Economic growth and new ideas

by / Tuesday, 02 May 2017 / Published in Director's Blog

Economic growth and new ideas

2017/05/02


Are Ideas Getting Harder to Find?

by Nicholas Bloom, Charles I. Jones, John Van Reenen and Michael Webb_

Stanford University, MIT and NBER, March 13, 2017 Version 0.7

http://web.stanford.edu/~chadj/IdeaPF.pdf

Summary of the article

Economic growth arises from people creating ideas, and the long-run growth rate is the product of two terms: the effective number of researchers and the research productivity of these people called “idea TFP” (TFP = Total-Factor Productivity).

Research effort is rising substantially, while research productivity is declining sharply. We can write:

Idea TFP = nº of new ideas / nº of researchers

The standard hypothesis, in much of the growth literature, is that idea TFP is constant over time.

Under this hypothesis, a constant number of researchers can generate exponential growth (constant growth rate). In other words “constant idea TFP” and the fact that sustained research subsidies produce “permanent growth effects” are equivalent statements.

The empirical finding reported is that idea TFP is declining virtually everywhere. This poses serious problems for endogenous growth models.

Let’s take for instance Moore’s law that states the number of transistors in a microprocessor doubles every two yeras. While there is some discussion of Moore’s Law slowing down in recent years (there always seems to be such discussion!), we will take the exponential growth rate of transistors, as corresponding to a constant flow of new ideas at a rate of 35% per year.

Moore’s Law is not a law of nature but is instead a result of intense research effort: doubling the transistor density is often viewed as a goal or target for research programs. The striking fact, shown in Figure, is that research effort has risen by a factor of 78 since 1971. This massive increase occurs while the growth rate of chip density is more or less stable: the constant exponential growth implied by Moore’s Law has been achieved only by a staggering increase in the amount of resources devoted to pushing the frontier forward.

Economic growth and new ideas 01

No matter how R&D spending is measured, we see a large increase in effective research and a corresponding large decline in idea TFP. Even by the most conservative measure, idea TFP falls by a factor of 25 between 1971 and 2014. Therefore, the hypothesis of the constancy of idea TFP is proven false in the case of Moore’s Law.

Another activity to measure the idea TFP is for instance the evolution of crop yields. Crop yields and agricultural R&D spending are relatively well-measured for various crops … On average, idea TFP declines for crop yields by about 6 percent per year using the narrow definition of research and by about 4 percent per year using the broader definition.

Life Expectancy: Health expenditures account for around 18 percent of U.S. GDP, and a healthy life is one of the most important goods we purchase. U.S. life expectancy at birth and at age 65 is shown in the figure below.

Economic growth and new ideas 02

Life expectancy is one of the few economic goods that does not exhibit exponential growth. Instead, arithmetic growth provides a better description of the time path of life expectancy: 1.8 years each decade for life expectancy at birth, and 0.9 years per decade at age 65.

The research input aimed at reducing mortality from a given disease is harder to measure. Nevertheless, the authors have a solution by measuring the number of scientific publications (“publications”) in PUBMED with a given MESH (Medical Subject Heading) term. A narrower approach (“trials”) restricts to those publications that correspond to a clinical trial. Rather than using scientific publications as an output measure, as other studies have done, they use publications and clinical trials as input measures to capture research effort.

Economic growth and new ideas 03 Economic growth and new ideas 04

The figure above shows the research effort, in logarithmic scale, for two main causes of death in the United States: cancer and hearth disease.

Idea TFP for medical research applications is computed as the ratio of years of life saved to the number of publications.

Economic growth and new ideas 05 Economic growth and new ideas 06

For all cancers, idea TFP rises until the mid 1980s and then falls. Overall, it declines by a factor of 1.2 using all publications and a factor of 4.8 using clinical trials. The decline for heart disease is even larger

Between 1975 and the mid-1980s, idea TFP for cancer research increased quite substantially. The production function for new ideas is obviously complicated and heterogeneous. This case suggest that it may get easier to find new ideas at first before getting harder, at least in some areas.

Conclusions

Idea TFP is declining at a substantial rate in virtually every place we look. We can quantify the magnitude of the declines in idea TFP by reporting the half-life in each case. Idea TFP declines at an average rate of 5.3 percent per year, meaning that it takes around 13 years for idea TFP to fall by half. Or put another way, the economy has to double its research efforts every 13 years just to maintain the same overall rate of economic growth.

Some goods, like semiconductors, can have rapid productivity growth, while other goods like the speed of airplanes or perhaps the education industry itself could have slow rates of innovation, depending on the elasticity factor ß that measures the extent of dynamic diminishing returns in idea production. Nevertheless, all products could exhibit constant exponential growth if the amount of research effort put toward innovation is itself growing exponentially.

Reference: Director’s Blog 20170502 – Cuatro economistas dan con la clave de por qué no crece la productividad  Tendencias  EL PAÍS Retina.pdf


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