Chapter 2: The Unbearable Lightness of A – Useful Knowledge and Economic Growth
Thráinn Eggertsson 1. INTRODUCTION Economists usually sing with the same hymn sheet when they are questioned about the role of technology in economic growth. They generally agree that sustained long-term growth in productivity, which began in Western Europe some two centuries ago, could not have been maintained in an environment of stagnant production technologies. Whether we consult Karl Heinrich Marx, Joseph Alois Schumpeter or Robert Merton Solow, the answer is the same: new technologies are the source of long-term economic growth. Economists, as we know, usually argue that the production and utilization of new technologies depend critically on appropriate social institutions, such as competition, decentralized markets, secure property rights, enforceable contracts, and norms of trust and reciprocity. Yet virtually no one argues that long-term growth in output per worker is possible in an economy with stationary production techniques.1 In his pioneering contribution to modern (neo-classical) growth theory, Solow (1956; 1957) uses the letter A to represent technology. Specifically, in Solow-type growth models the letter A symbolizes the stock of technology, which for convenience is assumed to increase with time at a fixed rate. The exogenous increase in A is assumed to be labor saving, which means that technical change makes it possible to produce a given level of output by using fewer labor units than before and the same amount of capital. In equation (1) y, average output per capita for an economy, is a function of the state of technology, A, and the ratio of capital to labor,...
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