Working Paper: NBER ID: w28340
Authors: Charles I. Jones
Abstract: New ideas are often combinations of existing goods or ideas, a point emphasized by Romer (1993) and Weitzman (1998). A separate literature highlights the links between exponential growth and Pareto distributions: Gabaix (1999) shows how exponential growth generates Pareto distributions, while Kortum (1997) shows how Pareto distributions generate exponential growth. But this raises a "chicken and egg" problem: which came first, the exponential growth or the Pareto distribution? And regardless, what happened to the Romer and Weitzman insight that combinatorics should be important? This paper answers these questions by demonstrating that combinatorial growth in the number of draws from standard thin-tailed distributions leads to exponential economic growth; no Pareto assumption is required. More generally, it provides a theorem linking the behavior of the max extreme value to the number of draws and the shape of the tail for any continuous probability distribution.
Keywords: economic growth; combinatorial growth; exponential growth; Pareto distribution
JEL Codes: O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| number of draws (k) (C46) | maximum productivity (zk) (E23) |
| number of draws (k) (C46) | exponential growth in productivity (O49) |
| number of draws (k) (C46) | maximum productivity (zk) stabilizes (E23) |