So, I talk a lot on here about science, innovation and technologies. I have also mentioned before why innovation is important to economic growth. So, why? What’s the big deal? Well, simply put, it’s a perspective of economics. There is one major school in Economics, with a few competing schools. I study one of the competing schools, the largest in fact. This branch is referred to as Evolutionary Economics. The traditional type of economics is called NeoClassicalism.
Neoclassical economics is split between micro and macro economics, where at a micro level there will be some demand and some supply and between two people a price agreement will be set based on the factors that go into costs and how many people want the good etc. Then there’s macro economics which looks at growth at a regional, or country level using terms like gross domestic product (GDP), which I discussed previously. In this post I will focus on macro economics, tomorrow, I will discuss how evolutionary economics at a micro level is different than neoclassical.
GDP measures some very specific things, however, it does not include all economic activity. Despite limitations it currently is the best measure we have for economic activity. Based on the GDP, many different economists have attempted to create theories based on the GDP that will model growth. These started in the mid 50’s with Solow and his model based on savings rates, salaries and previous GDP levels. This model is still the basis for most mainstream economists models. It is a horrible measure as it leaves a huge portion of economic growth as a residual, or as one economist put it “the measure of our ignorance.” This measure is about 75% of the growth.
In 1982 two guys put together the basis of evolutionary economics, which focused on micro level transactions instead of macro level events. However it has been extended to the macro level quite easily. The major argument is based on Schumpeter and that innovation drives economic growth. These economists basically ignore savings and things like that, and focus on knowledge capabilities. They were able to show that technology growth accounts for a massive amount of the economic growth in an economy.
Through these challenges neoclassical economists have adopted something called endogenous growth model. Where technology change is part of the driving force economic change. Before, it was considered an external factor that just happened to the economy. However, there is still a severe limitation to this theory: knowledge is a public good freely available to anyone anywhere. As we all know this is absurd. Basically we can see how this is a failed theory through the discussion I have on the patent system.
I will discuss more of this topic tomorrow.
Kuznets, S. (1973), Modern Economic Growth: Findings and Reflections, The American Economic Review, Vol. 63, No. 3 (Jun., 1973), pp. 247-258.
Mankiw, G.N. (1995), The Growth of Nations, Brookings Papers on Economic Activity, Vol. 1995, No. 1, 25th Anniversary Issue, pp. 275-310.