The neo-classical growth theory examines how exogenous factors such as Labour, Physical capital and Technological changes pilot economic growth. The Solow growth model which is considered central to the neo-classical growth theory assumes an economics of maximum employment capabilities and was later on extended by Mankiw et al, (1992) so as to accommodate Human capital. The body of the essay is going to firstly start by an overview of the Solow model, and the way in which the model was enlarged so as to accommodate human and physical capital. Secondly, the nature with which the model corresponds to human capital and the data used by Mankiw-Romer and Weil will be analysed. Lastly, the strength and weaknesses of the MRW model will be assessed and a reasonable conclusion will be drawn at the end.
The Solow model, motivated by the 19th century pioneers of neo-classical models of growth assumes that each resource channelled towards production is bound to face diminishing returns, and this means that output can only be improved by a significant increase in productivity as other factors are held constant (Solow, 1999). The typical Solow-Swan model is constructed on a Cobb-Douglass production function with two inputs under the equation: Y(t) = A* K(t) α *L(t) 1- α where the model presumes a constant rate of technology. Furthermore (Ozdemir, 2017) explained the intuition of the model is of incessant production function, where there is varying investment function with an inclination for labour-capital ratio to regulate itself with time onto the path of equilibrium proportion as a substitute of the Harrod-Domar model, exclusive of its main hypothesis of constant percentage in production. The Solow model according to Mankiw et al, (1992), deduce that population growth and savings rate are exogenous, Solow also indicated that the two inconstant regulate the steady state balance of income per capita, and similarly population and savings rate alter transversely in different countries and thus economies emerge to different steady states. Therefore, the higher the proportion of savings the wealthier the country gets and a high population growth will in turn lead to a penurious society.
Furthermore, Accinelli and Brida (2007) clarified how the neo-classical model presumes that the labour force will develop towards a constant rate of n>0 and additionally, population growth will trail towards an exponential law, which is perceptibly impractical since it suggests that as time reaches infinity, population grows to infinity as well. Although, Solow's model accurately foretells the consequences of population and savings, it does not foretell its enormousness, for instance the data available for population growth and savings on income appear robust.
Mankiw-Romer-Weil model explained how the exclusion of human capital from the Solow model can hypothetically prove the predictable effect on population growth and savings rate being robust, and as a result, the Solow model was extended by Mankiw-Romer-Weil so as to assimilate the concept of human and physical capital. By doing so, the Cobb-Douglas production function was stretched to include human capital (H) as a third distinct production input, thereby giving the equation: Y(t)= K(t)α H(t) β (A (t) L(t)) 1-α-β. Mincer (1981) outlined how human capital accumulation can create a comprehension which provides a basis for technological change and innovation which impels all factors of production. Similarly, Grossman and Helpman (1994) stressed how the significance of technology is useful in overcoming the issues regarding "limits to growth" in such a way that as humanity learn of better ways of generating more productivity, whilst preserving resources that cannot be generated or accumulated leading to an increase in the living standards for numerous centuries.
The Mankiw-Romer-Weil model deduce that all countries apply latest technology at approximately the same level, and also emphasize that the constraint identical to that in technological growth replicates the progression in knowledge which is not country exclusive. This hypothesis of a routine technological growth implies that all alternatives in country growth rates has to be clarified by variants in countries interval from the steady state and the level of decline in the proceeds of capital (Dowrick and Rogers, 2002). The fact that the MRW model assumes identical level of technological progress in all economies can be considered a great weakness as Benhabib and Spiegel (2002) further on supported this by stating the Nelson-Phelps structure, where incorporeal technical know-how freely passes from the lead to followers of technology which in turn leads to a total factor productivity boost. The defence in the patent system or blueprint possession is not clearly proposed, therefore a technique should be implemented as a substitute in order to succour innovative activities which by doing so will hinder the issues of free-riding which regardless of technology will still pass between convergence clubs, through associated cost to imitation rather than patent security, which will secure invention activities within clubs. Although the model has worked immensely in creating plans for long-term economic growth, it has failed to properly capture the processes of technological change and Sredojević et al, (2016) added how the model does not instigate the role of technological progress in the development of capital accumulation, investing in research and education.
Galor (1996) also explains how the assumption of "Conditional Convergence" under the neo-classical growth theory recommends that between countries with comparable choices in government policies, technologies and population growth rate, an increase in the rates of growth leads to an inferior rate of per-capita output. Therefore, economies with very similar aspects with the exclusion of their original level of output per capita are more likely to converge to the exact steady state rate of output per capita and subsequently to one another. Sala-i- Martin (1996) stated how the initiation of the notion of conditional convergence by the neo-classical model reveals how the data can be considered reliable, even though the model seems to predict a rapid level of conditional convergence with an expected pace 2% per year. A pace of 2% per year on conditional convergence is relatively trivial, for instance, it proposes that for half of the space between the steady state rate and the original level of income will take 35 years to completely disappear.
DATA ANALYSIS FOR MANKIW-ROMER-WEIL MODEL.
The MRW model used data for three samples, the first sample consist of data for 98 countries with the exclusion of oil producing economies, this is because oil producing economies GDP account for an already available natural resource, with no added value, and typical models of growth are not likely to justify measured GDP for those countries. The second sample consist of 75 countries with the exclusion of minor economies whose real income is probably regulated by unique factors. The last data is of 22 OECD economies with more than one million as population, even though the weakness of this data lies within its relatively trivial size and its exclusion of most significant variables. However, Brumm (1995) argued that the model is in no way robust and that both the 75 and 22 country sample used in the M-R-W model are a subgroup of the 98-country sample, and the model cut down the 98-country data set so as to attain an uninterruptedly better MWO economies. Conversely by doing that the MRW model can tilt towards a contrasting course which yields off bad LWO economies. Valiant (2016) also criticised the data by pointing out how major countries such as China, Middle Eastern countries, Vietnam and Oceania countries were excluded from the data set, which makes the data population central and also indistinguishable to country demographics.
LIMITATIONS OF THE MANKIW-ROMER-WEIL MODEL ON HUMAN CAPITAL.
A crucial indication made by Bernanke and Gürkaynak (2002) on the MRW framework is that Solow's model, in the long-run is very much dependent on exogenous factors such as technological improvement to lead on economic growth. Additionally, Felipe and McCombie (2002) stated how the MRW's model is based on an aggregate production function and should not be considered a conducive start for any argument about convergence, growth or development. Also, a rigid and more vivid clarification on the differences in income per-capita should be made if the neo-classical growth theory is to be used as a basis for future enquiries about growth, also a new technique should be created so as to test the methodology of the model. Moreover, the model does not give a clear reason to why some countries are wealthier and some are not. Lucas (1988) successfully introduced the role of externalities into the MRW model, which offsets the traditional concept of diminishing returns and sets it into an equilibrium state and thus, creating a major difference between the neo-classical and MRW model.
CONCLUSION.
This essay has explained the ways in which human capital was included into the neo-classical model and focusing primarily on the addition of human capital into new growth theory, may not be sufficient enough to provide a solid elucidation for economic growth. Other factors that determine economic growth can be used such as the Evolutionary growth models of Nelson and Winter (1982) which stressed how monopolies can create rapid technological progress.