Ideas and Growth: Some interesting economists

Some economists, starting decades ago, have studied the benefits of technological change for economic growth. In recent years, with the increase in interest in "the knowledge society" and "the information society" some economists have updated studies to consider the impact of "ideas" on growth. I have identified a few of these economists below, with one or more publications for each (to illustrate the work that is being done).

Background

A standard economic growth model includes three factors: capital, labor and productivity. One can add another factor -- knowledge. Knowledge can be embodied in labor, in the form of a better educated and trained workforce. It can be embodied in capital, as in the form of robotics.

Ideas are nonrivsalous. One person having an idea does not restrict other people from having the idea. On the other hand, if you train a person to operate a machine, it is assumed that he can only operate one machine at a time. Thus it takes an investment to train a person, and the human capital so developed can be rivalous. (On the other hand, if you write a program for a robot to carry out a specific assembly, then presumably all other robots of the same design can use the same program to carry out the same assembly without other major investment.)

The stock of knowledge can be seen to depreciate. Thus knowledge that people once held may be lost (e.g. how to chip stone tools). Similarly, knowledge capital can lose its value: thus technology that once had value may lose its ability to generate income as the knowledge of how to manufacture buggy wips lost value with the introduction of the automobile.

What are our indicators?

* Expenditures on research and development: and we can assume that R&D increases the stock of a certain kind of knowledge.
* Funadmental Research: this is presumably R&D that increases the stock of ideas, and to publications, but does not lead directly to commercial processes and products.
* Applied Research and Development: this is presumably information that is likely to lead to commercial advantage, and thus to patents or trade secrets.
* Process Patents: these seem to be related to the knowledge available to be embodied in plant and equipment, and thus related to capital in the normal definition of the term;
* Product Patents: These are ideas for new products, and it is the patent protection that turns them into intellectual property, and thus a kind of capital good.
Scientific and Technological Publications: These form a stock of ideas in the public domain.

Some knowledge with significant value for economic growth, I suggest, is not produced by research and development funding. Technology deepening illustrates such knowledge. When workers on the factory floor improve their mastery of an acquired technology through practice and analysis of its operation, the investment is not captured in R&D accounts. Similarly, when firms are reorganized to improve productivity, or markets and industries are restructured for the same purpose, knowledge is surely involved but the investment is not captured in R&D accounts.

While much thought has gone into figuring out where knowledge appears in the production function, and how the different aspects of knowledge can be measured, I suggest that there is likely to remain a residual improvement in productivity that will be attributed to unmeasured knowledge inputs.

The Economists

I attended a seminar recently by Roberto Samaniego (of the Department of Economics at George Washington University) in which he described a model that sought to explain the effect of research and development expenditures on economic growth. The talk was based on his working paper, "R&D and Growth: The Missing Link?".

Abstract: The presumption that R&D is a key driver of economic growth is difficult to reconcile with the empirical evidence. For example, in most studies, which identify technical change with total factor productivity (TFP), the link between TFP and measures of knowledge is found to be weak.

This paper shows that a reconciliation may be possible in a model where R&D contributes to growth through investment-specific technical change. Such a model predicts that the empirical link between knowledge and productivity would be weak even when the generation of knowledge is the predominant factor of economic growth. The paper also shows that estimates of the production function for knowledge using patent data may be biased.

Charles I. Jones is at the Department of Economic of the University of California at Berkeley. Read his working paper, "The Value of Information in Growth and Development" (November 2005).

Abstract: This paper explores the role of information in the theory of economic growth and development. They way it is used here, ?information? refers to every feature of an economy, including not only the economic environment, but also the institutions like markets and government policies that affect the allocation of resources. The first half of the paper considers a model where consumers are faced with an enormous range of possible goods they can purchase, so many that they do not know exactly how much utility they would get from consuming each good. Improvements in this information possessed by consumers increases welfare by making the allocation of resources more efficient, and these effects may be large in some cases. The second half extends these ideas to the production side of the economy and argues that a model where different kinds of information are crucial to successful production can lead to an information-based theory of TFP. In the theory outlined here, large differences in incomes can be explained by small differences in the ease with which people in a given country can acquire four different kinds of complementary knowledge.

Jones' "Growth and Ideas" in the Handbook of Economic Growth (Chapter 10, September 2004) is especially interesting:

Abstract: Ideas are different from nearly all other economic goods in that they are nonrivalrous. This nonrivalry implies that production possibilities are likely to be characterized by increasing returns to scale, an insight that has profound implications for economic growth. The purpose of this chapter is to explore these implications.

Philippe Aghion at the Department of Economics at Harvard University and Peter Howitt of the Department of Economics at Brown University, and their paper "Appropriate Growth Policy: A Unifying Framework" (August, 2005):

From the Introduction: In this Schumpeter lecture, we shall argue that growth theory is in fact useful to think about growth policy, provided one uses the adequate growth paradigm. We posit that Schumpeterian theory in which growth results from quality-improving innovations, provides such a paradigm and can be developed into a theory of the policy of growth. Unlike the other endogenous growth models, namely the AK model and Romer’s product variety model, the Schumpeterian paradigm provides a way to “systematize” the case-bycase approach advocated by Rodrik, by pointing at key economic variables such as the country’s distance to the technological frontier or its degree of financial development, that should affect the design of structural and macroeconomic policies aimed at fostering growth.

The lecture is organized as follows. Section 2 briefly reviews the three main endogenous growth paradigms: AK, the Schumpeterian framework, and the product variety model. The next sections discusses three areas in which good policy can make a difference for growth, and in particular help overcome current European stagnation. Section 3 focuses on competition and entry, and in particular explains why Europe would benefit from a competition and labor market policy that does not only emphasize competition among incumbent firms, but also stresses the importance of entry, exit and mobility. Section 4 analyzes education, and argues that growth in Europe would benefit from devoting more resources to higher education. Section 5 discusses the role and design of countercyclical budgetary policies. Finally Section 6 concludes the lecture by revisiting the role of savings in the growth process, in a way that questions the neo-classical and AK models at their very heart and also suggests new policy avenues.

Danny Quah at the Department of Economics of the London School of Economics, and his paper "Fostering innovation for productivity – the challenges for managing intellectual property":

Excerpt: The commodity on which the world is running excess supply? Knowledge.

Today, just as the world's knowledge stock is climbing ever higher peaks, the fraction of knowledge being used productively is plumbing ever lower depths. Since knowledge can't be added up the same way that, say, apples and bananas can, we can only tell if knowledge is under-used by comparing its social benefits with its social costs. If, at the margin, benefits exceed costs then productive usage is too low - life would be sweeter on net were society to deploy more of that particular item of knowledge; we would say knowledge is under-used.

Check out his website on "The Weightless Economy".