Thus instead of land, labor and capital--the traditional inputs of economic theory--it was "people, ideas and things" that mattered, driving technological change and entrepreneurial creativity. "No longer were the advantages of technical superiority to be understood as a case of 'market failure,'" Mr. Warsh writes. "They were part of the rules of the game." Such superiority was by its nature temporary--i.e., nonmonopolistic. New knowledge constantly trumped old, and the law (rightly) gave ideas only limited property-protection.

More and more, economists came to see that it was knowledge that made the difference in modern societies--e.g., in software, drugs, industrial processes, biotechnology and other parts of the economy where the upfront costs were large, the payoffs enormous and the benefits widespread. Economists inevitably turned their attention to the institutions or invisible structures--constitutions, customs, property rights, cultural sentiments (like trust)--that help to generate knowledge and sustain its effects.