A Model of Economic Growth and Structural Change

Several distinguished stylized facts form the new economy — an information technology service sector organized in network forms of organization, an inflation rate below its fundamentals, a stock market boom, low productivity rates but high rates of economic growth. This chapter presents a model in which new varieties of services are introduced to generate rents, and offers an explanation of the stock market boom of the late 1990s. Whilst a particular service provider is assumed to realize no productivity gains at all, the increase in variety increases value-added per employee, thus explaining high growth rates despite low productivity rates. This unmeasured productivity gain is the implicit reason for the intrinsic inertia in the consumer price index.