Demographic Transition and the Unobservable Scale Effects of Economic Growth

Idea-based growth models usually predict that economic growth rates are increasing with the level or growth rate of the population. This scale effect prediction is intuitive and derived directly from the nonrivalry of ideas. However, time-series data over the last century generally did not support this scale effect prediction. This article illustrates why scale effects were unobservable. A modified idea-based model shows that economic growth rates increase with investments in human capital accumulation and population growth rates. The offsetting movements of these two factors during the demographic transition of the last century obscured the scale effects.