Growth theory & the role of knowledge
Posted by John Humphreys on March 3, 2007
Standard growth theory suggests that there are four basic factors of production:
* Land & resources
* Capital (including human capital)
* People
* Technology/knowledge
These are combined in the identity: y/n = A f (k, l)
Where y = income, n = population, y/n = per capita income, A = technology, k = capital, l = land/resources.
But capital is simply the combination of base resources (land, resources, people) combined with knowledge. So in essence there are only two factors of production — base resources (land, resources, people) and knowledge. Most things are a combination.
It is important to consider “knowledge” as broader than simply “technology”. There are two types of knowledge — technical knowledge & personal knowledge (Hayek). Both are necessary in production.
Assuming knowledge is constant then an economy will move to a steady state of per capita income using all available resources with all available knowledge. To consider economic change (including economic growth) it is necessary to consider changes in knowledge.
Conclusion: the study of economic growth & change is the study of changing knowledge
