Here is my first article of a series on Economics of Growth, titled "Knowledge and Growth". You can read the article's first paragraphs here.

Download the full article on PDF or LIT formats. LIT files can be read using Microsoft reader on any Pocket PC device.

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We live in a world of ever deeper contrasts. While North American children get to enjoy a new and much improved videogames console every 16 months, Mozambique’s kids get to play with same trash tin technology that already entertained their grandparents, decades ago.
Of course that North America, Mozambique, and the entertainment technology are just examples, and that not all the entire population fits the scenario. But maybe it’s a good enough example of the huge differences between countries sharing the same XXI century.
How economies grow is an important question. In 1957, Robert Solow presented a mathematical model showing that sustained economic growth depends largely on technological advancement. Solow’s model assumes a production function (Y) that measures output from the variables capital (K) and effective labour – a term that combines the inputs knowledge (A) and labour (L).

Solow’s model doesn’t explain technological change, but states that only technological progress can have growth effects; this is why it is labeled as an exogenous technological change growth model.
This is a diminishing returns model, meaning that, over time, output is expected to decrease. The rate of growth of output per capita and the rate of return on investment are expected to decrease, as capital stock increases. This makes sense to some extent: after all, any equipment a firm buys today will be worth less money tomorrow, the same way people (human capital) tend to have a performance peak on their early lives.
As a consequence, on the long run, thinking in aggregate terms, for different countries, wages and K/L ratios will converge, shadowing the relevance of the initial conditions and whatever might happen along the road… and that doesn’t make much sense, for what reality shows looks like more the opposite.

If we think on feedback mechanisms, diminishing returns can be seen as a healthy or negative one: if something pushes in one way, something else pushes the opposite (negative) way, towards a homeostatic (equilibrium) state. The term “healthy” comes from Medicine, for when there is a disease, the body fights against it. Unfortunately, economies aren’t that self-regulatory – Adam Smith’s invisible hand might not exist.
For many countries, what data shows is a positive feedback trend. The rich get richer; the poor get poorer. The increasing returns of the so-called developed countries contrasts with the increasing difficulties of the so-called third world.
The problem with diminishing returns models might be the non tangible assets, and today’s economies strongly depend, more and more, on such ethereal goods…

On Solow’s production function – Y(t)=F(K(t),A(t)L(t)) – the effective labour factor, implies that knowledge only directly affects labour. Relating this with Keith Smith’s papers on “the Knowledge Economy”, it emerges the feeling that knowledge is not fully accounted. Knowledge is also present (incorporated) in physical assets, and it is codified on broadly spread knowledge bases which are some of the consequences of its public good characteristics: nonrivalous and partially nonexclusive consumption .
The fact that knowledge has these attributes, makes it accumulable per capita without bond (since the exact same knowledge can be shared among millions, across time) and hard to contain, making it easy for spillovers and positive externalities (for example, the knowledge bases).

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