“Knowledge to build the world, knowledge to destroy the world.” K.S. Pang (2013)

The Knowledge Economy

Chapter 8: Augmented Solow Model: The human capital accumulation

From Malthus Growth theory (Population control) to Solow Growth model

(Technological progress).

Then now from augmented Solow model (Human capital accumulation) to brain gain

and drain (Human capital flight).

8.1: Malthus Growth theory

Robert Malthus (1820) stated in his “Principle of Political Economy”, population

control Y = F (L) is the only way to improve the standard living of a society as he

believe that the food supply would lag behind population growth. The fixed supply of

land and limited agricultural resources will cause the widespread of starvation.

8.2: Solow Growth Model

Robert Solow (1987) establish his growth model, Y = ZF (K, N) is solely focused on

technological progress to long term betterment of standard of living by increase the

capital per ratio, y = zf (k). He also believes that, technological progress is occurring

indefinitely in future.

8.3: Augmented Solow Model

However, Romer (1986) and Lucas (1988) stated their Augmented Solow Growth

Model; this was established by treated human capital accumulation as an integral part

of the model, Y = ZF (K, AN) A is augmenting labour function.

Augmented Solow Model was specified by adding human capital accumulation inside

the traditional Solow Model. Therefore, this “new” Solow Model is trying to interpret

that human capital is a critical source and beneficial for long term economic growth

instead of the traditional Solow Model was solely focused on technological progress

and believe it is only way to improve standard of living in the long run.

The relationship between human capital and technology progress has been discussed

by another economist. Lucas (1988) was developed the endogenous growth model

“Knowledge to build the world, knowledge to destroy the world.” K.S. Pang (2013)

which is specified human capital as the most critical force to generate technology

progress in an economy. Human capital is responsible for labour productivity in the

world and overall output level in the world.

This is possible because human capital is creator of technological progress and makes

it be able to overcome diminishing returns to capital and other producible factors. And

the increase in human welfare occurred because we learned to do things more

efficiently. For example, we have created new methods, tools and ideas at a more

rapid pace. Because of this importance of technology, economists have developed

models to explain technological progress. These new models do not assume

technological progress as exogenous or determined outside the model. But it is

endogenous, or is treated as an integral part of the model. These new models are

referred as models of endogenous technological progress.

The planning and strategies should be adopted by developing nation to increase the

overall level of human capital accumulation

The less developed countries have not established a set of institutions favouring

equality and role of education for the masses and therefore they have been incapable

of investing in human capital stock necessary for technological growth.

Policy maker should treat human capital as a crucial resource for its future economic

growth and taken this into consideration while they are developing their national

policy and planning.

In order to push up the overall level of human capital accumulation, few matters must

bear in mind. Increase expenditure allocation for education; improve the efficiency of

labour market as to impede human capital flow out or brain drain and so on.

To sustain the economic development is ultimately due to human capital and

technological progress. Perhaps the most important things that we need to concern in

the growth theory are the determinants of technological progress.