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What Economic Model Best Captures the Value of IP?

Former Boston Globe columnist David Warsh will share the discovery of a new knowledge-based growth theory at tonight’s Linus Pauling Memorial Lecture.

By John Blyler, Editorial Director

DavidWarshLater this evening, I’ll be attending a lecture by David Warsh entitled, “Knowledge and the Wealth of Nations: The Discovery of New Growth Theory.” This presentation is part of the Linus Pauling Memorial lecture series, which is sponsored by Mentor Graphics and others.

It is my understanding that Warsh will explore the riddle of technology and prosperity in terms of a new growth theory for the economy. To prepare for this lecture, I created the following list of key terminologies and players in tonight’s economic drama (taken from various reviews of Warsh’s book):

  • Increasing Returns – “The parable of the pin factory says that there are increasing returns to scale — the bigger the pin factory, the more specialized its workers can be, and therefore the more pins the factory can produce per worker. But increasing returns create a natural tendency toward monopoly, because a large business can achieve larger scale and hence lower costs than a small business. So in a world of increasing returns, bigger firms tend to drive smaller firms out of business, until each industry is dominated by just a few players.” – Paul Krugman is an Op-Ed columnist for The Times.
  • Diminishing Returns – Diminshing returns ensure that firms cannot grow too big, preserving competition between them. This, in turn, allows the invisible hand of the market to perform its magic. The applications of diminishing returns seems to have held sway over economist until the 1990s.” — By Tim Harford, The Financial Times
  • Robert Solow published the first of two papers on economic growth that eventually won him a Nobel prize in the early 50s. He promoted the idea of diminshing returns as a way to model economic activity.
  • Paul Romer, of Stanford University, who tried to answer this question: If technological progress dictates economic growth, what kind of economics governs technological advance? According to Harford, Romer response was three-fold:
  1. Ideas are non-rival goods: everyone can make use of a single design, recipe or blueprint at the same time.
  2. Ideas are cheap to reproduce. Thus the total cost of a design does not change much, whether it is used by one person or by a million.
  3. Unless idea factories can enjoy some measure of monopoly over their designs—by patenting them, copyrighting them, or just keeping them secret—they will not be able to cover the fixed cost of inventing them.

How does technology fit into this discussion of diminishing vs. increasing returns? Mr Solow’s model, according to a common caricature, technology falls like “manna from heaven.” Conversely, Mr Romer’s theory calls for the education of people, subsidize their research, import ideas from abroad, carefully gauge the protection offered to intellectual property.

Most professionals in the semiconductor and electronics industry would say that Romer got it right. However, my impression from reading various reviews of Warsh’s work suggest that neither Solow’s nor Romer’s understandings resulted in a useful economic model for today knowledge-based economy. Perhaps my own understanding will be clearer after listening to Warsh in person.

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