The Hindu Business Line : Into the fourth dimension of economics

Classical economists may have believed only in three factors of production — labour, capital and land or natural resources. But modern economists are convinced that knowledge, as a fourth dimension in economics, is more important than the original three. T. C. A. RAMANUJAM on the economics of knowledge. Investment in science and technology is a fraction of the level recommended in the Science and Technology Policy, a document which is itself sadly forgotten.

"Empires of the future are Empires of the mind."

— Winston Churchill

Classical economists believed only in three factors of production — labour or human services, capital or manmade means of production, and land or natural resources. These categories were worked out in the 17th century when the expanding global economy gave birth to modern capitalism. Economists argue that there is a limit for expansion and beyond this, the law of diminishing returns comes into operation. They sought to set norms as to who should produce what goods and for whom. Norms were brought in about work relationships and determining the size of human population.

Decreasing returns to additional investment were a familiar topic in economics. Models were envisaged about economic growth based on these old world concepts of the three factors of production. The Harrod-Domar model considered the consequences of fixed capital — labour ratios and savings propensities. The endogenous growth model visualised a system where the long run growth rate is determined by the working of the system itself.

Technical Progress

This is contrasted with the exogenous growth where the long-run growth rate is determined from outside the system, by population increase and an exogenously given rate of technical progress. In 1956, Robert Solow published A Contribution to the Theory of Economic Growth, which showed that the growth of total GDP is explained not merely by investments and population increase but by technical progress. It was, however, given to Paul Romer of Chicago University to bring out a mathematical model of economic growth focusing on knowledge as a factor of production.

New ideas, said the young professor in 1990, more than savings or investment or even education, are the key to prosperity, both to private fortunes, large and small and to the wealth of nations.

The distinguishing feature of technology as an input, according to Romer, is that "it is neither a conventional good nor a public good; it is a non-rival, partially excludable good."

These apparently unintelligible words, in the opinion of Paul Krugman, initiated a far-reaching conceptual rearrangement in economics by augmenting the familiar distinction between "public" goods, supplied by governments, and "private" goods, supplied by market participants, with a second opposition, between "rival" and "non-rival" goods.

Deviating from the traditional theory of diminishing returns on investment, David Warsh has now brought out the story of an intellectual revolution in his latest book Knowledge and the Wealth of Nations, arguing that increasing returns always happened to be a conspicuous part of reality like an "underground river" in economic thought — always there, rarely seeing the light of day.

He points out that technological change has been internalised as part and parcel of economic growth instead of being a parallel development.

The new growth theory shows how new ideas that are integral to economic growth fit into the economic system itself.

Building on Romer's paper on Endogenous Technological Change, David Warsh cast new light on the ubiquitous role of ideas in the economics of everyday life — meaning trade secrets, formulae, trademarks, algorithms, mechanisms, patents, scientific laws, designs, maps, recipes, procedures, business methods, copyrights, bootleg copies.

Collectively, the economics of knowledge. These economists now argue that furthering the growth of knowledge, and ensuring that its benefits are widely shared are the responsibility of the government and every bit as important as monetary and fiscal policy.

The emphasis here is on the spread of knowledge and its utilisation in industry and agriculture. It was widely believed that China may be the factory of the world but India would be its laboratory, what with the growing prowess in nuclear and information technology sectors. But officials of the US Navy and global defence suppliers such as Northrop have submitted a report about the insufficiency of India's scientific endeavour.

No wonder, Prof C. N. R. Rao bemoans the decline of Indian science. One of the parameters for judging interest in the development of science and technology can be the investment in Research and Development. The Human Development Report 2005 provides data on R&D expenditure, the Human Development Index and patent applications for various countries.

Just-in-time

The current thinking among Western economists is that knowledge as a fourth dimension in economics is more important than the original three factors of production.

This has led to the development of the concept of `Just in Time', which focuses on a system of production using minimal inventories and relying on prompt and frequent deliveries of materials and components from suppliers, arriving just before they are needed.

The system also relies on prompt and reliable reporting of stock holding, which is facilitated by the use of computers. It has the advantage of reducing the space needed to store inventories and the interest cost of financing them. This means not merely conquest of time but also of space.

Computers have brought about innovative techniques in communication. Affordable, fast global communication, online commerce, the ability to find the answer to almost any question on the web using a search engine, and the many other wonders of the Internet are all underpinned by the widespread availability of inexpensive, powerful PCs.

We are gloating over our achievement as the world leader in BPO, forgetting the fact that the BPO industry itself is only a shadow; the principal reality lies in the West.

Raise tech investment

India adopted a Science and Technology Policy in 2003 and laid down that investments in science should be pushed to a desirable level of 2 per cent of GDP to sustain healthy economic growth.

The present investment in science and technology is a fraction of that level. The S&T Policy document ordained that science-based ministries and departments should be run only by scientists and technologists and all other ministries should have an in-house scientific advisory mechanism. The policy document was forgotten the day after it was released; a pity.

Yet, all is not lost. Fifteen-year-old S. Chandrasekar of Tirunelveli (from deep Tamil Nadu) has become the youngest person to pursue an M.Tech course at IIT Madras. He bagged the Microsoft Certified Systems Engineer Certificate at the age of 10. He has even published a paper on Intrusion Detection Systems: A Survey. India needs thousands of such Chandrasekars for rapid economic growth.

(The author is a former Chief Commissioner of Income-Tax.)