How the World Works has been quiet for a few days: I was busy finishing David Warsh's "Knowledge and the Wealth of Nations" in preparation for interviewing the author.
"Knowledge" tells the story of a paradigm shift in the "technical economics" community: those high-powered academic economists who communicate to each other in mathematical dialects beyond the ken of normal humans. The fulcrum of the shift is a paper written in 1990 by economist Paul Romer, "Endogenous Technological Change," which, argues Warsh, for the first time explains in clear mathematical terms how the accumulation of knowledge fuels economic growth.
To explain this, Warsh pulls off a tour de force. He takes us all the way back to Adam Smith, and then forward in time in an illuminating tour of economic history. In his hands, economics is far from a "dismal science" -- it is a discipline that, with many a zigzag and no shortage of ideologically tinted disagreements, has steadily progressed in its understanding of how economies work.
The overriding question -- one that is at the heart of this blog -- is what makes some countries rich and some countries poor? And the answer, according to Warsh, has to do with understanding the essential nature of knowledge: how it is fundamentally different from the classically understood elements of an economy like land, labor and capital.
Knowledge is different because, to use Romer's term, it is an example of a "nonrival" good. Two people can't eat the same apple or farm the same plot of land, but they can both listen to the same piece of music, or read the same book, or build a semiconductor chip off the same blueprint.
This has been an obvious aspect of reality to anyone paying attention since the dawn of the computer era and the spread of the Internet. Information can be easily copied. For some, like open-source-software developers, this is a strength to be built upon. For others, like record companies and movie studios, it is a threat to established business models. But whether threat or boon, the crucial thing to understand is that the economics of knowledge is an economics of abundance. Land, labor and capital are constrained. There's only so much of each. But knowledge has no limit -- it can be shared endlessly -- one breakthrough in light bulb technology or a malaria treatment can benefit the whole world. The challenge of government is how to ensure that both knowledge itself and the people who know how to create and use it flourish.
David Warsh was kind enough to share a few comments on these issues with me by phone from his home in Massachusetts on Wednesday.
Any book that that has 10 entries in the index for the phrase "infinite dimensional spreadsheet" is going to be considered heavy going by a lot of readers. But it seemed to me that it wouldn't be too hard to give a pithy summary. The title of your book is "Knowledge and the Wealth of Nations": Could you summarize the thesis by saying "the accumulation of knowledge is the key to becoming a wealthy nation"?
I'd be happier saying "a" key. It's about having to create the human capital -- the infrastructure of smart, well-educated people and institutions -- that seems to clearly be the trick. The ur-example of this archetype was the Japanese miracle after the Meiji restoration, where they really took a good look abroad. They sent commissions out to tour the world looking for best practices, mainly in textile machinery, because they recognized that that was where they had a huge cost advantage, and then they learned how to run textile companies and textile mills, they electrified the country, and pretty soon they were a low-cost producer of textiles. In the last 20 years, we've seen Israel and India and China do roughly the same thing, though much faster.
It's true: The creation of this new knowledge -- like learning how to build a chip or a personal computer or a laptop -- is, I guess, the key, ultimately. If you don't continue to learn how to do new things with new products, you don't really go any place at all. But you just can't learn how to do that if you don't have people who are highly educated.
The paradox is that I don't think the average person would think that "knowledge is the key" is really that breathtaking an insight.
I don't think it's anything surprising at all, to a smart person who pays attention to the world.
So then what's so special about what Paul Romer accomplished?
You know the joke that economists like to tell each other about the drunk looking for his keys under the streetlight, not because that's where he lost them, but because that's where the light is? That's just the way life is -- you use the tools that you've got to examine the problems that you've got, whether they are big problems or small ones. What really makes economics move forward is when somebody learns how to build a new streetlight, or a portable streetlight, or an infrared streetlight, and in essence what Romer did was build an infrared streetlight, a portable infrared streetlight.
Anybody who knew anything knew that technology was our friend. [MIT economist and Nobel Prize winner] Bob Solow made this absolutely crystal clear, back in 1956 when he published his original model of growth. There were a spate of books in the late '50s and early '60s about the research revolution. But what the Solow model didn't do, because he didn't have the tools -- the mathematical tools and techniques -- it didn't make any kind of a judgment about where the growth of knowledge was coming from. It was just taken for granted.
What's remarkable about Romer is that he was a guy who was trained as a physicist as an undergraduate, but he saw the market for physics was falling apart in the mid-'70s, and he decided to become a lawyer. But as soon as he looked at the law he saw that economics was moving into law with a vengeance, so he thought, I'll become an economist and I can still be a lawyer that way. So in the late '70s, he started doing the kind of economics boot camp that is necessary just to speak the language of economics. That language is entirely mathematics at this point; if you look at the punch line of the story I tell in this book it really has to do with why mathematics is such an efficacious language for these guys.
If you just look at a bunch of economists talking to each other, it just looks unfathomable, unproductive or, as someone once said, "a bunch of agitated pygmies spouting nonsense." But Romer learned to speak the language and then he learned to write models, and he tried to get at this question of where the knowledge was coming from.
And in the course of his research, out popped this principle that is really the one-word summary of the book, that the economically important thing about knowledge is that it is "nonrival" -- everybody can use it at the same time. This undercut completely the mathematical convention in the Solow model, which says that when you double the inputs you double the output. The funny thing about knowledge is that once you've created it, it's already there, you don't have to double it. Once you've created it, any number of people can use it.
This gets you out of the mathematics and it gets you into words -- simple words like "nonrival" -- and I think that's the clearest demonstration I've ever seen of why mathematics is even more useful than writing, as well as Peter Drucker or Ken Galbraith, or any number of people.
One of the goals of your book is to show how Romer's breakthrough insights influenced the entire community of academic economists. But I get awfully skeptical when I hear about consensus among economists. It doesn't take much of a survey of the literature on any particular economic question to see that there are vast differences among economists, particularly on issues that are politically charged. Isn't that one of the key differences between economics and the hard sciences?
Sure. I agree. On the other hand, I think this particular case is a clear case of economics making progress -- meaning it becomes a little more generally redefined. I agree we could talk for two days before we began to agree on what the evidence was for that. Political differences are likely to remain among human beings for the rest of time. But on some of these issues, like what you have to do to grow, we have come to understand more. I think the whole new growth revolution has made it absolutely, inarguably clear why [command economies] didn't work. They didn't work because while there was a provision for the creation of knowledge -- the state did it -- and there was a little diffusion, there were no incentives to move that knowledge out into people's hands. I think that's something that's just been nailed down.
I've noticed that the World Bank has now got a growth commission which has a whole lot of star people on it, a high-powered bunch of people. They are going to sit around for two years and see what they can agree on. I'll be very surprised if in the end they don't adopt Romer-esque language.
But what does that mean, practically speaking? What are the policy implications? In the case of intellectual property, it wasn't clear to me from your book where exactly Romer's policy prescriptions would fall on how to balance the benefit of more access to information for the general public with the corporate desire to capture all possible value from ownership of intellectual property?
Basically his prescription would be to open it up more. There's no point in letting people make a jillion dollars off a statin that prevents cholesterol buildup when once it has been discovered you can put it in the water and everybody can have the benefit of it. It's like fluoride; you wouldn't want somebody to trademark fluoride or any number of things.
There are all kinds of mechanisms for doing this. What are things that really matter in terms of people's welfare? Well, they are mostly pharmaceuticals at this point. There's a guy I write about in my book, Michael Kremer, who is very much in the Romer tradition, and one of his policy prescriptions to is to fund development of really crucial things with a "prize." If there is something that people would obviously benefit a lot from having, have the government put up a big prize for it, -- specify very carefully what you are looking for, then give the money to whoever comes up with it, and forget about the royalties.
[Britain's] Blair government is way out in front of this: They've got a prize for a malaria vaccine. It would just be of enormous benefit to people who don't have the money to pay for it.
Paul Romer goes on about this more than anyone. There is enormous stuff yet to be discovered. But in order to discover it, you have to train scientists and engineers. At one point, the conclusion of one of his papers was, let's have more scientists and engineers and fewer MBAs and lawyers. That's what a country needs to do: beef up its university system and train people who know how to do things.