So there's another way to look at economic growth through the New Growth Theory. This is a different theory that focuses on Technology. New Growth Theory takes a different approach to modeling economic growth. So far, we've been talking about productivity, right, when we are talking about economic growth. Well, this is focused on technology. The idea here is that technological change is the key to productivity growth. New technology is going to drive new productivity growth and that makes sense. We saw that even on the per worker production function that whenever we had technological change, well, that boosted it up, right? So economic incentives can increase the rate at which technologies are developed. If the government can incentivize people to focus on new technology, well, that's going to increase economic growth.
Let's think about what this new growth theory discusses. One of the key terms here is Knowledge Capital. And the idea here is that the economy has a certain level of Knowledge Capital and this is the amount of knowledge available. This isn't exactly human capital. This is kind of just the availability of knowledge. It represents available technology that what technology is available in the economy and knowledge. So a firm can increase its personal knowledge capital, the knowledge capital of its firm by emphasizing research and development. By emphasizing research and development, they can increase the knowledge that they have, right? They can test new things, test new productive activities, and see what leads to higher production, right?
So by increasing their knowledge capital, well then they become more productive right? And like we saw in that per worker production function right? What did it tell us about physical capital? What did we see happening with physical capital in the per worker production function? That function had capital over here, physical capital, and output over here. Output on this axis. Well, we saw that the per worker production function looks something like this. Right? Where as we added more and more capital, the increases in output were smaller. So we had diminishing returns. Right? Diminishing returns to our physical capital.
However, let's think about knowledge. When there's new knowledge that's found out, well it increases the firm's knowledge but also the knowledge of the economy as a whole, right? If we think about some new idea gets introduced, like cell phones, for example. When cell phones were first adapted, well, at first, the firm that created the cell phone had its increase in knowledge, but then the economy as a whole grew because of the knowledge of the cellphone, right? So when we think about Knowledge Capital, not only does the firm benefit but the whole economy benefits. So when we think about knowledge capital, it's thought to have increasing returns rather than diminishing returns because not only does the firm grow, but the whole economy grows as well.
This is because knowledge is a public good. Remember when we talked about public goods in earlier chapters? Public goods are things that are non-rival. So just because you know something doesn't mean I can't know it as well, right? It doesn't mean that only one person can know it. If I know 2+2 equals 4, that doesn't stop you from knowing 2+2 equals 4, right? So it's non-rival and it's non-excludable. So more than one person can know it, and you can't keep somebody from knowing it either, right? If the knowledge is available, well, they can learn it. So in this sense, when one firm does R&D and discovers something, other firms can benefit from that R&D as well.
So when the first firm developed cell phones, other firms kind of were able to see what technology they were using and create their own cell phones as well, and that increased the knowledge as a whole, right? So this was the idea of free riding. Remember, we're talking about free riding where you're taking a free ride on someone else's work, right? So firms are able to grow on other firms' knowledge. So how can the government help increase knowledge capital? Since knowledge is so important in this theory, the knowledge capital, well, the government can offer first patents for intellectual. Here in the United States, a patent, when you say you did this research and development and you created this new lawnmower that mows the lawn, and you just look at it and it just mows the lawn, right? Well, you have the exclusive right to create this product for the next 20 years. After those 20 years, well, other people can start to imitate it, right? But for those first 20 years, you have that protection so you can make money off of your invention, okay? So notice how this kind of goes hand in this kind of conflicts with what we were just talking about knowledge capital. How one firm learning something allows other firms to learn it as well. What if they have a patent, the other firms can't copy it. However, the patent is just for 20 years, right? It's only for 20 years and then that knowledge becomes a public good. Okay?
So governments can also support research and development by offering subsidies or grants or tax breaks by giving firms, you know, some sort of monetary benefit for research and development that'll help them incentivize their research and development there. And lastly, subsidizing education. Right? If we have higher human capital, the more human capital we have, well then our research and development is going to be more productive and we have more chances of having some sort of technological breakthrough. Thank you.
