Paul Romer: Growth Theory & Non-Rival

Source: Growth Economics blog, Oct 2015

The essential contribution of Romer (1990) is its clear understanding of the economics of ideas and how the discovery of new ideas lies at the heart of economic growth.

the first two sections of the 1990 paper are written very clearly, almost entirely in text and with the minimum required math serving as the light switch that illuminates a previously dark room.

Here is the key insight: ideas are different from essentially every other good in that they are nonrival.

Ideas are not depleted by use, and it is technologically feasible for any number of people to use an idea simultaneously once it has been invented.

The key is that nonrivalry gives rise to increasing returns to scale.

Once you’ve got increasing returns, growth follows naturally. Output per person then depends on the total stock of knowledge; the stock doesn’t need to be divided up among all the people in the economy.

With nonrivalry, growth in income per person is tied to growth in the total stock of ideas — an aggregate — not to growth in ideas per person.

Over long periods of recent history — twenty-five years, one hundred years, or even one thousand years — the world is characterized by enormous growth in the total stock of ideas and by enormous growth in the number of people making them. According to Romer’s insight, this is what sustains exponential growth in the long run.

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