in investing more because this would bring no returns. Therefore output, capital and labour would all increase at the same rate (steady state)
7. Less-industrialised countries, which enjoy a lower capital/labour ratio, should benefit more from capital increases (investment) than industrialised ones, where the capital/labour ratio is higher. The larger returns on investment in less industrialised countries, (assuming constant returns to scale), should generate convergence between less-industrialised and industrialised countries. However, exogenous technology improvements shift the output, pushing forward the steady state. Romer (1986) with his “endogenous growth model”, questioned the idea of technology shifts as exogenous to the economic system, highlighting how investment and human activities in general have positive “spillover” effects on knowledge. He implies that technology, which is an application of knowledge to production processes, is endogenous, i.e. generated within the economic system. Similarly, impacts of investment in research (innovation) and in human capital on technological changes and growth, have been considered. For instance, Aghion and Howitt (1990)8 address the issue of research and obsolescence and highlight that the expectations of an accelerated pace of research in the future can depress current research. There is a fear of rapid obsolescence of possible innovations (a too fast process of Schumpeterian creative destruction). Galor and Zeira (1993)9 highlight how strong income inequalities may prevent investment in human capital leading to lower per capita output. Galor and Moav (2004) 10 identify the replacement of physical capital accumulation with human capital accumulation, stimulated by a more equitable income distribution, as an advanced stage along the development process, which sustains the so called “modern growth”, as opposed to the “industrial revolution” growth.