Reviews of Economic Development

ii New Growth Theory emphasizes that economic growth results from the increasing returns associated with new knowledge. Knowledge has different properties than other economic goods (being non-rival, and partly excludable). The ability to grow the economy by increasing knowledge rather than labor or capital creates opportunities for nearly boundless growth. Markets fail to produce enough knowledge because innovators cannot capture all of the gains associated with creating new knowledge. And because knowledge can be infinitely reused at zero marginal cost, firms who use knowledge in production can earn quasi-monopoly profits. All forms of knowledge, from big science to better ways to sew a shirt exhibit these properties and contribute to growth. Economies with widespread increasing returns are unlikely to develop along a unique equilibrium path. Development may be a process of creative destruction, with a succession of monopolistically competitive technologies and firms. Markets alone may not converge on a single most efficient solution, and technological and regional development will tend to exhibit path dependence