Growth and Recipes (Pranav Wadhwa)

Importance of ideas in economic growth

Ideas have generally been ignored or sidelined in discussions of economic growth and
development. Economic growth has been explained using accumulation of physical and
human capital. Technological change has been considered to be exogenous. However
historical growth evidence of many countries’ suggests (to be described in subsequent
sections) that there is something extra like innovation, or discovery of new ideas that is
needed to understand and explain growth.

It is true that increases in value of the human capital and physical capital explain the
increases in economic growth. But what is the meaning of saying that the productivity of
an average worker today is far more than a worker in the last century. For example, a
computer can perform the same tasks multiple times faster than it would have done ten
years ago even though it is manufactured in the same way. Similarly, with respect to
human capital, a person today can be more valuable than a person ten years ago even
though the brain is made of same neurons. So the critical question is what causes this
increase in value of physical and human capital. The answer is ideas.

Rearrangement of resources in ways that make them more valuable leads to economic
growth. Ideas are a form of instruction manual or recipes that let us combine limited
physical resources in arrangements that are ever more valuable. For instance, consider
the example of a kitchen. You use a recipe to combine your fixed ingredients into
something valuable that you can eat. However, the amount you can cook is limited by
the supply of your ingredients. So you cannot keep increasing the quantity of your dish
by doing more and more of the same kind of cooking as we would eventually run out of
raw materials. Similarly there are limits to economic growth you can achieve on the
basis of finite resources. Economic growth thus occurs from better recipes, not just
from more cooking.

Big ideas and small ideas

Ideas could be very small discoveries or big inventions. A small discovery could be in
the form of a new design for the cups and lids in a coffee shop that allows using the
same size lid for small, medium, and large cups of coffee and reducing overall costs.
Big innovations could be in the form of discoveries of electric motor or antibiotics. The
discovery of big ideas together with millions of little inventions makes persistent
economic growth possible.
Potential for new discoveries

The potential for discovering new ideas has always been underestimated. There is no
dearth of ideas to be discovered. To get a sense of the extent of the scope for
discovering new ideas we can consider an example from chemistry. There are more
than hundred elements in the periodic table. To make a compound using four different
elements we have 100 × 99 × 98 × 97 = 94,000,000 possibilities. If we also allow for
different fractions of each of the four elements it would further increase the possibilities.
Therefore, there is an enormous scope of new ideas that can be discovered.