Today I very briefly explain why I find innovation economics so intriguing, through a discussion of the work of Paul Romer throughout the late 1980s and early 1990s. You can find some great information in this EconTalk, as well as this EconTalk and his latest TED talk regarding Charter Cities.
Paul Romer (1990) – Endogenous Technological Change – refocused our economic lens. Previously, Neoclassical economics regarded capital accumulation and savings as the primary determinants of economic growth. That is, through an optimal savings rate, we would accumulate more and more capital (physical capital), and this would increase economic growth.
There were a number of issues with this, yet I wish to focus on one: steady-state of growth. This was true for two reasons. Firstly, because of the various assumptions regarding savings and capital accumulation, economies eventually reached a steady state – that is, all countries would reach their full potential of growth, and stop growing. Secondly, we would see all economies converge over time.
The data disagrees, and so did Romer.
Romer said something else was important – ideas and knowledge. Throughout his work, he uses the metaphor of recipes.
In our world, we have a certain number of scarce resources. Economic growth occurs when we take these resources and make them into something more valuable. The resources are the ingredients, and the ideas and the recipes.
From his 1993 paper:
“The most important lesson from the study of Research and Development, economic growth, and the history of technology is that there are more ways to arrange the objects of the physical world than humans can possibly imagine.”
Further, from this article:
“To get some sense of how much scope there is for more such discoveries, we can calculate as follows. The periodic table contains about a hundred different types of atoms, which means that the number of combinations made up of four different elements is about 100 × 99 × 98 × 97 = 94,000,000. A list of numbers like 6, 2, 1, 7 can represent the proportions for using the four elements in a recipe. To keep things simple, assume that the numbers in the list must lie between 1 and 10, that no fractions are allowed, and that the smallest number must always be 1. Then there are about 3,500 different sets of proportions for each choice of four elements, and 3,500 × 94,000,000 (or 330,000,000,000) different recipes in total. If laboratories around the world evaluated one thousand recipes each day, it would take nearly a million years to go through them all. “
This is why I’m an innovation economist. I believe, following Romer, that our focus should be on innovation, new ideas, knowledge accumulation and human capital.