This is a very important fact for understanding the broad sweep of human history and it is very different from what we are used to thinking about in terms of physical objects, where scarcity is the overwhelming fact with which we have to deal.
S&B: You say we are getting better at finding new things. What exactly do you mean by that?
Paul Romer: There are only a finite quantity of things with which we can work -- basically, the matter in the earth's crust. We've had essentially the identical amount of physical stuff for millions of years. Now a lot in the language of economics -- and in the popular language, as well -- makes it appear as if we are wealthier today because we have more of this physical stuff. It makes it sound as if we have actually produced more physical things. But in truth, that is not right. If you think about it the way a physicist does, the law of the conservation of matter and energy states we have essentially the same quantity of things we have always had.
S&B: So what have we done?
Paul Romer: We have taken the fixed quantity of matter available to us and rearranged it. We have changed things from a form that is less valuable into a form that is more valuable. Value creation and wealth creation in their most basic senses have to do with taking physical objects and rearranging them.
Now, where do ideas come in? Quite simply, ideas are the recipes we use to rearrange things to create more value and wealth. For example, we have ideas about ways to make steel by combining iron with carbon and a few other elements. We have ideas about how to take silicon -- an abundant element that was almost worthless to us until recently -- and make it into semiconductor chips.
So we have physical materials to work with -- raw ingredients -- which are finite and scarce, and we have ideas or knowledge, which tell us how to use those raw materials. When I say there are always more things to discover, what I mean is that there are always more recipes that we can find to combine raw materials in ways that make them more valuable to us.
S&B: What you are saying sounds straightforward enough. What does it mean for the economy and for growth?
Paul Romer: The claim I made a moment ago about standing on the shoulders of giants tells us something important. It says that we can take advantage of a form of increasing returns in the process of discovery. Now it could have been -- I suppose -- that with each new discovery, it got harder and harder to make additional discoveries. In that case, we would -- at some point -- simply give up. Progress would be slowing down and eventually would come to a halt. Of course, this is not what we see when we look at history. From one century to the next, the rate of technological change and the rate of growth of income per capita has been speeding up.
S&B: This is contrary to discovery in the physical world, isn't it?
Paul Romer: Yes. The physical world is characterized by diminishing returns. Diminishing returns are a result of the scarcity of physical objects. One of the most important differences between objects and ideas, the kinds of differences that I alluded to before, is that ideas are not scarce and the process of discovery in the realm of ideas does not suffer from diminishing returns.
S&B: One of the differences? Are there other differences as well?