Paul Romer Says Knowledge is the True Fountain of Wealth – 2 of 2

Professor Romer accepted that perfect competition is not necessarily possible with technology. He threw away perfect competition as a simplifying assumption for equilibrium.

(Start of Part 2 of 2)

Subsequent research has shown that despite apparent imperfect competition, monopoly may not necessarily follow. Unlike the time of Adam Smith, rapid obsolescence of technology, consequent changes in business, and convergence actually place a limit on monopoly power. Note IBM and even Microsoft. Congestion in the technology channel as with bandwidth, speed of diffusion, physical limits like atomic sizes in the case of circuit widths, will likewise constrict monopoly power.

“The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.”

Professor Romer’s conclusions also raise danger signals for technology follower countries like the Philippines. It places full importance on education and research (STI) and on learning-by-doing (DUI). With our focus on exporting the learned as OFW’s, the easy way out, we leave the country further and further behind.

He also concludes that globalization will increase growth rates. This is a consequence of network effects which value is determined by Metcalfe’s law. The law says value is determined by number of nodes (that must be in contact). The fine print is in the phrase ‘in contact’. This is the assumption that nodes, like those in the Philippines, trade with equal or better terms of trade to benefit to become a virtuous cycle.

His final conclusion implies that only population that are educated and knowledgeable will create growth. Thus, there is a practical requirement to letting populations grow; the society must be able to educate and make its people productive participants for that society to grow.

Unlike Black-Scholes option pricing theory that had almost immediate benefit as new technology, even some economists still struggle to understand the Romer paradigm shift. Internet-enabled businesses like marketing portals, search, gaming and social media networking already benefit from the effects described in Professor Romer’s research.

Historically, it does take 15 – 25 years for a new technology to be diffused and yield its benefits to society at large. As of today, his research has seen the light for 18 years already. Entrepreneurs in new economies are starting to get what exclusion means:

The learning for the innovative entrepreneur is that the modern successful product has embedded knowledge from research, market insight, adjacent markets or new business models, but make excludable. He then uses network effects to distribute and re-capture values.

(Click here for Part 1 of 2.)