Capital Accumulation, Technological Progress and Environmental Change in a Three-Sector Growth Model

Introduction

Dynamic interdependence among economic growth, technological change and environmental change is currently a main topic in economic theory. This study attempts to provide another contribution to the literature by examining interdependence among dynamics of growth, knowledge and environment under different environmental policies with a new approach to consumers’ behavior with endogenous saving. Our model is built upon Solow’s one-sector growth model, Arrow’s learning by doing model, and some dynamic model of environment. The main mechanisms of economic growth in these three models are integrated into a single framework.

The neoclassical growth theory model is extensions and generalizations of the pioneering works of Solow (1956). The Solow model is sometimes referred as to the Solow-Swan model because Swan (1956) proposed a model similar to the Solow model. The one-sector neoclassical growth model has played an important role in the development of economic growth theory by using the neoclassical production function and neoclassical production theory. The model has been extended and generalized in numerous directions (Burmeister & Dobell, 1970; Azariadis, 1993; Barro & Sala-i-Martin, 1995; Zhang, 2005). An important extension was the Uzawa model proposed by Uzawa (1961). The model is an extension of Solow’s one-sector economy by a breakdown of the productive system into two sectors using capital and labor. One sector produces industrial goods and the other sector consumption goods. As far as economic structure is concerned, our model is based on the Uzawa model. Our approach to technological change is based on Arrow’s learning-by-doing. One of the first seminal attempts to render technical progress endogenous in growth models was made by Arrow in 1962. He emphasized one aspect of knowledge accumulation - learning by doing (Arrow, 1962). Uzawa (1965) built another growth model with a sector specifying in creating knowledge. The knowledge sector utilizes labor and the existing stock of knowledge to produce new knowledge, which enhances productivity of the production sector. There are many other studies on endogenous technical progresses. But on the whole theoretical economists had been relatively silent on the topic from the end of the 70s until the publication of Romer’s 1986 paper. The literature on endogenous knowledge and economic growth has increasingly expanded (Romer, 1986; Lucas, 1988; Grossman & Helpman, 1991; Aghion & Howitt, 1998; Zhang, 2008) since Romer re-examined issues of endogenous technological change and economic growth in his 1986’s paper. Since then various other issues related to innovation, diffusion of technology and behavior of economic agents under various institutions have been discussed in the literature. There are also many other models emphasizing different aspects, such as education, trade, R&D policies, entrepreneurship, division of labor, learning through trading, brain drain, economic geography, of dynamic interactions among economic structure, development and knowledge. Nevertheless, there are only a few models which have endogenous environmental change in growth models of capital and knowledge.