Diversity, discovery, and economic growth

Paul Romer is an economist who is at the vanguard of the most exciting school in the science today: New Growth Theory. Some history: until the 1960s, economists believed that economic growth resulted from two things:
  1. investing today's surplus (mostly profits) in more equipment, like factories and/or more civil infrastructure, like highways and canals
  2. adding more workers through social policy -- immigration, the baby bonus, etc. -- to accomplish more economic activity at lower cost
In the 1950s, Robert Solow amended that formula by adding technology to the mix. In Solow's view, most economic growth results from technological change -- discovery -- while some still results from the things mentioned above. As an economist, Solow didn't seek to understand why technological change occurred, but he could measure it and this came to be called the Solow Residual. The Solow Residual measures the pace of discovery: things like more viscous motor oils, more durable highway pavement, more efficient light bulbs. Imagine for a moment that in World War II you were asked by your government to build a computer with eight billion vacuum tubes; in fact, winning the war would be easier than building such a device, though today you can buy 8.56 billion transistors at Wal Mart for $10 in a 2 gig flash key.

In Solow's view, this technological change occurs exogenously -- outside of the economic system. Perhaps discoveries happen in universities, or in government labs.

Romer's contribution in the 1980s, as a young economist moving between Chicago, MIT and, for a year, Queen's University in Kingston, was to place technological change within the economy. For Romer, transistors don't become smaller because the government makes this a priority, but because every man woman and child in North America may have bought 1000 transistors in 1985 annually, via their TV remote controls, Walkmans and home computers. Today, we perhaps buy 25 billion transistors annually -- all the while directing investment to transistor development and research, while innocently playing X-box or using a remote control or answering a cell phone.

In fact, the Soviets developed the system of centralized discovery; that regime was an impressive force in science and technology, but this was never linked to the market system and so advances never went beyond the moon -- which in fact is not a good thing. The Soviet model could not benefit from compounding returns from discovery, from the X-box market funding the development of faster computers that design better transistors to make faster computers. Romer boldly projects increasing returns for humanity in perpetuity.

Richard Florida and Jane Jacobs comprise the Yin and Yang of urban theory. Jacobs prized diversity and density as necessities for a thriving city; Florida looks for thriving cities to find pools spawning the ideas that are changing the world. Famously, Florida uses a "gay index" to rate cities; though predominance of overt homosexuality in a city is unlikely to cause genius, it tends to be correlated with tolerance and openness to new ideas; while Pride Week doesn't spawn transistor development in any direct way, Florida believes that a city that can handle Pride Week is more likely to discover new things. To Florida, this diversity is exogenous; Jacobs situates it in an urban planning policy that, thankfully, Toronto has to a large degree adopted. So has New York and many other leading cities.

So, to this point in my post you have Jane Jacobs telling us how to arrange cities, Richard Florida telling us how good cities produce discovery, and Paul Romer telling us that discovery matters more than anything else when describing economic growth.

But take this interesting article by a U.S. academic, Vivek Wadhwa. Titled, America's Perilous Anti-Immigrant Protectionism, Wadhwa delves into recession-fueled Xenophobia in America -- blaming foreigners for taking "American jobs"; Wadhwa claims he himself is not excepted, receiving hate mail and threats for pointing out roughly what I have just written -- that America's immigrants are not taking "commodity jobs"; rather, they are growing the U.S. economy through discovery linked with the uniquely pervasive American market system. In simple terms, non-white people are inventing things and then employing lots of white people, all the while keeping America at the leading edge of economic growth and technology.

Wadhwa astutely notes that these immigrants, facing hate and anti-immigrant policies, may be taking their ideas elsewhere; just as many smart Jewish Germans did in the mid to late 1930s, in large part enabling the U.S. and not German to invent the atom bomb.

Much has been written about global neoliberalism and the "race to the bottom" of corporate tax rates -- certainly, states like Ireland have benefited by agreeing to charge multinationals much less tax. Horrible poverty has been wiped out in a generation by this.

But what about the race to attract the next Sergey Brin, the next Vivek Wadhwa, the next Albert Einstein? A cleavage is occurring in employment between the highly skilled and those who can only sell their labour as a commodity; the market is global for both, creating horrible pain for the unskilled and incredible opportunity for the skilled.

Growth in the global economy is from knowledge. People who are smart enough to contribute to that are smart enough, open enough to migrate globally. India and China must produce smart kids at the same rate as the U.S., or Britain -- just look at the competition in our universities at a point when the majority of people in these countries do not have access to proper education or opportunities to showcase their inheritance. In time, the cities with the right planning -- structural change -- and the states with the right policies to attract these people will quickly become better than the other ones.

[Note: this post was called Xenophobia, discovery, and economic growth; Richard Florida linked to it under the current title, which I thought was a good one, so I changed it.]

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