VitalAccurateThinking

Knowledge and the Wealth of Nations

I have just finished reading Knowledge and the Wealth of Nations by David Warsh. I'll give a H/T to The Edge Perspectives for introducing me to the book.

This book traces the economic theory of growth from a historical perspective all the way from Adam Smith's pin factory to Paul Romer's journal article Endogenous Technological Change. For someone who is not a trained economist nor mathematician, much of the book was beyond my ability to understand. However, that did not stop me from reading all 408 pages of it. Not comprehending convexity or non-convexity, infinite-dimensional spreadsheets, rival and non-rival goods (which I do understand now; I think!) does not detract from the overall message of the book: the accumulation of knowledge is the engine of economic growth.

On one level I agree with the author that technology, knowledge and invention are a key to economic growth. The case is made very convincingly by Warsh. However, it is my belief that even with the spread of technology to poor countries, economic growth has not followed. Even in countries that have made stunning leaps in growth, like Japan and Korea, their economies trail the US in growth. Another interesting book, The Power of Productivity by William W. Lewis argues that a bigger determinant of economic growth is political enabling (or disabling) as well as strong competition. What is striking about Knowledge and the Wealth of Nations is that it touts theory, mathematics and models over validation with real world data. Very little discussion is given to matching real-world outcomes to the mathematical models developed by knowledge growth theory. To be fair, quantifying technology and the accumulation of knowledge within any economic system is likely impossible. Further measuring the absorption and use of that technology is even harder. However, it is striking to look at the empirical results of Lewis matched with the mind-stretching models and mathematics used by Warsh's protagonist Romer. What I would conclude from reading both Knowledge and Productivity is that both government structure and the accumulation of knowledge are drivers of economic performance and growth. The degree to which government establishes the rule of law and proper competition is the degree to which knowledge will drive economic growth.

Another implication of Warsh, if I understand it correctly, is serious governmental policy decisions regarding intellectual property need to be considered. Since knowledge generation is indivisible (that is, the entire amount of knowledge is needed or it is worthless, just like the entire bridge is needed or it worthless) and the cost to produce knowledge is a huge fixed cost, some protection of intellectual property is needed. Unless intellectual property generation is rewarded with government protection, it will not be undertaken.

There are those who wish to deny the right of those who generate knowledge or easily copied material (movies and music) right to control that material. Without some sort of mechanism to protect IP, it would not exist. An outcome of Warsh is that with no knowledge accumulation, no economic growth. My conclusion from that, not Warsh, is that those that steal IP rob society of growth opportunity.

So would I recommend reading Knowledge? Yes, for those with some previous economics education. No, for those who are just learning about economics. For me, the value added was borderline as 50% of the book was over my head. That is my failing, not Warsh.

posted by Jim VAT @ 6:07 PM