The Importance of Creative Capital for Economic Growth in the Presence of Learning by Doing

Abstract

We analyze the economic growth related effects of learning by doing in a region that is creative in the sense of Richard Florida. Firms in this region use physical and creative capital to produce output. We model learning by doing and our analysis of the working of this creative region leads to four results. First, we specify the private marginal products of physical and creative capital and the corresponding factor rewards and then explain why the physical to creative capital ratio must be identical for all firms. Second, we compute the equilibrium growth rate of consumption and then point out that this rate must equal the equilibrium growth rate of output. Third, we show how long run growth in this region is affected by changes in technology, a preference parameter, and the stock of creative capital. Finally, we compare the decentralized equilibrium growth rate in this region with the growth rate arising from social planning.

Keywords: Creative Capital, Creative Region, Economic Growth, Learning by Doing, Social Planning

JEL Classification: R11, O33