Monday, January 2, 2012

New Growth Theory and the Opportunity State

To fully appreciate the need for an “Opportunity State" you must first understand “New Growth Theory”, also known as “Endogenous Growth Theory” (i.e. growth from within an organism… in the case the economy.) Way back in 2001 Reason Magazine did an interview of Paul Romer, the key architect and cheerleader of NGT. At the time, the libertarian mag described Romber as “The Post-Scarcity Prophet.” Here’s a snip of their interview:

reason: In terms of real per capita income, Americans today are seven times richer than they were in 1900. How did that happen?

Paul Romer: Many things contributed, but the essential one is technological change. What I mean by that is the discovery of better ways to do things. In most coffee shops these days, you'll find that the small, medium, and large coffee cups all use the same size lid now, whereas even five years ago they used to have different size lids for the different cups. That small change in the geometry of the cups means that somebody can save a little time in setting up the coffee shop, preparing the cups, getting your coffee, and getting out. Millions of little discoveries like that, combined with some very big discoveries, like the electric motor and antibiotics, have made the quality of life for people today dramatically higher than it was 100 years ago.

Consider some of the technological changes in our lives since this interview: blogs, Ebay, Twitter, Facebook, Ipads, tablets, apps, texting, Groupon, Google,, etc, etc. These are just a few of the platforms that have changed our lives, created billions in new wealth, and in each instance created new commercial tools and opportunities for millions.

The premise behind New Growth Theory is that technological innovations are virtually limitless with the proper support. Another snip:

reason: What do you see as the necessary preconditions for technological progress and economic growth?

Romer: One extremely important insight is that the process of technological discovery is supported by a unique set of institutions. Those are most productive when they're tightly coupled with the institutions of the market. The Soviet Union had very strong science in some fields, but it wasn't coupled with strong institutions in the market. The upshot was that the benefits of discovery were very limited for people living there. The wonder of the United States is that we've created institutions of science and institutions of the market. They're very different, but together they've generated fantastic benefits.

I’ll doubtless return to this great article many times in the coming months, but let me stop here. In summary, the economic theory that undergirds my notion of the Opportunity State, that is, a state that relentlessly prepares its citizenry with the tools that give them economic opportunity, is New Growth Theory. We can grow our economy exponentially from withn (primarily… outside factors will stay play a role; think energy for example) given the right set of institutions. For me, the notion of an Opportunity State (as opposed to the Welfare State) allows policy makers and theorists to create a framework for policies that will ultimately create the “unique set of institutions” that Romer believes are necessary.

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