The Economics of Ideas

Human knowledge or capital are catch-all phrases that are used describe both

  • embodied skills such as the ability to use a word processor or operate a piece of machinery, and

  • disembodied knowledge, such as software code or the blue print for a machine.

But Paul Romer has emphasized the role of ideas as distinct objects separate from human capital. Romer defines ideas as “the instructions that let us combine limited physical resources in ways that are more valuable.”

Romer (1992) uses the example of two children’s toys to make his point

The difference between objects(goods) and ideas

First let’s define some terms:

  • rival – one person’s use of the good precludes another person from using the good.

  • nonrival – one person’s use of the good does not preclude another person from using the good.

  • excludable – a person can prevent anyone from enjoying the benefit of the good.

  • nonexcludable – a person can not prevent anyone from enjoying the benefit of the good.

Examples:

  • a public good – national defense – nonrival and nonexcludable

  • a private good – a pair of shoes – rival and excludable

  • a fish in the ocean – rival but largely non-excludable

  • netflix streaming – nonrival but excludable

In general

  • Objects are rival goods while ideas are non rival goods.

  • Ideas can be excludable through patent and copyright laws.

Human capital, as traditionally defined, is both rival and excludable.

However ideas such as those that come out of basic research and development are nonrival and nonexcludable.