Arnold Kling  

Ideas and Growth

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Charles I. Jones writes,


The nonrivalry of ideas implies that increasing returns to scale is likely to characterize production possibilities. This leads to a world in which scale itself can serve as a source of long run growth. The more inventors we have, the more ideas we discover, and the richer we all are. This also leads to a world where the first fundamental welfare theorem no long necessarily holds. Perfectly competitive markets may not lead to the optimal allocation of resources. This means that other institutions may be needed to improve welfare. The patent system and research universities are examples of such institutions, but there is little reason to think we've found the best institutions--—after all these institutions are themselves ideas.

The paper is filled with equations. Some of the ideas can be gleaned from chapter 22 of Learning Economics. Jones adds focus on the theory that population growth raises economic growth by increasing the number of inventors.

For Discussion. If ideas are such a critical component of growth, and ideas are almost costless to transfer, what does this say about the large differences in standard of living across countries?



COMMENTS (14 to date)
Lawrance George Lux writes:

The ideas must come in the arena of aggregation of capital, Cost Accounting, Technical Engineering, and Marketing Skills. Wait, does this mean ideas take advanced Collegiate level skills in order to work? lgl

shamus writes:

The three key ingredients for producing wealth are political stability, free enterprise, and the rule of law. Ideas are no good unless there is an evironment conducive to their productive use.

Patri Friedman writes:

If ideas are such a critical component of growth, and ideas are almost costless to transfer, what does this say about the large differences in standard of living across countries?

Excellent question. My answer is that ideas are not costless to implement. For example, consider assembly-line manufacture. This is a GREAT idea. But learning it does not make widgets instantly appear. You still have to build a widget-building factory and feed it labor and the raw material from whence widgets are whittled.

Many ideas are like this - they are ways of leveraging capital into goods, services, and more capital. They do help poor countries leverage their capital better, but they do not, for the most part, grant wealth instantly.

Mike Rizzo writes:

Looking at the components of growth literature would suggest that increases in total factor productivity drive growth in the developed countries. While still important in developing countries, increases in capital are still the most important factors contributing to there. In fact, the four Asian tigers experienced negative TFP growth since 1960 - but grew at astonishingly high rates nonetheless. All of this simply underscores the importance of a fully balanced and integrated development plan - where both physical and human capital accumulation are emphasized (in addition to all of the institutional and legal factors that vary so dramatically across all countries such as ownership rights, court systems, corruption, etc.).

Cheers,
Mike

Mark Bahner writes:

"If ideas are such a critical component of growth, and ideas are almost costless to transfer, what does this say about the large differences in standard of living across countries?"

It says that ideas are very difficult to get into and out of North Korea. And Iraq prior to the fall of Saddam Hussein. And Afghanistan even now, but much more so prior to the fall of the Taliban. And Cuba. And...

Mark Bahner writes:

"Jones adds focus on the theory that population growth raises economic growth by increasing the number of inventors."

I hate to give away the substance of my upcoming blog post on this subject ;-), but that's why computers are going to cause an absolute explosion of economic growth...probably circa the 2020-2030 time frame.

Look at it this way: the current PC on our desktops is probably 1/1000th of the capability of the human mind. But computers are doubling in capability approximately every 2 years. So in ~20 years, we'll have undergone 10 doublings, which is a factor of 1000 improvement.

Suddenly, computers will be on the same order of capability as a human mind. So if your home has 3 desktop computers, you have three additional human minds. And in ten years after that, if your home has 3 computers, you have 3 THOUSAND more human minds.

We're talking about per-capita annual GDP growth rates of way above 10%. It will be mind-boggling. (If you stay with your hydrocarbon brain, unassisted by electronic chips.)

Mcwop writes:

How many great ideas failed because of poor execution? My hunch is a great many.

David Masten writes:

If ideas are such a critical component of growth, and ideas are almost costless to transfer, what does this say about the large differences in standard of living across countries?

Ideas are not costless to transfer. Consider Ricardo's comparative advantage, it is a simple idea, easy to demonstrate, and yet how many people outside of academic economics have any any grasp of it? Alternatively, why does it cost tens of thousands of dollars a year to transfer ideas in Cambridge, Massachusetts?

The transfer of ideas requires costs from putting the idea into a medium, transporting that medium, and the receiver of the idea may have to change his mind. And we often need to transfer not only the original idea, but also the idea that the original idea should be transferred.

beingtrue writes:

the inertia is the main reason for the failure of ideas.any reform will make someone lose temperarily.

A. West writes:

The answer to the question is:
The populations of some countries possess better and more useful ideas than others.

This includes really fundamental cultural and philosophical ideas. Some countries cultures generally support the idea tha living their own lives focused on the material world producing value to earn values from others, is good, and that their property is their own. Other cultures believe the material world is much less important than the afterlife, and some cultures believe that individual lives and property are subordinate to the collective. In those different contexts, the value of the knowledge of how to build a rocket is dramatically different.

Chuck writes:

This opens a big 'ol can of worms, doesn't it? :)

I'm not that concerned about the standard across countries (each political entity "lives" with the environment for idea generation it creates for itself), more than I'm concerned about the disturbing trends we are seeing on how ideas get rewarded within our own country.

To put it quite bluntly, corporate executives get way too much "reward" for the innovation they oversee. Those who tend to be instrumental in creating intellectual property do well get paid in the form of good salaries and company options, but the skewness on the side of "professional managerial talent" is downright disturbing and is getting worse.

What we are getting left with are new ideas, but the ideas are somewhat incremental, stale, and totally lack in providing a distruptive force on raising our standards of living. Until a somewhat radical change occurs in our rewards mechanism, the problem will only get more acute.

Adam writes:

If ideas were costless to transfer, we wouldn't have professors, now would we?

;)

Jason Ligon writes:

It seems to me that saying ideas are a nonrivalrous component of wealth generation is like saying that protons are an (essentially) nonrivalrous component of manufacture. A true observation, no doubt, but one that needs refinement to be nontrivial.

Wealth is generated in the relationship between an idea and its exploitability to fill a demand. With innumerable ideas out there, economic value will not be in creating artificial scarcity in the transfer of the idea, but rather in tailoring the idea to individual tastes and requirements. Services that we will pay for are those that optimize our interaction with ideas, that make them useful to us, and even lead us in a Say's Law sort of way to discover our own demands.

Ideas have always been unrefined stuff. These new ideas are unrefined but cheply flexible stuff. Value was about refining the idea to the consumer, and it still is, but now there are more possibilities.

AWA writes:

Ideas remain ethereal until acted upon. The cost to bring an idea to actuality is not zero. Ask Bill Gates what it cost to put computing at the fingertips of everyone in the world. That is an idea that IBM, Xerox, and others failed to appreciate, but its realization is one of the most significant economic events in world history so far.

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