Knowledge and the Wealth of Nations
By David Warsh
An engaging history of modern economics centered on the story behind one of its most important breakthroughs
In 1980, the twenty-four-year-old graduate student Paul Romer tackled one of the oldest puzzles in economics. Eight years later he solved it and published a paper that became the flashpoint of a decade-long debate among growth economists. In Knowledge and the Wealth of Nations, economic journalist David Warsh uses Romer’s paper as the central redoubt from which to view modern economics and one of the discipline’s oldest riddles. The paradox of falling costs, first identified by Adam Smith more than 200 years ago, came to haunt economics throughout the nineteenth and twentieth centuries—because while the problem was apparent, the tools to solve it were not.
Warsh skillfully narrates this story of scientific discovery while drawing astute portraits of the economists involved, including towering figures such as Adam Smith, Alfred Marshall, and John Maynard Keynes as well as a new wave of theorists that includes Robert Solow, Kenneth Arrow, Robert Lucas and Romer. In a fluid style, Warsh recreates the series of discussions among economists that began as early as 1979 and follows them up to the publication of Romer’s paper and beyond, chronicling the heady swarm of new ideas and the internecine battles as his fellow economists struggled with them.
The results were fundamental. In a radical transformation, economists eventually succeeded in resolving Smith’s 200-year-old quandary by internalizing technological change, and the ideas that spawn it, as part and parcel of economic growth instead of a parallel development. “New growth” as the theory came to be called, shows how the new ideas that are integral to economic growth fit into the economic system. Placing ideas at the center of this system helps to explain the dominance of first-mover firms like Microsoft or Google, underscores the value of intellectual property, and provides essential advice to those concerned with the expansion of the economy.
Former Boston Globe columnist David Warsh writes the online newsletter Economic Principals. He lives in Somerville, Massachusetts.