The Idea

The volume has circled a single truth without yet naming it. Growth, the great exception, broke a trap that had held for ten thousand years (the trap); accumulation, the obvious engine, runs into diminishing returns and stalls at a standstill (the steady state); the real engine, the residual, is technological progress, which advances by the churning destruction of the old by the new (the churn) and spreads to the nations that build the conditions to absorb it (the catch-up). Through all of this runs one thread, and the flagship's task is to draw it out and follow it to the bottom: that the source of lasting growth is not things but ideas, and that ideas obey a law entirely unlike the law of things. The economist who made this precise, and who showed why it means that growth need never end, was Paul Romer; and his insight is the deepest reframing the whole table contains — the point at which the economics of scarcity turns into the economics of abundance.

Begin with the world the rest of economics describes: a world of scarce, rival things. Almost everything economics studies — land, labor, capital, goods — is rival, which is to say that its use by one person precludes its use by another. If I eat the loaf, you cannot; if I work the hour, I cannot also work it elsewhere; if this acre grows my wheat, it cannot grow yours. Rival things are scarce by nature, and scarcity is the premise from which all the rest of economics flows: prices ration the scarce thing, markets allocate it, and adding more of it while holding the rest fixed yields diminishing returns. In a world made only of rival things, the classical conclusion is inescapable, and Malthus and Solow both reached it: growth must end, because the rival inputs are limited and the returns to piling them up diminish. The economics of scarce things is an economics that runs down toward a stationary state. For all of history before the great escape, this was the only economics there was, because humanity lived almost entirely off rival things.¹

Now consider the thing that is not rival: an idea. A formula, a design, a method, a recipe — once it exists, it can be used by anyone, and its use by one does not in the least diminish its availability to another. If I teach you a theorem, we both have it whole; if a method of making steel is discovered, every steelmaker on earth can use it at once, and my using it takes nothing from your using it. An idea is non-rival: it can be used by everyone, everywhere, simultaneously, and forever, without being consumed, divided, or diminished. This is the property that changes everything, and it is worth dwelling on how total the contrast is. The loaf of bread is rival and feeds one; the recipe for the loaf is non-rival and feeds all who know it, without itself being eaten. Things are used up in the using; ideas are not. And because the great majority of what economics had always studied was things, the great majority of economics had never reckoned with the strange and generous logic of the one input that does not run out.²

From non-rivalry follows the escape from diminishing returns, and with it the possibility of growth without end. Recall why accumulation stalls: adding more capital to a fixed number of workers yields less and less, because the new capital is spread over the same labor and runs into the wall of diminishing returns. But an idea is not added to a fixed stock and spread thin; it is applied everywhere at once and improves the productivity of all the labor and all the capital simultaneously. A better method of making steel does not make one furnace a little better while the rest stay the same; it makes every furnace better, and a still better method tomorrow improves them all again. Ideas do not diminish as they accumulate, because each new idea raises the productivity of everything, not just of the marginal unit. So an economy that keeps producing new ideas can grow without the brake that stops an economy growing by accumulation; the diminishing returns that doom the piling-up of things simply do not apply to the discovery of ideas. This is the heart of what came to be called endogenous growth: the rate of growth is not handed down from outside, as Solow's manna was, but is produced within the economy, set by how much of its effort and talent it devotes to the making of new ideas.³

What keeps the ideas coming, and why need they never run out? Romer's image is the recipe. An idea, at bottom, is a recipe — a set of instructions for arranging the raw matter of the world into a more valuable configuration. The atoms that make a microchip are worth almost nothing as sand; arranged according to the right recipe, they are worth a fortune, and the difference is entirely the idea. Economic growth, in this light, is the discovery of ever better recipes for arranging the world's fixed stock of atoms into more valuable forms. And here is why growth need not stop: the number of possible recipes — possible arrangements of matter — is so unimaginably vast that we have explored only the most negligible fraction. The space of undiscovered ideas is, for all practical purposes, inexhaustible; we will never run out of better ways to arrange the world long before we run out of anything else. The pessimism that sees the limits of growth in the exhaustion of physical resources — the fear that a finite world cannot sustain endless growth — mistakes the source of wealth. Wealth was never in the atoms, which are fixed and finite; it was always in the recipes, which are effectively unlimited. Growth is not the consumption of a dwindling stock of stuff but the discovery of an endless supply of ideas about what to do with it.⁴

This is the answer to the riddle the volume began with — why the great escape happened, and why around 1800. For all of history, humanity lived off rival things, and so lived under the law of diminishing returns and the Malthusian ceiling it implied; every gain in the rival stock was eaten by more mouths, and the standard of living could not rise. The escape came when the production of non-rival ideas accelerated to the point where the generous, non-diminishing engine of knowledge overtook the grudging, diminishing world of things. The Industrial Revolution was, at bottom, the moment the making of new ideas became fast enough and self-sustaining enough to outrun the old constraints — the moment when knowledge began to compound. And compounding is the right word, for ideas build on ideas: each discovery opens the way to others, every new recipe becomes an ingredient in recipes not yet imagined, so that the stock of knowledge grows not by addition but by multiplication. The hockey-stick curve of world income, flat for ten thousand years and then turning almost vertical, is the curve of accumulated human knowledge — the visible shadow of the compounding of ideas. Growth, in the end, is what it looks like when a species learns to remember and to build upon what it has learned.⁵

If ideas are non-rival and available to all, the question the author placed at the volume's center returns with new force: why, then, do some nations grow rich and others stay poor, when the world's ideas are there for all to use? The answer lies in the two things non-rivalry does not by itself provide. First, ideas must be produced, and producing them is costly — it takes investment in research, in education, in the talent and the time of those who discover; and because an idea, once made, can be copied freely, no one will bear the cost of making it unless the rules let the maker capture some reward, which is why growth depends on institutions that reward innovation, the patents and markets and property the churn described. Second, ideas must be adopted, and adoption is resisted — by the incumbents whom the new idea would ruin, who use their power to block it, so that a society grows only if its rules prevent the powerful from strangling the new to protect the old. Both of these — the incentive to make ideas and the freedom to adopt them — are matters of institutions, which is the architect's domain. The world's knowledge is a common inheritance, non-rival and free for the taking; but a nation claims it only if it has built the engine to produce its share and the openness to absorb the rest. The nations that grew rich built that engine; the nations that stayed poor did not, or were prevented. Growth is the compounding of ideas, and institutions are what decide whether a society's idea-engine runs or seizes — which is how this volume, tracing the wealth of nations to its deepest source, arrives exactly where the architect stood, by a different road.⁶

Stand back, now, and see how far the ground has shifted. The rest of economics is the science of scarcity — of how a society allocates rival things that are never enough to go around, under the iron law of diminishing returns. But the most important economic phenomenon of all, the growth that lifted humanity out of the trap, runs on the one input that is not scarce in that way: ideas, which are non-rival, which do not diminish, and which can be multiplied without apparent end. So the deepest truth about growth inverts the deepest premise of everything else economics studies. The wealth of the modern world is not, at bottom, the accumulation of scarce things — the hoard of gold, the stock of capital, the dominion over land — but the accumulation of abundant ideas, the compounding inheritance of human knowledge. The classical economists, reasoning faithfully about a world of rival things, foresaw a stationary state and an end to growth; they were not wrong about things, which do run down toward a standstill. They were wrong about ideas, whose existence as a separate and non-diminishing source of wealth they did not reckon with. And the whole gap between the world they predicted and the world we live in — between the trap and the great enrichment — is the difference that ideas make. Economics began as the science of scarcity; growth reveals that the master fact of the modern age is an abundance.⁷

Growth is the first and grandest of the aggregates, and the volume has traced it to its bottom: the compounding of non-rival ideas, set running by the institutions that reward their making and permit their use. But the economy taken whole does not only grow; it has other great motions, and they are the subjects of the family this volume opens. Around the long upward trend of growth, the economy swings in shorter rhythms of boom and slump, in which the willing worker can fail to find work for reasons that have nothing to do with the trend — the cycle. Threading through it all runs the changing value of money itself, the slow erosion or collapse of what every price is measured in — the level. And the growing product, however large it becomes, must be divided between those who labor and those who own, in a split that growth does not settle and may even sharpen — the share. For a rising tide does not lift all boats together, and the very ideas that drive the enrichment may enrich their owners far faster than the rest, so that the grandest of the aggregates hands directly to the others the questions it cannot answer alone. The fifth family, the aggregates, opens here, with the trend; the plates to come turn to the motions around it — the cycle, the level, and the share. Growth has shown the economy at its most magnificent, compounding the knowledge of a species into the wealth of nations. It remains to ask why that wealth sputters, what its measure is worth, and to whom it falls.⁸

An idea is not used up when it is used. That single property — non-rivalry — is the seed from which the whole modern world has grown. Because ideas can be shared without being divided, applied everywhere at once, and combined without limit, they escape the diminishing returns that doom the accumulation of things and bring every economy of mere stuff to a standstill. Growth is the compounding of ideas; the wealth of nations is the residue of discovery; and the difference between the rich and the poor is, in the end, the difference between the societies that built the engine to make and to use ideas and those that did not. Malthus described the trap of a world living off scarce things, and was right about that world. Romer described the escape of a world enriched by abundant ideas, and was right about ours. Between the two stands the great enrichment, the most important fact in economic history, and its explanation is the simplest and the strangest in all of economics: that a people grows rich not by hoarding what is scarce, but by discovering what can be shared without end.