GLOBAL FINANCE

countries, needs are often so basic and urgent that such a debate can
seem irrelevant.

PAUL ROMER: NEW GROWTH THEORY

Paul M. Romer, a Professor of Economics at Stanford University, is a
leading developer of ``new growth theory,'' which attempts to explain
the dynamics of wealth creation better. He argues that while classical
economic theory is good at explaining how extracting natural resources
works, it does not properly explain the ``information economy.''
Extracting natural resources such as oil from the earth is subject
to diminishing returns: as more oil is produced, there is less of it
left and extraction becomes more expensive. In the case of computer
software or biotechnology, however, there are large initial develop-
ment costs, but the costs of subsequent production are very small. For
example, once you have designed a bacterium to produce a desired
product say, insulin there is almost no limit to the amount you can
produce.

Classical economics sees labor and capital as the two inputs that

increase productivity (output) to increase production, you either
employ more workers or invest in better machinery. Romer argues
that technology and knowledge are also ``inputs'' new designs and
techniques can also increase productivity. In high-tech industries,
productivity has massively increased for decades while prices have
declined, the opposite of what happens with finite resource extraction.
The more we invent and discover, the better we get at the process of
discovery, so our ability to create growth and value builds on itself,
says Romer.

Romer thinks that having an economy conducive to having and

applying ideas may be more important than having resources or capital.
Japan lacked resources and capital, for instance, but has achieved
astounding growth over the last 50 years. Romer comments:

``The lesson from the Japanese experience is clear: mundane forms
of applied research, such as design work or product and process
engineering, can have large cumulative benefits for the firm that
undertakes them and even larger benefits for society as a whole.
Moreover, the gains from applied research are largest not when it