The neoclassical approach to economic growth has been divided into two sections −. Global expansion of trade through modern externalities and networks. For a discussion of the economic epoch concept see Simon Kuznets, Modern Economic Growth: Rate, Structure, and Spread, Yale University Press, New Haven, Conn., 1966, pp. Modern economics also looks at items such as the role of demand, money supply, and its effect on growth or monetarism and free trade. The neoclassical growth model developed by Solow fails to explain the fact of actual growth behavior. So just as you said, the economy is run more in line with Keynesian theory than anything else. Exercises 307 Chapter 7. Review of the Theory of Optimal Control 313 By creating opportunities and making resources available within an organization, the expectation is that individuals will be encouraged to develop new concepts and technology for the consumer market. A significant aspect of the new growth theory is the idea that knowledge is treated as an asset for growth that is not subject to finite restrictions or diminishing returns like other assets such as capital or real estate. Following are the important key elements −. Trade enables a country to buy goods from abroad at a lower cost as compared to which they can be produced in the home country. The second section of the neoclassical model assumes that technology is given. It's actually not possible to have a completely free and independent market. The point is that R&D investment and human capital through learning by doing were not explicitly recognized. Economies of the globe are now intertwined in such a way that a single policy or event in one country can affect the economies of many other countries. The purpose of these studies was in effect to determine how an economy could best use resources in a given market. This means that the long-term rate of national growth is determined Keynes looked at the role of demand in a market and what happened when there was too much supply and not enough demand. In some ways, modern economic theory is a much more macroeconomic study that looks at vast swaths of a single economy. Rather, it depends on the number of people seeking out new innovations or technologies and how hard they are looking for them. @Logicfest-- I actually don't believe that modern economic theory is too different from classic economic theories. In short, free trade is necessary for a country to have a thriving economic center. Everything You Need to Know About Macroeconomics. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Modern economic theory tends to separate itself from classical economic theory by looking at more than just the source of production and the invisible hand theory. Endogenous growth theory, which has redefined the concept of economic growth, says growth is primarily determined by population growth and innovation. In addition, people also have control over their knowledge capital—what to study, how hard to study, etc. The prominence of Keynesian theory has, indeed, expanded as the role of government in the economy has expanded. Princeton University Press. The theory argues that innovation and new technologies do not occur simply by random chance. These organizations not only make trade easier between countries, they also serve as regulatory agencies that can reward and punish countries who do not play by the rules. The neo-classical theory of economic growth suggests that increasing capital or labour leads to diminishing returns.