[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

OUTPUT (Y )
Y 1
Y 0
L 0
LABOR (L)
Figure 27.6
TECHNOLOGICAL CHANGE
Improvements in knowledge and technology shift up the
production function; at each level of physical and human
capital per worker, higher levels of output per worker
can be achieved.
the laser were developed. Indeed, most major firms spend about 3 percent
of their gross revenues on research and development (R & D).
We have become so accustomed to the current level of technological
progress that it is hard to believe how different the view of reputable
economists was in the early 1800s. Real wages of workers were
little higher than they had been more than four centuries earlier, when
the bubonic plague killed a large part of the population of Europe and
thereby created a scarcity of labor that raised real wages. After half a
millennium of slow progress at best, Thomas Malthus, one of the greatest
economists of that time, saw population expanding more rapidly
than the capacity of the economy to support it. His prediction of an
inevitable decline in living standards earned economics the nickname
of “the dismal science.” Today, many continue to predict that the world
economy will be unable to grow faster than the population and that
living standards must necessarily decline. Such calculations have been
proved wrong over and over again, as technological advances have rendered
their premises false. The role of technological change in the economy’s
aggregate production is depicted in Figure 27.6. Improved
technology enables the economy to achieve more output per worker
at each level of physical and human capital per worker.
The Production of Ideas Knowing that ideas are important for economic
growth tells us little about how they are produced. Can we use some of the basic
ideas of economics to understand the production of ideas?
To start, think about the incentives that face a potential inventor. Those incentives
will be greatest if the inventor can charge a fee to anyone who uses her new
idea. She must be able to prevent its employment by those unwilling to pay. But
some ideas are hard to maintain control over. Once Henry Ford came up with the
idea of the modern assembly line, he might have kept it secret for a while by barring
visitors to his factory, but certainly anyone who saw his new method of manufacture
could take the idea and set up a new factory. Most software companies keep
their source code secret in order to exclude its use by those who have not paid a
licensing fee. The incentive to produce new ideas will be increased if inventors are
able to profit from such licenses. To that end, inventors must be granted property
rights to their ideas, as those ideas are given form in a specific process, machine, article
of manufacture, composition of matter, or design. Property rights give their
holder legal authority to determine how a resource is used, including the right to
charge others for its use. If property rights are insecure, if a firm planning on engaging
in research is uncertain about whether it will be allowed to capture the benefits
of any new ideas it produces, then fewer resources will be invested into research
and the production of new ideas.
Society has another consideration, however. Producing a new idea may be very
costly, but it need be produced only once. Your laptop embodies thousands of new
ideas, but these ideas did not have to be reproduced each time a new laptop was
made. The screen, memory chips, and case did have to be produced for each laptop;
they are examples of rivalrous goods—the memory chips in your laptop cannot be
in your roommate’s laptop. But the design of the laptop is a nonrivalrous good, and
594 ∂ CHAPTER 27 GROWTH AND PRODUCTIVITY