The New Theory of Growth

Although knowledge and information are terms of common parlance, they have no established definitions and are used in a parallel or overlapping manner, especially between different scientific disciplines. Here, however, it will be appropriate to use the definitions which are at least becoming established in the language of jurisprudence in the Nordic countries. According to these definitions, knowledge is tied to individuals in that it refers to human skills or abilities which are difficult to pass on. Information, on the other hand, may be stored and transferred with ease. Human knowledge and abilities must thus first be encoded as information and only then may they be communicated to others. A recipient may then turn the information back into knowledge.

Knowledge and information are, in turn, requirements for creating ideas. These ideas may then lead to innovations, which are of crucial importance to this research. Innovations are technical or economic novelties or reforms. Although a patentable invention is naturally also an innovation, there are many other ideas which enhance the competitiveness of an undertaking, concerning such things as production concepts, product development, organisation, marketing or finance.

In the middle of the 19th century Adam Smith's Wealth of Nations contributed to the first ever change in economic policy. Smith's classical school of economics derived from personal liberty and freedom of trade and its principle factor was called the invisible hand. This was the idea that if trade were to be entirely independent of State patronage and individuals could freely seek to maximise their own benefit, then the law of supply and demand would ensure that all goods are produced in the most efficient manner to meet the demand. To this model David Ricardo later added his principle of comparative advantage, whereby each country should concentrate on producing those goods which it produces with greater efficiency than other countries. Another of Ricardo's insights was the law of diminishing returns, which holds that productivity always declines regardless of how much work and capital are invested in production. These observations are now regarded as valid and they form part of the current economic theory.