What are the transmission channels?
The economics profession has evolved in its views of the primary factors driving economic growth. Traditionally, economic growth theory focused on labor usage and capital accumulation as the main engines of long-run growth. This approach, however, has been unable to explain sustained growth without also assuming ongoing productivity growth, because the impact of capital accumulation is limited by diminishing returns for a given labor force; each unit of capital added in the economy will have a smaller marginal improvement on output. Beyond some point, the marginal return on adding new capital will be smaller than the marginal cost of adding new capital. Therefore, growth would stop at this point without increases in productivity. “New” growth theory has focused on the ongoing technological change that raises productivity as the main engine of growth. In principle, technological development could lead to sustained long-term growth because the increases in productivity would be enough to
