Why do different countries have different long-term savings and growth rates? Why is the productivity rate not the same around the world? Recent new theories of endogenous growth have tried to answer these questions by replacing the usual assumption of diminishing returns in production. The author offers an alternative: he introduces ” the spirit of capitalism ” into the model. In the long run, countries with different degrees of capitalist spirit will have different consumption, capital stock, and endogenous growth rates. In his model, inflation is no longer superneutral in relation to long-run growth. The author provides a formal model that is supported by many empirical and historical studies on cultural attributes and economic development. His model helps explain: (a) why Japan and four East Asian countries, South Korea, Taiwan, Hong Kong and Singapore have succeeded; (b) why nations that had an established Protestant religion in 1870 had a per capita income in 1979 that was more than a third higher than in Catholic nations; and (c) why British industry has declined since 1850.
