Conclusions
Thinking carefully about the way in which ideas are different from other economic goods leads to a profound change in the way we understand economic growth. 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 have found the best institutions - after all these institutions are themselves ideas.While we have made much progress in understanding economic growth in a world where ideas are important, there remain many open, interesting research questions. The first is “What is the shape of the idea production function?” How do ideas get produced? The combinatorial calculations of Romer (1993) and Weitzman (1998) are fascinating and suggestive. The current research practice of modeling the idea production function as a stable Cobb-Douglas combination of research and the existing stock of ideas is elegant, but at this point we have little reason to believe that it is correct. One insight that illustrates the incompleteness of our knowledge is that there is no reason why research productivity in the idea production function should be a smooth, monotonic function of the stock of ideas. One can easily imagine that some ideas lead to a domino-like unraveling of phenomena that were previously mysterious, much like the general purpose technologies of Helpman (1998).
Indeed, perhaps the decoding of the human genome or the continued boom in information technology will lead to a large upward shift in the production function for ideas.[37] On the other hand, one can equally imagine situations where research productivity unexpectedly stagnates, if not forever then at least for a long time. Progress in the time it takes to travel from New York to San Francisco represents a good example of this.A second unresolved research question is “What is the long-run elasticity of output per worker with respect to population?”. That is, how large are increasing returns to scale. This parameter (labeled γ in the main models of this chapter) is crucially related to the long-run rate of growth of the economy. Estimating it precisely would not only provide confirmation of idea-based growth theory but would also help us in accounting for the sources of economic growth.
Finally, a policy-related question: “What are better institutions and policies for encouraging the efficient amount of research?”. There is a large, suggestive literature on social rates of return to research and on the extent to which firms might underinvest in research. Still, none of these individual studies is especially compelling, and more accurate estimates of these gaps would be valuable. To the extent that the returns to research do not reflect the marginal benefit to society, better institutions might improve allocations.
Acknowledgements
I am grateful to Philippe Aghion and Paul Romer for helpful comments, and to the National Science Foundation for research support.
References
Acemoglu, D. (2002). “Directed technical change”. Review of Economic Studies 69 (4), 781-810.
Aghion, P., Howitt, P. (1992). “A model of growth through creative destruction”. Econometrica 60 (2), 323351.
Aghion, P., Howitt, P. (1998). Endogenous Growth Theory. MIT Press, Cambridge, MA.
Alcala, F., Ciccone, A. (2002). “Trade and productivity”. Mimeo. Universitat Pompeu Fabra.
Arrow, K.J. (1962a). “The economic implications of learning by doing”. Review of Economic Studies 29 (June), 153-173.
Arrow, K.J. (1962b). “Economic welfare and the allocation of resources for invention”. In: Nelson, R.R. (Ed.), The Rate and Direction of Inventive Activity. Princeton University Press (NBER), Princeton, NJ, pp. 609-625.
Atkeson, A.A., Kehoe, P.J. (2002). “The transition to a new economy following the second industrial revolution”. NBER Working Paper 8676.
Backus, D.K., Kehoe, P.J., Kehoe, T.J. (1992). “In search of scale effects in trade and growth”. Journal of Economic Theory 58 (August), 377-409.
Barro, R.J., Sala-i-Martin, X.(1995). Economic Growth. McGraw-Hill, New York.
Ben-David, D., Papell, D.H. (1995). “The great wars, the great crash, and steady-state growth: Some new evidence about an old stylized fact”. Journal of Monetary Economics 36 (December), 453^75.
Bils, M., Klenow, P. (2000). “Does schooling cause growth?”. American Economic Review 90 (December), 1160-1183.
Boldrin, M., Levine, D.K. (2002). “Perfectly competitive innovation”. FRB of Minneapolis StaffReport 303. Boserup, E. (1965). The Conditions of Agricultural Progress. Aldine Publishing Company, Chicago, IL.
Boyce, W.E., DiPrima, R.C. (1997). Elementary Differential Equations and Boundary Value Problems. Wiley, New York.
Cannon, E. (2000). “Economies of scale and constant returns to capital: A neglected early contribution to the theory of economic growth”. American Economic Review 90 (1), 292-295.
Clark, G. (2001). “The secret history of the industrial revolution”. Mimeo. University of California, Davis.
Comin, D. (2002). “R&D? A small contribution to productivity growth”. Mimeo. New York University.
Cozzi, G. (1997). “Exploring growth trajectories”. Journal of Economic Growth 2 (4), 385-399.
David, P.A. (1993). “Knowledge, property, and the system dynamics of technological change”. Proceedings of the World Bank Annual Conference on Development Economics, 1992, 215-248.
DeLong, J.B. (2000). “Slouching Toward Utopia”. University of California, Berkeley. Online at: http://econ161.berkeley.edu/TCEH/Slouch_Old.html.
Diamond, J. (1997). Guns, Germs, and Steel. W.W. Norton and Co., New York.
Dinopoulos, E., Thompson, P. (1998). “Schumpeterian growth without scale effects”. Journal of Economic Growth 3 (4), 313-335.
Dixit, A.K., Stiglitz, J.E. (1977). “Monopolistic competition and optimum product diversity”. American Economic Review 67 (June), 297-308.
Ethier, W.J. (1982). “National and international returns to scale in the modern theory of international trade”. American Economic Review 72 (June), 389-405.
Frankel, J.A., Romer, D. (1999). “Does trade cause growth?”. American Economic Review 89 (3), 379-399.
Frankel, M. (1962). “The production function in allocation and growth: A synthesis”. American Economic Review 52 (December), 995-1022.
Galor, O., Weil, D. (2000). “Population, technology, and growth: From the Malthusian regime to the demographic transition”. American Economic Review 90 (September), 806-828.
Goodfriend, M., McDermott, J. (1995). “Early development”. American Economic Review 85 (1), 116-133.
Greenwood, J., Hercowitz, Z., Krusell, P. (1997). “Long-run implications of investment-specific technological change”. American Economic Review 87 (3), 342-362.
Greenwood, J., Seshadri, A., Yorukoglu, M. (2001). “Engines ofliberation”. Mimeo. University ofRochester. Griliches, Z. (1998). R&D and Productivity: The Econometric Evidence. University of Chicago Press.
Grossman, G.M., Helpman, E. (1991). Innovation and Growth inthe Global Economy. MIT Press, Cambridge, MA.
Hall, R.E., Jones, C.I. (1999). “Why do some countries produce so much more output per worker than others?”. Quarterly Journal of Economics 114 (1), 83-116.
Hansen, G.D., Prescott, E.C. (2002). “Malthus to Solow”. American Economic Review 92 (4), 1205-1217.
Helpman, E. (Ed.) (1998). General Purpose Technologies and Economic Growth.
MIT Press, Cambridge, MA.Howitt, P. (1999). “Steady endogenous growth with population and R&D inputs growing”. Journal ofPolitical Economy 107 (4), 715-730.
Jones, C.I. (1995a). “R&D-based models of economic growth”. Journal ofPolitical Economy 103 (4), 759784.
Jones, C.I. (1995b). “Time series tests of endogenous growth models”. Quarterly Journal of Economics 110 (441), 495-525.
Jones, C.I. (1999). “Growth: With or without scale effects?”. American Economic Association Papers and Proceedings 89 (May), 139-144.
Jones, C.I. (2001). “Was an Industrial Revolution inevitable? Economic growth over the very long run”. Advances in Macroeconomics 1 (2). Article 1. http://www.bepress.com/bejm/advances/voll/iss2/artl.
Jones, C.I. (2002a). Introductionto Economic Growth, second ed. W.W. Norton and Co., New York.
Jones, C.I. (2002b). “Sources of U.S. economic growth in a world of ideas”. American Economic Review 92 (1), 220-239.
Jones, C.I. (2003). “Population and ideas: A theory of endogenous growth”. In: Aghion, P., Frydman, R., Stiglitz, J., Woodford, M. (Eds.), Knowledge Information and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps. Princeton University Press, Princeton, NJ, pp. 498-521.
Jones, C.I., Williams, J.C. (1998). “Measuring the social return to R&D”. Quarterly Journal of Economics 113 (4), 1119-1135.
Jones, L.E., Manuelli, R. (1990). “A convex model of economic growth: Theory and policy implications”. Journal of Political Economy 98 (October), 1008-1038.
Judd, K.L. (1985). “On the performance of patents”. Econometrica 53 (3), 567-585.
Kortum, S.S. (1997). “Research, patenting, and technological change”. Econometrica 65 (6), 1389-1419.
Kremer, M. (1993). “Population growth and technological change: One million B.C. to 1990”. Quarterly Journal of Economics 108 (4), 681-716.
Kremer, M. (1998). “Patent buyouts: A mechanism for encouraging innovation”. Quarterly Journal of Economics 113 (November), 1137-1167.
Kuznets, S. (1960). “Population change and aggregate output”. In: Demographic and Economic Change in Developed Countries. Princeton University Press, Princeton, NJ.
Lee, R.D. (1988). “Induced population growth and induced technological progress: Their interaction in the accelerating stage”. Mathematical Population Studies 1 (3), 265-288.
Li, C.-W. (2000). “Endogenous vs. semi-endogenous growth in a two-R&D-sector model”. Economic Journal 110 (462), C109-C122.
Li, C.-W. (2002). “Growth and scale effects: The role of knowledge spillovers”. Economics Letters 74 (2), 177-185.
Lipscomb, A.A., Bergh, A.E. (1905). The Writings of Thomas Jefferson, vol. 13. Thomas Jefferson Memorial Association, Washington. Online at http://press-pubs.uchicago.edu/founders/documents/al_8_8sl2.html.
Lucas, R.E. (1988). “On the mechanics of economic development”. Journal of Monetary Economics 22 (1), 3-42.
Lucas, R.E. (1998). “The Industrial Revolution: Past and Future”. Mimeo. University of Chicago.
Maddison, A. (1995). Monitoring the World Economy 1820-1992. Organization for Economic Cooperation and Development, Paris.
Mankiw, N.G., Romer, D., Weil, D. (1992). “A contribution to the empirics of economic growth”. Quarterly Journal of Economics 107 (2), 407 438.
Mulligan, C.B., Sala-i-Martin, X. (1993). “Transitional dynamics in two-sector models of endogenous growth”. Quarterly Journal of Economics 108 (3), 739-774.
Nordhaus, W.D. (1969). “An economic theory of technological change”. American Economic Association Papers and Proceedings 59 (May), 18-28.
Nordhaus, W.D. (2003). “The health of nations: The contribution of improved health to living standards”. In: Murphy, K.M., Topel, R. (Eds.), Measuring the Gains from Medical Research: An Economic Approach. University of Chicago Press, Chicago, IL, pp. 9-40.
Ohanian, L., Cole, H. (2001). “Re-examining the contribution of money and banking shocks to the U.S. great depression”. NBER Macroeconomics Annual 16, 183-227.
Peretto, P. (1998). “Technological change and population growth”. Journal of Economic Growth 3 (4), 283311.
Phelps, E.S. (1966). “Models of technical progress and the golden rule of research”. Review of Economic Studies 33 (2), 133-145.
Phelps, E.S. (1968). “Population increase”. Canadian Journal of Economics 1 (3), 497-518.
Quah, D.T. (1996). “The Invisible Hand and the Weightless Economy”. Mimeo. LSE Economics Department. April.
Quah, D. (2002). “Almost efficient innovation by pricing ideas”. Mimeo. LSE. June.
Rebelo, S. (1991). “Long-run policy analysis and long-run growth”. Journal of Political Economy 99 (June), 500-521.
Rivera-Batiz, L.A., Romer, P.M. (1991). “Economic integration and endogenous growth”. Quarterly Journal of Economics 106 (May), 531-555.
Romer, P.M. (1986). “Increasing returns and long-run growth”. Journal of Political Economy 94 (October), 1002-1037.
Romer, P.M. (1987). “Growth based on increasing returns to specialization”. American Economic Review Papers and Proceedings 77 (May), 56-62.
Romer, P.M. (1990). “Endogenous technological change”. Journal of Political Economy 98 (5), S71-S102.
Romer, P.M. (1993). “Two strategies for economic development: Using ideas and producing ideas”. Proceedings of the World Bank Annual Conference on Development Economics 1992, 63-115.
Romer, P.M. (1994a). “New goods, old theory, and the welfare costs of trade restrictions”. Journal of Development Economics 43, 5-38.
Romer, P.M. (1994b). “The origins of endogenous growth”. Journal of Economic Perspectives 8, 3-22.
Romer, P.M. (1995). “Comment on a paper by T.N. Srinivasan”. In: Growth Theories in Light of the East Asian Experience. University of Chicago Press, Chicago, IL.
Romer, P.M. (2000). “Should the government subsidize supply or demand in the market for scientists and engineers?”. NBER Working Paper 7723, June.
Sala-i-Martin, X. (1997). “I just ran four million regressions”. NBER Working Paper 6252.
Segerstrom, P. (1998). “Endogenous growth without scale effects”. American Economic Review 88 (5), 12901310.
Segerstrom, P.S., Anant, T.C.A., Dinopoulos, E. (1990). “A Schumpeterian model of the product life cycle”. American Economic Review 80 (5), 1077-1091.
Shell, K. (1966). “Toward a theory of inventive activity and capital accumulation”. American Economic Association Papers and Proceedings 56, 62-68.
Sheshinski, E. (1967). “Optimal accumulation with learning by doing”. In: Shell, K. (Ed.), Essays on the Theory of Economic Growth. MIT Press, Cambridge, MA, pp. 31-52.
Simon, J.L. (1986). Theory of Population and Economic Growth. Blackwell, New York.
Simon, J.L. (1998). The Ultimate Resource 2. Princeton University Press, Princeton, NJ.
Solow, R.M. (1956). “A contribution to the theory of economic growth”. Quarterly Journal of Economics 70 (1), 65-94.
Solow, R.M. (1957). “Technical change and the aggregate production function”. Review of Economics and Statistics 39 (3), 312-320.
Solow, R.M. (1994). “Perspectives on growth theory”. Journal of Economic Perspectives 8 (1), 45-54.
Spence, M. (1976). “Product selection, fixed costs, and monopolistic competition”. Review of Economic Studies 43 (2), 217-235.
Stiglitz, J.E. (1990). “Comments: Some retrospective views on growth theory”. In: Diamond, P. (Ed.), Growth/Productivity/Unemployment: Essays to Celebrate Robert Solow’s Birthday. MIT Press, Cambridge, MA, pp. 50-69.
Stokey, N.L. (2001). “A quantitative model of the British industrial revolution, 1780-1850”. Carnegie Rochester Conference Series on Public Policy 55, 55-109.
Tamura, R. (2002). “Human capital and the switch from agriculture to industry”. Journal of Economic Dynamics and Control 27, 207-242.
Weitzman, M.L. (1976). “On the welfare significance of national product in a dynamic economy”. Quarterly Journal of Economics 90 (1), 156-162.
Weitzman, M.L. (1998). “Recombinant growth”. Quarterly Journal of Economics 113 (May), 331-360.
Whelan, K. (2001). “Balance growth revisited: A two-sector model of economic growth”. Mimeo. Federal Reserve Board of Governors.
Williams, J.C. (1995). “Tax and Technology Policy in an Endogenous Growth Model”. Ph.D. Dissertation. Stanford University.
Young, A. (1998). “Growth without scale effects”. Journal of Political Economy 106 (1), 41-63.