Thursday, August 8, 2013

Economic Expansion Requires Saving: R & D Edition

Goldman Sachs' Robert Boroujerdi has co-authored a report "The Search for Creative Destruction" that reveals an empirical relationship between research and development spending, sales revenue growth, and stock price returns. On the face of it, these results are not surprising. With more and better technology, we can be more productive and utilize our scarce resources more efficiently.

It is important to remember however, that taking advantage of technological development requires saving. It does so for two reasons. First, as I say in my book, Foundations of Economics, in order to take advantage of technology, it must be bound up in actual capital goods, which must be produced. Such production must be funded by savings.  Additionally, investment in research and development itself must also be funded by savings. Some neo-classical growth theorists downplay the importance of saving and investment and play up technology as engines of prosperity. It is important not to forget, however, that even R & D requires savings. 

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