Today's most technologically advanced economies are truly knowledge-based. Knowledge, productivity, education, and intellectual capital were all regarded as exogenous factors that is, falling outside the system. New Growth Theory is based on work by Stanford economist Paul Romer and others who have attempted to deal with the causes of long-term growth, something that traditional economic models have had difficulty with. Knowledge has become the third factor of production in leading economies.
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.