Growth and Ideas

This Handbook of Economic Growth survey chapter lays out why treating ideas – nonrivalrous instructions or recipes, as distinct from the rivalrous “objects” that embody them – as a distinct input to production has deep implications for growth theory, captured in the chapter’s “Idea Diagram”: ideas imply nonrivalry, nonrivalry implies increasing returns to scale, and increasing returns imply that a standard perfectly competitive equilibrium cannot decentralize the optimal allocation of resources. Working through a simple toy model and then a richer model with physical capital, human capital, and a Dixit-Stiglitz variety structure, the chapter shows that, along a balanced growth path, per-capita output depends on the economy’s total (not per-capita) stock of ideas, so that the long-run growth rate of output per person is proportional to the growth rate of the number of researchers – which, in the long run, is tied to the population growth rate – with the factor of proportionality measuring the economy’s overall degree of increasing returns. The chapter argues at length that the “strong” scale effects of the first-generation models of Romer (1990), Aghion-Howitt (1992), and Grossman-Helpman (1991) – in which the growth rate itself rises with population size – are empirically rejected by the long-run stability of U.S. growth rates alongside large increases in research effort, and that the “weak” scale effects of later semi-endogenous growth models (in which only the level, not the growth rate, of income depends on scale) are the correct and in fact unavoidable implication of nonrivalry, supported by cross-country trade-controlled evidence and by models of growth over the very long run. The chapter also reports that growth accounting attributes only about 20 percent of post-war U.S. growth to the scale effect itself, with the remaining 80 percent coming from transition dynamics in educational attainment and world R&D intensity, and uses a “linearity critique” to argue that locating the economy’s required knife-edge linear differential equation in the population growth equation, rather than in a capital or human-capital accumulation equation, is the most defensible modeling choice.

Handbook of Economic Growth | Macro Paper Warehouse

Growth and Ideas