CIRJE-F-43. Aoki, Masanao and Hiroshi Yoshikawa, "Demand Creation and Economic Growth", March 1999.

In the standard literature, the fundamental factor to restrain economic growth is diminishing returns to capital. This paper presents a model in which the factor to restrain growth is saturation of demand. We begin with common observation that growth of an individual product or sector grows fast at first, but its growth eventually declines to zero. The economy sustains growth by the introduction of new products/industries. Preferences are endogenous in this model. The introduction of new products/industries affects preferences, and creates demand. By so doing, it induces capital accumulation, and ultimately sustains economic growth.