Download Economics of Ideas

Economics of Ideas
ECON 401: Growth Theory
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Economics of Ideas
Studies neoclassical models
model accumulation of physical and human capital
they do not generate economic growth in the absence of
technological progress
Although technology is central, it was left unmodeled. It was
exogenous to the model.
What is technology?
In economics, technology is the way inputs to the production
process are transformed into output.
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Economics of Ideas
For example, in a general production function
Y=F(K,L,.)
tehnology is given by F(.). In a Cobb-Douglas production
function, A is an index of technology.
Ideas improve technology of production.
A new idea leads to a higher prdoctivity of given inputs a given bundle of inputs produce more or better output.
 In the context of production function, a new idea causes
technology index to increase

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Economics of Ideas
Examples of ideas are many (not technological as well):
Moore’s law asserts that the number of transistors that can be
packed onto a computer chip doubles approximately every 18
months.
In 1800, light was provided by candles and oil lamps. Not
today. Nordhaus (1994) calculates that the price of light,
adjusted by the quality, has fallen by a factor of 4000 since
1800.
Wal-Mart approach to retailing
Diet Soft drinks
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Economics of Ideas
The relationship between ideas and growth can be formalized as
(by Paul Romer):
Ideas ==>Nonrivalry ==> Increasing Returns => Imperfect Competition
Ideas are nonrivalrous, implying the presence of increasing
returns to scale. Increasing returns to scale implies imperfect
competition.
Most goods are rivalrous. That is, the use of one good by one
person prevents others using the same good.
- CD player
- Attorney time
- Attending growth class
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Economics of Ideas
Ideas, however, nonrivalrous. In other words, the use of one
good does not prevent others using the same good. Once an
idea has been created, anyone can take advantage of it.
- computer chips
- operating systems (apple, windows etc)
Note that the paper the ideas are written on is rivalrous, an
engineer is rivalrous, but the ideas are not.
Ideas are partially excludable.
- excudability indicates that the owner can charge a fee
for its use
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Economics of Ideas
Figure 4.1 (from Romer (1993)) lists a variety of economic goods
indicating the degree of excludability and whether they are
rivalrous or not.
Goods that suffer from “tragedy of commons” problem are
rivalrous but have low degree of excludability.
- grazing of commonland
- restaurant bill
- fishing
Ideas are nonrivalrous, but the degree of excudability varies.
Public goods are nonrivalrous goods that are essentially
unexcludable.
- national defense
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Economics of Ideas
The economics of goods depends on their attributes:
Goods that are excludable allow their producers to capture the
benefits
• Goods that are not excludable involve substantial ‘spillovers’.
Spillovers are benefits that are not captured by producers.
•
•
Goods with positive spillovers tend to be underproduced
(government intervention?)
•
•
Basic R&D and national defense are some examples
Goods with negative spillovers tend to be overproduced by the
market (government regulation?)
•
tragedy of commons
Rivalrous goods must be produced each time they are sold
• Nonrivalrous goods need to be produced only once
•
•
•
Fixed cost of production
Marginal cost is zero (or close to zero)
• The only reason why marginal cost can be different from zero is that the
nonrivalrous good is embodied in a rivalrous good.
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Economics of Ideas
Hence, economics of ideas is tied to presence of increasing
returns to scale and imperfect competition.
Ideas are associated with a fixed cost (link to IRS)
•
Idea (for say next word processing with speech recognition)
requires a one-time research cost
• Once we have the idea and the first product, each additional unit
is produced with constant returns to scale
•
In other words, we can view the production with a fixed cost and
a constant marginal cost.
Figure 4.2 plots production function y=f(x)=100*(x-F), where F is
the fixed cost. This function exhibits constant marginal cost of
production.
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Economics of Ideas
Recall that a production function exhibits increasing returns to
scale if f(ax)>af(x) , where a>0. For the figure 4.2, 2F units of
input will produce 100*F units of output – labor productivity (y/x)
is increasing with the scale of the production.
If MC is so low, why the prices of the products (say a computer
software) are so high? Does it imply an inefficiency in the
market?
Yes, there is an inefficiency.
- Remember efficiency requires price=marginal cost
Presence of increasing returns implies that P=MC will lead to negative
profits (Figure 4.3)
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Economics of Ideas
With increasing returns to scale, average cost is always greater
than marginal cost and hence marginal cost pricing results in
negative profits.
 No firm will enter this market and pay the fixed cost
The production of new ideas requires the possibility of earning
profits and therefore necessitates a move from perfect
competition.
How do we make sure the ideas will have some degree of
excludability?
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Economics of Ideas
Patents and copyrights are legal mechanisms that grant
inventors monopoly power.

to reap a return from their inventions

for a limited time period

they are attempts to influence the degree of excludability
of ideas (I.e., prevent reverse engineering)
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Economics of Ideas
World economic growth is a recent phenomenon.

There is no good data going back before 1700 or 1800.
So like Malthus, we can assume population and income are
closely related.
Figure 4.4 plots the average annual world population growth for
the last 2000 years.
this growth rate was 0.0007% from 1 million B.C. to 1 A.D.
 From 1 A.D. to 1700, it was 0.075%.
 During the 18th century and especially in the last forty years, it is nearly
2%.

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Economics of Ideas
How did the sustained economic growth started in the first
place?
According to economic historians, development of intellectual
property rights is responsible for the modern economic growth.
Establishment of long-lasting institutions allowed entrepreneurs
to capture a positive rate of return from their innovations.
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Economics of Ideas
What data do we have on ideas?
It is not easy to measure the inputs to the production function
and also outputs of the production function (the ideas
themselves).
R&D should be an important input
 Patent counts may produce a measure of ideas produced
 Drawback: many ideas are not patented (Coca-Cola) or produced
using R&D resources (Wal-Mart operation manual)
 # of patents does not convey the economic value of the patents

Figure 4.5 plots the number of patents awarded from 1880 to
1999.
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Economics of Ideas
The number of ideas used in the US economy increased
substantially over the century.
Nearly half of all patents granted in 1999 were of foreign origin
 Most of the increase in patents over the last century reflects an increase
in foreign patents

Does this mean that the number of new ideas generated within
US has been relatively constant? Probably not.
Value of patents might be higher
 Not all ideas are patented
 Globalization of firms

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Economics of Ideas
Figure 4.6 plots the number of scientists and engineers engaged
in R&D from 1950 to 1993.
Not only the level of resources devoted to R&D has increased,
but the share has also increased.
The number of US scientists and engineers engaged in R&D increased from
about 0.25% of the labor force in 1950 to around 0.75% in 1993.

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Economics of Ideas
R&D expenditures in Turkey
1992......
1993......
1994......
1995......
1996......
1997……
1998……
1999……
ARGE harcaması ($)
AR-GE harcaması GSYİH
Gross domestic expenditure on R&D GERD/GDP (%o)
(gerd)(000 000)
767.5
785.3
476.1
639.0
817.8
933.3
1005.1
1157.7
Kişi başına düşen AR-GE harcamasıGERD per capita
4.9
4.4
3.6
3.8
4.5
4.9
5.0
6.3
13.1
13.2
7.9
10.4
13.0
14.9
15.5
17.5
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