Introduction to economic growth (4)

Transcription

1 Introduction to economic growth (4) EKN 325 Manoel Bittencourt University of Pretoria August 13, 2017 M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

2 Introduction The Solow model (and its augmented version with human capital) are capital-based models, they focus on physical and human capital accumulation furthermore, technology a is the engine of economic growth, however the framework does not model technology as such, technology is exogenous so, there is a clear motivation for a framework which considers technology as part of the model, or endogenous, so that a better understanding of economic growth and development emerges M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

3 What is technology? Technology is simply how inputs are (re)combined in a production function, so that we can get larger output, (y = f (x)), or higher utility, that is, we do more with less what about ideas? Ideas help to improve the technology of production, it allows the inputs to produce more output, or to get higher utility. To put it differently, ideas have the potential to improve the technology index a example of ideas: iron oxide, used by the Neanderthals and now used by Homo Sapiens, light and electricity, transistors, now processors, Wal-Mart approach to retailing; Sam Walton (re)created the way retailing is done with his new set of ideas. A (re)combination of inputs so that larger output is generated (st. revealed preference) throughout history tin has had a number of different uses and applications: weapons, armours, plates, cups, air-tight food containers, and now it is used for touch screens on (our) smart phones M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

4 The economics of ideas The economics of ideas has been formalised by Paul Romer in the mid-1980s in a couple of seminal papers. The framework is as follows: Ideas! Nonrivalry! IncreasingReturns! ImperfectCompetition according to Romer, ideas are nonrivalrous, which implies increasing returns. Can we have increasing returns under perfect competition? why are ideas nonrivalrous? Most economic goods are rivalrous, what is so special about ideas? Toyota implemented the new idea of just-in-time inventory methods, which is available to its competitors to implement. The use of this idea by Toyota does not preclude GM to make use of it at the same time. Ideas are blueprints or instructions that can be used by different agents at the same time. But, what about the paper in which these blueprints are written? What about your smart phone? Is it nonrivalrous? M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

5 The economics of ideas So, are ideas also (partially) excludable? Excludability depends on whether the owner of a new idea can charge for its use or not. Can a inventor/innovator/scientist/university/lab charge for the use of his/her/its idea? copyright and patent laws secure the right of the scientist to gain something for his efforts. Hence, those tools (or institutions) impose a certain degree of excludability on ideas M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

6 The economics of ideas M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

7 The economics of ideas So, ideas are nonrivalrous, however their degree of excludability presents some variation, a software can easily be copied, the idea behind Wal-Mart can also be easily copied by Pick and Pay. Both ideas can be used by different agents at the same time (nonrivalry property) and also be copied (nonexcludability property) what about Calculus (invented by Newton in the 17 th century)? What about R&D in general? Can ideas generate spillovers or externalities? Do you think Newton was well rewarded for his invention which spillovers well into the 21 st century? because ideas are nonrivalrous and nonexcludable, they can generate spillovers and therefore run the risk of being underproduced if left to the market to decide. That is why basic R&D is usually financed by governments. Think about the fixed cost that Newton had to create Calculus... Huge! His gains, small! The spillovers to Humanity, unmeasurable! M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

8 The economics of ideas Moreover, think about the fixed costs involved in creating a new software (or a new app for your smart phone). The initial cost will be immense, however after the idea is created (an idea is created only once) and embodied in a rivalrous product, the average costs will decrease can we say that the above leads to increasing returns to scale? You create an idea which embodies a large fixed cost, however, after that all is needed is a process of copying the blueprint so that thousands of products can be produced, with decreasing average costs M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

9 The economics of ideas M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

10 The economics of ideas Therefore, the fixed cost is bound to be a large number, the first copy of a new software is expensive, however from the second copy onwards it gets cheaper and cheaper (do you think it depends on the size of the market?) so, fixed costs are bound to be large, average costs are decreasing, what about the price charged by this producer of software (IBM in the past, Microsoft in the present, Google right now) if Microsoft charges P = MgC for Windows10 it will run into negative profits, so the price charged will have to be higher than the MgC, which leads us to imperfect competition that is, with increasing returns to scale we have, by definition AveC > MgC, profits M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

11 The economics of ideas M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

12 The economics of ideas We are going full circle now, ideas are nonrivalrous, the fixed cost of an idea is high, the average costs are decreasing with production, the price charged will be higher than the marginal cost, a profit will be made, we have imperfect competition the need for profit is that without this financial incentive no firm will invest in a new idea in the first place (think of pharmaceutical companies which have labs with highly skilled and expensive scientists) (also bear in mind that not all ideas become commercially successful, there is an element of risk involved) if the inventor (or company, or university) does not expect a return for his scientific effort, he will not create a new idea. There is a natural need for a profit, and a perfect competitive environment does not account for the existence of profits M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

13 Intellectual property rights and the industrial revolution Ideas are nonrivalrous, they present large fixed costs to be created in the first place, however, after that the average costs decrease with production, which leads to increasing returns, profits and imperfect competition but for ideas to exist, a system of rewards must be in place, patents and monopoly rights, otherwise the inventors/innovators/scientists will not create new ideas. Therefore, the incentive will be the prospective profit to be earned with new ideas furthermore, the companies which will buy these new ideas (in many cases from research-led universities and private labs) need a reassurance of a profit to be made; patents again! A temporary monopoly is granted for such firms. Patents and monopoly rights exist to make sure that a certain degree of excludability is incorporated into new ideas M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

14 Intellectual property rights and the industrial revolution What about the Industrial Revolution in Britain? Up to 1790, rapid and sustained economic growth was an elusive idea. Up to that point in time we lived in a Malthusian economy, diminishing returns to scale in agriculture (the main sector of natural economies) and a stagnant population Nobel Laureate Douglass North suggests that one of the determinants of the Industrial Revolution was the institutional body existent in Britain (the Statute of Monopolies is dated from 1624, not to mention other institutions such as the Magna Carta from 1215), which raised the rate of (private) return on inventions and innovations. the very existence of patents and monopoly rights raised the returns, or profits, to be earned by inventors and also by those buying the inventions and applying them to production M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

15 Population and ideas What about the number of people creating, or prospecting, for new ideas? What is the role of an increasing population for the creation of ideas, or more ideas? what is the reasoning behind Solow, and even Malthus? Do they live in a world of nonrivalrous goods? population growth, new ideas (nonrivalrous), technology, economic growth M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

16 Population and ideas M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

17 Data on ideas R&D can be seen as an important input in the production of ideas. Patents can also be seen as a measure of ideas. Hence, R&D and patents will be proxies for ideas but bear in mind that a number of things have never been patented, the Coca-Cola formula. Overall though, there has been a constant increase in the numbers of patents over time. What about R&D? R&D has increased consistently over time too, not only its levels, but also its share, the number of scientists in R&D has increased over time (think of private labs, universities, multinationals with their own labs, Silicon Valley, Route 128 in Boston) for instance, the share of the labour force engaged in R&D in the U.S. in the 1950s was around.25%, and 1% in Or 0.1% in 1950 and 1.1% in 1990 in Japan M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

18 Data on ideas M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

19 Data on ideas M Bittencourt (University of Pretoria) EKN 325 August 13, / 20

20 Summary Ideas, nonrivalry, increasing returns to scale, need for profit, imperfect competition, patents, incentives, (partial) excludability, institutions, population M Bittencourt (University of Pretoria) EKN 325 August 13, / 20