Stop Crying over Spilt Knowledge: A Critical Look at the Theory of Spillovers and Technical Change

This essay analyzes critically the idea of knowledge spillovers, especially as it enters the New Growth Theory. The conventional theory of spillovers, we argue, suffers from a thin and misleading account of the nature of productive knowledge. In this model, firms undersupply R&D, which impedes economic growth and calls for research subsidies. We argue, by contrast, that a more subtle picture of the creation of knowledge, and the presence of network externalities (including true Marshallian external economies), tend to reverse the predictions of neoclassical theory: spillovers may actually lead to increases in the production of new knowledge