Phases of economic development and the transitional dynamics of an innovation–education growth model

This paper extends earlier analysis of the transitional dynamics of a growth model in which both human capital and innovation drive income expansion. Funke and Strulik [2000. On endogenous growth with physical capital, human capital and product variety. European Economic Review 44, 491–515] suggest that the typical advanced economy follows three development phases, characterized in a temporal order by physical capital accumulation, human capital formation, and innovation, and that the transitional dynamics of the model reproduce such a sequencing. I argue that other sequences of the phases of development are possible and show that the model can generate a trajectory in which innovation precedes human capital formation. This trajectory accords with the observation that the rise in formal education followed with a considerable lag the process of industrialization. U.S. income and educational time series data are used to corroborate the innovation–education trajectory.