Sandrobibi

(1) WHAT IS KNOWLEDGE?

Knowledge has become perhaps the most important factor determining the standard of living - more than land, than tools, than labour. Today's most technologically advanced economies are truly knowledge-based.

For the last two hundred years, neo-classical economics has recognised only two factors of production: labour and capital. Knowledge, productivity, education, and intellectual capital were falling outside the system. New Growth Theory is based on work by Stanford economist Paul Romer and others who have attempted to deal with the causes of long-term growth, something that traditional economic models have had difficulty with. Romer has proposed a change to the neo-classical model by seeing technology (and the knowledge on which it is based) as an intrinsic part of the economic system. Knowledge has become the third factor of production in leading economies.

Romer's theory differs from neo-classical economic theory in several important ways:

* Knowledge is the basic form of capital. Economic growth is driven by the accumulation of knowledge.

* While any given technological breakthrough may seem to be random, Romer considers that new technological developments, rather than having one-off impact, can create technical platforms for further innovations, and that this technical platform effect is a key driver of economic growth.

* Technology can raise the return on investment, which explains why developed countries can attain sustain growth and why developing economies, even those with unlimited labour and ample capital, cannot attain growth. Traditional economics predicts that there are diminishing returns on investment. New Growth theorists argue that the non-rivalry and technical platform effects of new technology can lead to increasing rather than diminishing returns on technological investment.

* Investment can make technology more valuable and vice versa. According to Romer, the virtuous circle that results can raise a...