raise a country's growth rate permanently. This goes against traditional economics. Enhancing human capital is critical for GDP growth But sustained GDP growth doesn't just happen. In order to make investments in technology, a country must have sufficient human capital. In the industrial era, wealth was created by using machines to replace human labour.