The idea of increasing returns in neoclassical models

In the mid 1980s there was a remarkable revival of interest in growth theory and once again this became a very active area of macroeconomic research. A relevant strand of this approach is characterized by the departure from the usual assumption of diminishing returns of capital or, more generally, of the accumulated factor. This paper will show how the neoclassical theorists incorporated the idea of increasing return in the formal models of economic growth. The central point is that the recent recognition of the importance of this notion is not new but now depends on the vision of economic growth as driven by knowledge accumulation and no longer by capital accumulation as in the Solovian tradition.