According to this theory, the real GDP on a per person note increases since the growth rates as well as need for profits will keep increasing. This theory was developed by Paul Romer from Stanford University in 1980’s. This was based actually on the 1940’s-50’s ideas of Joseph Schumpeter.
According to this theory, the rate of new discoveries are made and technologically advancements are not mere chance occurrences. This need for a new technology is specifically associated with number of people who are looking for it and incentives that are associated with introduction of this technology.
The technological change to a great extent results from profit rates, hence it can be seen that the forces of competition that are present in the market, are a result of creating these profit rates. When people seek for low cost methodologies, or better methodologies resulting in higher yield, it can be stared that their main aim is increasing rates of profit associated with a particular domain.
In such a scenario, it is very important to note the difference that is associated with public and private goods. When it comes to public goods, multiple numbers of individuals can make use of it. While, private goods are only for personal usage. It should be noted that knowledge, which is technically taken as a public good is not subject to the law of diminishing returns. Hence, after a number of discoveries, it can be found that accumulation of physical wealth both rate of interest and return to capital falls and this affects demand for capital. This demand rate increases with real rate of interest incentive associated with innovation as well as real rate of interest also rises.
With discovery of new technologies, labor growth rate also rises and therefore it provides a higher rate of interest and this growth rate further depends on how and when people innovate for their own benefits.
Motion economy of perpetual standard:
As per the new theory of growth, economy is viewed in regards to a singular motion. In spite of our current economic situation, demands of individuals are not satiated in any manner. This shows how higher standard of living paves way for incentives that are to be provided by the society. This innovative technique is related to incentives as property rights, monetary issues and market rights.
With innovation, brand new techniques are introduced in the markets and to keep up to this necessity, new firms make use of them, while the old firms go out of work. With this, new jobs are created that result in a higher rate of pay in comparison to old jobs and this result in higher productivity. So, better goods are introduced in the market and more and more people are drawn towards those which brings in a higher standard of living with better standards.
This is a circular process, since our wants remain and this further leads to innovative techniques, higher usage, better products, better standard of living.
Hence, this system is known as theory of perpetual motion machine.