Nineteenth International Conference on Environmental, Cultural, Economic & Social Sustainability

Abstract

We consider a production economy with three factors of production: capital, labor, and a third, renewable factor. This factor captures all of the goods and services that nature contributes to the production of output. Like capital and labor this factor is essential; it exhibits positive, diminishing marginal returns, and the production function exhibits constant returns to scale with respect to all three factors. We show that in such an economy, many of the main results from the theory of economic growth are overturned. First we show that total factor productivity (TFP) growth is a necessary but not sufficient condition for long run economic growth. Second, for long run economic growth to be positive, TFP growth must be bounded above, and we provide that bound. Taken together, our first two results overturn the notion that productivity gains are the only source of welfare improvements in the long run. Third, we show that a productive steady state is not guaranteed to exist. Fourth, when a productive steady state does exist, it is not globally stable. It is possible for output (GDP) to be too high and the economy converges to a zero production steady state. Finally, our framework offers an explanation for the empirical decline of the Solow Residual over the past few decades. The so-called Secular Stagnation puzzle can be explained by a decline in the third factor of production.