New Growth Theory,Technology and Learning: A Practitioner's Guide

New Growth Theory emphasizes that economic growth results from the increasing returnsassociated with new knowledge. Knowledge has different properties than other economic goods(being non-rival, and partly excludable). The ability to grow the economy by increasingknowledge rather than labor or capital creates opportunities for nearly boundless growth.Markets fail to produce enough knowledge because innovators cannot capture all of the gainsassociated with creating new knowledge. And because knowledge can be infinitely reused atzero marginal cost, firms who use knowledge in production can earn quasi-monopoly profits.All forms of knowledge, from big science to better ways to sew a shirt exhibit these propertiesand contribute......
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New Growth Theory,Technology and Learning: A Practitioner’s Guide Reviews of Economic Development Literature and Practice: No. 4New Growth Theory,Technology and Learning:A Practitioner’s Guide Joseph Cortright Joseph Impresa, Inc 2001 U.S. Economic Development Administration New Growth Theory, Technology and Learning A Practitioners Guide Joseph Cortright Reviews of Economic Development Literature and Practice: No. 4 2001 Impresa, Inc. 1424 NE Knott Street Portland, OR 97212 (503) 515-4524 jcortright@impresaconsulting.comThis report was prepared under an award 99-07-13801 from the Economic Development Administration, U.S.Department of Commerce. The views expressed are those of the author and do not necessarily reflect the views ofthe Economic Development Administration. ABSTRACTNew Growth Theory emphasizes that economic growth results from the increasing returnsassociated with new knowledge. Knowledge has different properties than other economic goods(being non-rival, and partly excludable). The ability to grow the economy by increasingknowledge rather than labor or capital creates opportunities for nearly boundless growth.Markets fail to produce enough knowledge because innovators cannot capture all of the gainsassociated with creating new knowledge. And because knowledge can be infinitely reused atzero marginal cost, firms who use knowledge in production can earn quasi-monopoly profits.All forms of knowledge, from big science to better ways to sew a shirt exhibit these propertiesand contribute to growth. Economies with widespread increasing returns are unlikely to developalong a unique equilibrium path. Development may be a process of creative destruction, with asuccession of monopolistically competitive technologies and firms. Markets alone may notconverge on a single most efficient solution, and technological and regional development willtend to exhibit path dependence.History, institutions and geography all shape the development of knowledge-based economies.History matters because increasing returns generate positive feedbacks that tend to causeeconomies to “lock in” to particular technologies and locations. Development is in part chaoticbecause small events at critical times can have persistent, long term impacts on patterns ofeconomic activity. Institutions matter because they shape the environment for the productionand employment of new knowledge. Societies that generate and tolerate new ideas, and thatcontinuously adapt to changing economic and technological circumstances are a precondition tosustained economic growth. Geography matters because knowledge doesn’t move frictionlesslyamong economic actors. Important parts of knowledge are tacit, and embedded in the routines ofindividuals and organizations in different places.New Growth Theory, and the increasing returns associated with knowledge have manyimplications for economic development policy. New Growth Theory underscores the importanceof investing in new knowledge creation to sustain growth. Policy makers will need to paycareful attention to all of the factors that provide incentives for knowledge creation (research anddevelopment, the education system, entrepreneurship and the tolerance for diversity,macroeconomic expectations, openness to trade). Because it undermines the notion of a single,optimal general equilibrium, New Growth Theory implies that economics will be less capable ofpredicting future outcomes. ii CONTENTSAbstract ......................................................................................................................................iiContents..................................................................................................................................... iiiIntroduction ................................................................................................................................1A Practitioners Guide to Theories for the Knowledge Based Economy .......................................1I. What is New Growth Theory?....................................................... ...