This paper formalizes an interdependence between a Research and Development (R&D) sector that produces knowledge and a human capital sector that educates individuals such that both activities appear equally essential to sustain per capita long-term growth. It treats the question of research funding in a model without any intermediate goods production sector, and assumes that knowledge is directly protected by patents so that any user must reward innovators directly. To keep the analysis simple, an equilibrium in which there is perfect competition on private goods markets is constructed. Knowledge is rewarded at its marginal profitability.

The modern growth literature considers human capital accumulation, and Research and Development (R&D) activity as two important engines of economic growth. In a recent study on the source of economic growth in the US, Jones (2002) confirms these views. He explains that 80% of the US economic growth is due to increase in human capital investment rates and research intensity while population growth accounts for 20%.

This paper has two objectives. First, an interaction between a human capital sector that educates people and an R&D activity that produces knowledge is formalized. An economy in which R&D firms use human capital (i.e., educated people) to innovate, but also in which human capital is itself produced using existing knowledge created by researchers is considered. The idea is that human capital is needed for the transmission and the diffusion of knowledge across time—persons embody knowledge which is produced in the research sector and use it to innovate. As a result, both research and human capital accumulation appear necessary to sustain per capita growth.

The main reason to specify an interaction between knowledge and human capital comes from the difficulty to dissociate the way to acquire skills from the way to produce knowledge. If skilled workers benefit from a comparative advantage, relative to unskilled workers, to produce new technologies, it is firstly because they have learned early knowledge developed by scientists or engineers. For example, we benefit today from Einstein’s theory of relativity. Since the physician is dead, in order to improve his theory or to find a new one, it is necessary, first of all, to produce at first new physicians. Before innovating, the future scientists must first learn the theories developed by Einstein (and others) to know what the state of knowledge is. Once the theory is embodied in their brains (i.e., known), they may try and find how to improve it.

Knowledge Management Journal, Human Capital Sector, Economic Growth, Research Sectors, Human Capital Accumulation, Production Sectors, Private Goods Markets, Economic Policy Tools, Educational Sectors, Economic Policies, Intellectual Property Rights, Human Capital Sectors.