Growth: With or Without Scale Effects?

The discovery of new ideas is the engine of growth in many recent growth models. As emphasized by Paul Romer (1986, 1990), ideas are different from most goods analyzed in economics in that they are nonrivalrous: the use of an idea by one person does not preclude, at a technological level, the simultaneous use of the idea by another person, or even by many people. This leads to a tight link between ideabased growth models and increasing returns to scale. To take a simple example, consider the production of the latest best-selling novel, the hottest-selling computer game, or the new Volkswagen Beetle. To produce the first unit of any of these items requires a large amount of effort: the novel must be written, the computer game must be created, and the Beetle must be (re)designed. But clearly these are one-time costs. The ‘‘idea’’ underlying each product only needs to be created once. Afterwards, subsequent units might plausibly be described as being produced with a constantreturns-to-scale production function, following the standard replication argument. The idea is nonrivalrous in the sense that it can be used for each unit simultaneously. Total production of novels, computer games, and automobiles is then characterized by increasing returns once the fixed cost of creating the idea is taken into account. It is this fundamental link between ideas and returns to scale that gives rise to a basic scale effect in idea-based growth models. In the first wave of such models in the recent growth literature ( the models of Romer [1990] , Gene Grossman and Elhanan