Intellectual Capital Growth Model: Using IC Measurement Logic on AK Endogenous Model

The theory of intellectual capital has experienced a boom in the first decade of 21st century. Most of the research work in this area focuses on enterprises and organizations, although there is an effort, especially lately, to provide answers concerning development of national economy. This theory has a lot of potential to create new insights and it is expected that it becomes even more incorporated into mainstream economics. This paper is an attempt to incorporate intellectual capital theory insights into endogenous growth theory as part of modern macroeconomics. In this paper, simple AK endogenous growth model is used as a basis. The intellectual capital growth model presented here also takes "A" or Total Factor Productivity as an average total productivity but with one fundamental distinction. It is using the logic of Calculated Intangible Value and/or Knowledge Capital Earnings by Baruch Lev where higher than average returns indicate higher intellectual capital. The model presented here applies this logic to Total Factor Productivity. In cases where TFP is equal to the average, the intellectual capital performance is also equal to the average, and the model is with constant returns as the AK model. But in cases where TFP is larger than average, the intellectual capital performance is also better than average, and the model is with increasing returns, and in cases where TFP is less than average, the intellectual capital performance is worse, and the model is with diminishing returns. The most important implication of the model is that savings and investments have a long-term effect on growth only if intellectual capital performance is equal or better than average. If intellectual capital is worse than average there is no such an effect because of diminishing returns. In such a situation the policy should be first to increase intellectual capital to at least average performance and then to increase investments.