By Reimut Jochimsen (auth.), Prof. Dr. Karin Peschel (eds.)

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Shell, editor, Essays on the Theory o/Optimal Economic Growth, pp. 31-52. MIT Press, Cambridge, MA. Solow R. M. (1956), A contribution to the theory of economic growth, Quarterly Journal ofEconomics, 70:65-94. Starrett D. (1978), Market allocations of location choice in a model with free mobility, Journal ofEconomic Theory, 17:21-37. 35 von Thilnen J. H. (1826), Der isolirte Staat in Beziehung auf Landwirtschaft und National6konomie, Friedrich Perthes, Hamburg. U. Walz (1995a), Does an enlargement of a common market stimulate growth and convergence?

The stock of knowledge is introduced as an additional factor of production. Investments into the stock of knowledge have to be produced using resources withdrawn from the production of goods. In this framework long term growth is possible, if augmentable production factors like knowledge and capital have jointly non-decreasing returns to scale in the aggregate production function (Le. if their respective partial production elasticities add up to an amount not less than unity). This implies that the entire production function has increasing returns to scale.

It is perfectly possible - perhaps more realistic (see below) - to take the view that there are mechanisms tending to generate convergence and others, such as increasing returns (Kaldor, 1970; Krugman, 1991), generating divergence. In calibrating the model the estimated value of ~ is therefore only a measure of their net effect over the time period in question. In other words to interpret the results as a test of the neo-classical steady state growth model you have to exclude other possible explanations ab initio.

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