Over time, economists realized that monopoly rights given to knowledge would diminish over time. Knowledge that couldn’t be kept hidden created a spillover. Romer believed that patents might limit unauthorized use of an idea, but that intellectual property was much easier to steal and copy than human capital. Romer also concluded that monopolistic competition must be present if we are to give rights to intellectual property. And while everyone agreed intellectual property rights should be given, hard question arose. Which ideas are subject to property rights, how long should property rights last? No one could answer these questions so they thought it best to leave it up to social policy.
Romer’s new model was very different from previous growth models; his model took monopolistic competition for granted and included an R&D sector. Information, especially information based on facts and connected with a rival good, was very valuable to Romer. He felt that once we got enough information, we could turn information into knowledge by structuring it. Once we’ve obtained knowledge, the final step is generalizing it so the world can make use of it. After realizing the missing piece of the economic puzzle was the idea that “the fundamental source of increasing returns was the non rivalry of knowledge”, he set out to do just that. Romer’s goal was to help everyone else understand what he has just discovered. And, after many years, he accomplished his goal and his ideas became a “conviction shared by the world.”
A for Jane.
ReplyDeleteRomer's model is a treat. His world is composed of two sectors. One makes ideas. One makes goods. The ideas sector has big fixed costs, and needs monopoly power to make money. The goods sector has competition. But the ideas are nonrival — anyone can use them. They make money when they get embodied in a rivalrous good: the theoretical idea of multiplexing gets built into cellphones that don't interfere with each other. Growth doesn't come from the sale of existing goods for zero profits, but rather from the creation of new goods embodying ideas. And, since those ideas don't depreciate, and they're non-rival, they're not scarce like everything else. In fact, they're super-abundant, and getting more so every day.
FYI: There's a one-off line on pg. 296 referring to the new theory of mechanism design. This was big enough for Warsh to know about when he wrote the book, but not big enough to deserve a Nobel Prize until a couple of years ago.
Extra credit for the first person to comment explaining who George Brett was, and why he was relevant to a conference in 1988.