7.12: The Neoclassical Growth Model: Technological Advancement

In the neoclassical growth model, once capital per worker stops increasing, the only way to keep growing is through better technology. This means finding smarter ways to use the same resources to produce more. It doesn’t require more machines or more people—just improvements in how things are done. As technology improves, output per worker rises even if capital stays the same. This leads to higher wages and better living standards over time.

The production function includes a term for technology. When that improves, it shifts the whole function upward. This shift means that the same amount of capital and labor can now produce more output than before. Even if investment remains steady, workers become more productive simply because the tools they use are more efficient or the processes are more advanced.

Take a small packaging warehouse as an example. In the early years, items were packed manually, one by one. Later, the owner installed a barcode system that tracks products and reduces the time spent searching for items. The number of workers and machines hasn’t changed, but the warehouse now processes more orders each day. That’s what technological progress looks like in practice.

This is what allows an economy to grow even after reaching the steady state. Instead of output and wages leveling off, they continue to rise, pushed forward by innovation. Without these advances, growth would slow down and eventually stop. But with regular improvements in technology, an economy can move past its earlier limits and keep improving how much each worker can produce.

In the Neoclassical Growth Model, sustained growth in output per worker relies on rising productivity through technological progress.

The production function is Y = A · F(K, L), where A stands for technology, K is capital, and L is labor. As A improves, the same amount of capital and labor generates more output.

At Agro Farm, technological improvements increase the quality of existing machines, like automated planters and greenhouse sensors help workers produce more without increasing capital.

As capital deepening combines with better technology, output per worker and real wages rise. This helps the economy move beyond stagnation at the steady state.

In the graph, the production curve shifts from APF₁ to APF₂. At point E₁, a given capital per worker yields a specific output. As technology advances, the economy reaches point E₂, producing more per worker.

Even with unchanged capital per worker, the shift to a higher curve increases output. The arrow in the graph shows this rise, from (Q/L₁) to (Q/L₂).

Instead of leveling off, the economy experiences continuous gains in output, wages, and living standards.