Economic growth and economic development 554

Introduction to Modern Economic Growth
Although this question has some descriptive merit (in the sense that describing
the discovery of new technologies with a production function obscures some important details of the innovation process), the concern is largely irrelevant. There is no
reason to assume that the meta production function for technology is deterministic.
For example, we can assume that when a researcher puts l hours and x units of
the final good into a research project, then there will be some probability p (l, x)
that any innovation will be made. Conditional on an innovation, the quality of the
good will have a distribution F (q | l, x). In this particular formulation, both the
success of the research project and the quality of the research output conditional on

success are uncertain. Nevertheless, all this can be formulated as part of the meta
production function with stochastic output. Therefore, the production function approach to technology is not particularly restrictive, as long as uncertain outcomes
are allowed and we are willing to assume that individuals can make calculations
about the effect of their actions on the probability of success and quality of the
research project. Naturally, some may argue that such calculations are not possible.
But, without such calculations we would have little hope of modeling the process
of technological change (or technology adoption). Since our objective is to model
purposeful innovations, to assume that individuals and firms can make such calculations is entirely natural, and the existence of individuals and firms making such
calculations is equivalent to assuming the existence of a meta production function
for technologies.

12.1.3. Non-Rivalry of Ideas. Another important aspect of technology is
emphasized in Paul Romer’s work. As we already discussed in the previous chapter,
Romer’s first model of endogenous growth, Romer (1986), introduced increasing
returns to scale to physical capital accumulation. The justification for this was that
the accumulation of knowledge could be considered a byproduct of the economic
activities of firms. Later work by Romer, which we will study in the next chapter,
took a very different approach to modeling the process of economic growth, but the
same key idea is present in both his early and later work: the non-rivalry of ideas
matters.
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