Economic growth and economic development 555

Introduction to Modern Economic Growth
By non-rivalry, Romer means that the use of an idea by one producer to increase
efficiency does not preclude its use by others. While the same unit of labor or capital
cannot be used by multiple producers, the same idea can be used by many, potentially increasing everybody’s productivity. Let us consider a production function of
the form
F (K, L, A) ,
with A denoting “technology”. Romer argues that an important part of this technology is the ideas or blueprints concerning how to produce new goods, how to increase
quality, or how to reduce costs. We are generally comfortable assuming that the
production function F (K, L, A) exhibits constant returns to scale in capital and
labor (K and L), and we adopted this assumption throughout the first three parts
of the book. For example, replication arguments could be used to justify this type
of constant returns to scale; when capital and labor double, the society can always
open a replica of the same production facility, and in the absence of externalities,
this will (at least) double output.
Romer, then, argues that when we endogenize A, this will naturally lead to
increasing returns to scale to all three inputs, K, L and A. To understand why
“non-rivalry” is important here, imagine that A is just like any other input. Then
the replication argument would require the new production facility to replicate A as
well, thus we should expect constant returns to scale when we vary all three inputs,
K, L and A. But, instead, assume that ideas are non-rival. The new production
facility does not need to re-create or to replicate A, because it is already out there
available for all firms to use. In that case, F (K, L, A) will exhibits constant returns
in K and L, and increasing returns to scale in K, L and A.
Thus the non-rivalry of ideas and increasing returns to scale to all factors of
production, including technology, are intimately linked. This has motivated Romer
to develop different types of endogenous growth models, exhibiting different sources
of increasing returns to scale, but the non-rivalry of ideas has been a central element
in all of them.
Another important implication of the non-rivalry of ideas is the market size
effect, which we will frequently encounter below. If, once discovered, an idea can
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