Straw into Gold Innovation

About this event

Economists have generally understood long-run growth as coming from the accumulation of reproducible factors (Lucas Jr, 1988; Rebelo, 1991), and from technological innovations that augment non-reproducible factors (Romer, 1994; Parente and Prescott, 2002; Aghion et al., 2014). Yet, many important innovations are different in nature. They create new factors of production from resources that were previously overlooked, unknown to be valuable — they “turn straw into gold.” Consider OpenAI’s use of online content in training ChatGPT or Google’s and Facebook’s use of consumer data in digital advertising. Online content, if not copied, was freely available under fair use; consumer data (e.g., search queries, browsing histories) was seen as “data exhaust” (Zuboff, 2019). The nature of each innovation was to recognize the value of online content and consumer data, and turn them into productive factors. In this paper, we identify and analyze a new class of straw-into-gold innovations, which the literature has not yet conceptualized. Doing so requires us to recognize that this class of technological innovations occur in a very different institutional context than the traditional innovations studied in the literature. Property rights over new factors of production are inevitably poorly defined prior to the innovation that creates them and, as a result, can become contested afterwards. We present a model of straw-into-gold innovation that captures the defining features of the class: (i) the creation of productive factors out of previously unrecognized resources and (ii) the lack of well-established property rights ex-ante. We show that economic rents from appropriation of resources can sustain innovation, beyond traditional rents. Moreover, property rights emerge as a consequence of innovation, not as pre-condition for it. The institutions through which property rights are established — not merely protected — become crucial determinants of innovation and economic growth.