How Many Innovations Need to Be Produced in the Process of Endogenous Growth with Fluid Intelligence

Abstract

In innovation-based endogenous (Schumpeterian) growth theory, the production of innovations is constrained basically by the finite nature of the labor supply. In this paper, I show that innovations are constrained because (1) the amount of fluid intelligence of researchers in an economy is limited and (2) the returns on investments in technologies and in capital are kept equal through arbitrage in markets. With these constraints, equilibrium values of the number of researchers and their average productivity in an economy exist, and the equilibrium value of average productivity determines the amount of innovation production in each period. Distributions of fluid intelligence among researchers are most likely heterogeneous across economies, but if economies are open to each other, an economy with a smaller number of researchers with a high level of fluid intelligence can grow at the same rate as an economy with more of them.