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Diversity, Economic Webs, and Growth

In this paper we build upon work by Jacobs (1961, 1963, 1984) and Glaeser et al. (1993) to derive the following hypothesis: diversity of economic agents is conducive to innovation, and thus to growth. We present a simple model of a small open economy existing in a world where prices are fixed exogenously, capital (in this case knowledge capital specific to the firm) is immobile, rival and excludable. There is no market for the exchange of knowledge capital, so persistent quasi-rents accrue to firms with better than average productivity. We discuss some results pertaining to special cases of the model. We then extend the model to allow for external economies and to examine the relationship between economic diversity and growth. This leads to a tentative conclusion that may reconcile two distinct views of economic growth: the view that diversity of economic activities drives growth, and the view that economic specialization drives growth. We propose that these two phenomena represent distinct episodes in the evolution of economic systems.