A Tale of Two Capitals: Modeling the Interaction between Ideas, Physical Capital, and Growth

Abstract

This paper models the relationship between innovation and sustained economic growth through as being mediated by institutions that calibrate a 'structure of technological production' analogous to capital-based models of the structure of production. Our framework discusses two types of capital: physical capital and ethereal capital (productivity-enhancing ideas). We cast these two structures in a network, the structure of which is determined by the institutions of a society. Predictions derived from this model may resolve some puzzles in the history of economic growth, such as ancient inventions 'far ahead of their time' failing to stimulate sustained growth, the phenomena of simultaneous independent invention, and failures of technology transfers.

Keywords: Innovation, technology, economic growth, institutions, capital theory, invention

JEL Classification: O43, O30