Growth and Ideas

Charles I. Jones

Abstract

Ideas are different from nearly all other economic goods in that they are nonrivalrous. This nonrivalry implies that production possibilities are likely to be characterized by increasing returns to scale, an insight that has profound implications for economic growth. The purpose of this chapter is to explore these implications.

Literature Notes

Including ideas in the production function leads to increasing returns to scale, as a doubling of physical inputs and ideas more than doubles output. This is a direct result of the fact that doubling physical inputs alone already doubles output, so layering in additional ideas must lead to an even larger increase.

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Don’t include “per worker” variables when considering the convexity/concavity of / returns to scale of a production function

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Growth models with ideas in them means that factors cannot be paid their marginal products, as the marginal products add up to more than output itself. Standard competitive equilibrium runs into problems in such models.

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The linearity critique makes the point that many endogenous growth models require the assumption of a linear differential equation in order to generate stable long-run exponential growth (or as I call it, Scale invariant growth). In a linear differential equation, absolute growth of a variable is proportional to scale.

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Any model with long-run exponential growth will involve a linearity, not just endogenous growth models

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Linearity / Scale invariant growth applies most naturally to population, since living beings reproduce in proportion to their number¹

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Perfect competition will not deliver the optimal allocation of resources (First Welfare Theorem) in growth models with ideas that generate increasing returns to scale.

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Permanent Notes

• Perfect competition is not optimal under increasing returns to scale
• Long-run exponential growth requires scale invariant growth in at least one input
• Ideas generate increasing returns because they are nonrivalrous

literatureEconomicsGrowthMacroCompetitiononline Imperfections of perfect competition // Scale invariant growth // Convexity

Footnotes

1. Related to my bacteria analogy in You Don’t Understand Compound Growth, also mentioned in The Past and Future of Economic Growth: A Semi-Endogenous Perspective ↩