According to this year, Nobel Prize winner in economics, Paul Romer, the technical knowledge that spills over into the creation of new products is the key to sustained economic growth. Is it, however, true that technical knowledge is the heart of economic growth? If this would have been the case, why do economies in the developing world continue to experience poverty? After all individuals in these economies have access to the technical knowledge of the developed world.
Furthermore, Romer is of the view that free market economies, left to their own devices, tend to produce little new knowledge. In a fully competitive environment, firms will be concerned that other firms will quickly copy any innovations they introduce, so they will be reluctant to make costly investments in research and development, argues Romer.
To deal with this problem, Romer is of the view that it is necessary to introduce policies like subsidies for research and development. Hence in this way of thinking, government policies play a critical role in fostering technological innovation.1
Contrary to Romer, the most important ideas actually emerge because of the initiative taken by various individuals in the private sector without any support from the government. To name a few such innovations includes computer technology in the late 20th century or the development of electricity, radio, and television in the early 20th century, or the automobile industry and the airline industry also in the early 20th century.
Furthermore, the policy of providing subsidies by the government would bypass the market mechanism thereby stifling the usage of scarce capital thus undermining economic growth.
It seems to us that Romer ignores the key factor of economic growth — funding. Individuals that are engaged in the various stages of production require access to final consumer goods in order to support their lives and wellbeing.
At any point in time, there is a finite pool of final consumer goods. To fund a greater number of activities requires an increase in the pool of consumer goods i.e. an increase in the pool of real wealth.
