Exogenous and Endogenous Factors in Economics

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Table of Contents

Introduction
Exogenous Neoclassical growth theories
Endogenous Theories: Emergent Quality
First endogenous growth models: AK
The theory of cumulative causation
Romer Theory and “The Economics of Ideas”
Government Regulation
Conclusions
References

Introduction

To start with two types of growth theories, one can distinguish two types of economic factors: exogenous and endogenous. They can be compared with exogenous and endogenous growth theories. While exogenous factors are external and describe the resources of the economic system, endogenous ones show the quality of the economic system’s agents. In general, exogenous factors are quantitative, such as the size of GDP per capita, and endogenous ones are qualitative: an example is the percent of people with higher education. Endogenous factors are essential when evaluating future perspectives of a system’s evolution.

One can conclude that while exogenous factors show the system’s current state, endogenous ones allow seeing how the system will evolve in the future.

Exogenous Neoclassical growth theories

Neoclassical growth theories are examples of exogenous ones: they are focused on exogenous factors, such as production rates, demand and supply amounts, and the state’s GDP. Such theories explore the equilibrium between various flows of goods and propose that the state should regulate them by taxation and subsidization (Chirwa & Odhiambo, 2018). Neoclassical growth theories are good for maintaining the balance in the economic system and seeing its optimal wealth distribution. However, they see the economic system as a closed-loop system: in that way, they cannot take into consideration that the system will evolve and change in the future.

Endogenous Theories: Emergent Quality

Endogenous growth theories, unlike exogenous ones, concentrate on the internal qualities of the economic system. They consider the system’s members, agents, as those who are able to create additional values by innovations (Gabardo et al., 2017). Examples of those agents are entrepreneurs, scientists, educators. Entrepreneurs create additional values by introducing new technologies and services which solve people’s problems more efficiently. Scientists make inventions that enrich the total human knowledge and may be used by entrepreneurs in the future; educators facilitate the spread of that knowledge. Together, they facilitate changes in the economic system which lead to its evolution.

First endogenous growth models: AK

Unlike exogenous growth theories, endogenous ones consider technological progress as the important endogenous variable of the economic system. Thus, they explore the dynamics of the system’s development, driven by innovations. The first endogenous growth theory, developed in the 1960s by Frankel and Cass, is based on the concept of “learning by doing” (Gabardo et al., 2017). It means the accumulation of knowledge about the production process and the improvement of it due to capital accumulation. Those processes lead to the development of the production process. Thus, the product becomes better than it was before, only due to knowledge and capital accumulation.

The theory of cumulative causation

The theory of cumulative causation studies how the already accumulated goods cause disequilibrium in the economic system. It explains the inequality between rich and poor classes inside one country, as well as between developed and developing countries. Developed countries have more accumulated capital, in a form of free money, goods, services, and technologies. It attracts more new agents which are motivated to work and produce more goods and innovations there (Chirwa & Odhiambo, 2018). In that way, they become even richer; a similar situation is with rich classes, which become richer using their already accumulated resources (Jones, 2019). Poor classes, on the contrary, are unable to develop themselves, lacking a capital and necessary resources, and lose their agents who seek for better opportunities, becoming even poorer.

Romer Theory and “The Economics of Ideas”

The theories of Paul Romer present a further development of endogenous AK theory. They are called the theories of cumulative knowledge, as they explore the knowledge: an intangible resource produced by the economic system’s agents, as were mentioned before (Jones, 2019). Based on the knowledge, they produce innovations, which stimulate the economic growth and further increase knowledge. The situation when such agents are actively producing various innovations is called the “economics of ideas”. It is typical for developed capitalist countries, where there is a lot of startups, bringing innovations, new products, and services, developing the economy.

Government Regulation

Along with policy issuing, governments regulate states’ economies by taxation and subsidization. The state takes money from profits by taxation and uses it to fund various initiatives, aimed at making life in the state better (Chirwa & Odhiambo, 2018). Exogenous growth theories provide tools to facilitate the exchange of goods via taxation and subsidization. Those instruments allow redistribution of the wealth among the system’s agents, who are the state’s citizens, eradicating both extreme wealth and poverty. Endogenous growth theories, which are focused on innovations, show how governments can stimulate economics by motivating their citizens to create innovations and implement them. There can be policies, for example, which help inventors to work with their inventions and fund them. To conclude, both theories provide sets of tools that, by using together, help governments to regulate state economy and facilitate long-term growth.

Conclusions

As one can see, exogenous and endogenous growth theories are, in fact, different. They see the economic system from different perspectives: formers consider its external resources, while the latter is focused on internal. Taken that, those theories are the best when they are combined together. In that way, they allow seeing the economic system as a whole: exogenous theories show the current state of the system, and endogenous ones point to its future perspectives and evolution.

References

Chirwa, T. G., & Odhiambo, N. M. (2018). Exogenous and endogenous growth models: A critical review.Comparative Economic Research. Central and Eastern Europe, 21(4), 63–84. Web.

Gabardo, F. A., Pereima, J. B., & Einloft, P. (2017). The incorporation of structural change into growth theory: A historical appraisal.EconomiA, 18(3), 392–410. Web.

Jones, C. I. (2019). Paul Romer: Ideas, nonrivalry, and endogenous growth.The Scandinavian Journal of Economics, 121(3), 859–883. Web.

Smętkowski, M. (2017). The role of exogenous and endogenous factors in the growth of regions in Central and Eastern Europe: The metropolitan/non-metropolitan divide in the pre- and post-crisis era.European Planning Studies, 26(2), 256–278. Web.

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