pmacst - richard lipsey presentation

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6/8/2011 1

RESPONSES TO THE ECONOMIC QUESTIONS PUT BY THE

PRIME MINISTERS ADVISORY COMMITTEE ON SCIENCE AND TECHNOLOGY(PMACST)

Richard G. Lipsey, OC, FRSCEmeritus Professor of Economics

Simon Fraser University



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HOW IS THE DISMAL SCIENCE CHANGING?

Called the dismal science because: capital accumulation in the context of constant technology was thought

to be the main vehicle for economic growth.

The law of diminishing returns predicted that as more capital was

applied to fixed resources, growth of output would slow and eventuallyhalt � the stationary state.

The new economic view: typically technological change is rapid and pervasive.

because new capital embodies new technological knowledge there isno reason to expect diminish returns.

emphasizes that knowledge is non-rivalrous, in the sense the oncediscovered, one person¶s use of it does not reduce another person¶sability to use it � in contrast to a piece of capital equipment, whichcannot be used in two places at the same time.



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Much attention given to the phenomenon of technological

change.

Particular interest attaches to what are called µGeneral Purpose Technologies (GPTs)¶ . Pervasive technologies that provide new research agendas to apply them across the

whole economy as did the steam engine, the electric dynamo, and the computer.

There is no reason to expect that each successive GPT will bring less rich

possibilities than each previous one.

Indeed, it is clear that the dynamo brought with it a much richer research program

than did the steam engine

S ince knowledge is not subject to decreasing returns in the

way that physical capital is when it is accumulated in thecontext of static technology, there is no technological

reason to expect that growth cannot be sustained into the

indefinite future



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But is continued growth sustainable?

Growth based on technological change typically reduces the all

resource inputs per unit of output.

Nonetheless, it has increased the demands on inputs because

over the last two centuries total output has increased faster than

inputs per unit of output have decreased.

Although we will run out of specific non-renewable resources,

there is no reason to think we will run out of all useful resources.

For example, if we held the rate of increase of output to the rate

of reduction in input use per unit of output, output could grow

indefinitely with no increase in resource use.

Pollution and environmental degradation may well stop growth.

If they do, it will not be for technological reasons but for want of

human willingness to control them, which can be done withexisting or easily foreseeable technologies.



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A Digression on GPTs Technological changes � new products, process and forms

of organization�

have been the driving force of growth for the last 10,000 years.

These changes have also dramatically altered our social and political relations.

Technological changes run the whole gamut from continuous,small, incremental changes, through discontinuous radicalinventions, to occasional ones that evolve to pervade theentire the economy. These latter ones are called General Purpose Technologies (GPTs). (This is a

somewhat narrower, and more tightly defined concept than those of

µdisruptive¶ or µtransforming¶ technologies, which include GPTs but more.) Typically, GPTs begin as fairly crude technologies with a limited number of

uses

They evolve into much more complex technologies with dramatic increases inthe range of their use across the economy and in the range of economicoutputs that they help to produce.



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Adapting to new GPTs effectively, typically requiresmajor changes in and in government policies and in the

whole structure of the economy)(what we call thefacilitating structure) which includes

human capital and where people live;

the physical organisation of production facilities, including labour practices;

the managerial and financial organisation of firms;

the geographical location of productive activities;

industrial concentration;

infrastructure;

private-sector financial institutions, and financial instruments;

educational practices.



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The domestication of plants (9,000-8,000 BC) (Pr)

The domestication of animals (8,500-7,500 BC) (Pr)

Smelting of ore. (8,000±7,000 BC) (Pr)

The wheel (4,000-3,000 BC) (P)

Writing (3400-3200 BC) (Pr)

Bronze (2800 BC) (P)

Iron (1200 BC) (P)

The water wheel Early medieval Period) (P)

The three-masted sailing ship (15th century) (P)

Printing (16th century) (Pr)

GPTs IN HISTORY



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The steam engine (late 18th-early 19th century) (P)

The factory system (late 18th-early 19th century) (O)

The railway (mid 19th

century) (P) The iron steam ship (mid 19th century) (P)

The internal combustion engine (late 19th century) (P)

Electricity (late 19th century) (P)

The motor vehicle (20th century) (P)

The airplane (20th century) (P)

The mass production, continuous process, factory (20th

century) (O)

The computer (20th century) (P)

Lean production (20th century) (O)

The Internet (20th century) (P)

Biotechnology (20th century) (Pr)

Nanotechnology (sometime in the 21st century) (Pr)



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Only about two dozen in all of civilized times but seven in the

20th century and already one, nanotechnology, that can be

foreseen in the 21st.

A new GPT brings with it a research program to improve the

efficiency with which it delivers its own services (along what

we call its µefficiency curve¶) and to learn how to apply it tonew products, processes, and forms of organization across the

entire economy (along what we call its µapplications curve¶).

For example, the shift from the Victorian mechanical age to the

modern electronic age transformed just about everything in thesociety as applications of electricity slowly spread through it.



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We are still living in the midst of the revolution in Information and

Communications technologies (ICTs) � a set of technologies that have the

computer at its centre.

The latest new GPT that is beginning to emerge is biotechnology, which is just beginning to transform � eg, criminology and food production� but

will have massive transforming effects over the first half of the 21st century.

Further away is nanotechnology. The greatest advance in materials

technology since we first began to shape stone tools, nanotechnology will

transform just about everything we know, products, processes, and forms of

organization.

Although there is always much uncertainty attached to the evolution of any

new GPT, there are enough commonalities that study of past GPTs, combined

with knowledge of the main characteristics of the new one, allow quite a bit

to be forecast about the impacts of both bio- and nano-technologies on the

economy and our social and political relations.

Recommendation: The government should be studying both of these new

technologies to determine their probable economic effects and the changes in

infrastructure and policies that will be needed if they are to be accommodated with

the minimum of disruption and the maximum of benefit.



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PERSPECTIVES ON HOW THE ECONOMY IS EVOLVING AT THE MACRO LEVEL

I nflations are unlikely for a long time to come S lumps similar to the 1930s are also unlikely.

The distribution of income. For the first seven decades of

this century, inequalities narrowed. Then, starting in the

1970s and driven by technological changes connectedwith the ICT revolution, inequalities in the pre-tax-

transfer distribution of income began to widen. Since then, wages have been constant or only slowly rising while top

incomes have risen dramatically.

In Canada, the tax-transfer system has mitigated these changes to asignificant extent.

In the US, the tax-transfer system has done little to alter the distribution

of income that is determined by the market.

How long can the US can avoid major social unrest as a result of the

widening gap between rich and poor?



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Government budgets are well under control in Canada and

more or less in the EU. So a fiscal crunch to deal with rising deficits is not in the foreseeable future

for Canada.

The US in contrast is on an unsustainable budget path rising deficits both in the present and built into the future.

This deficit largely financed by the Chinese. Many US Neocons see the deficit as a tool for greatly reducing, or even

eliminating, the remaining parts of the US social safety net.

Canadian macro policy makers should be concerned to estimate the fallout

for Canada when the US finally comes to terms with its growing debt.

Will the US have a µsoft landing¶ or a µhard landing¶ and how would each

affect Canada by presenting it certainly with problems and possibly with

opportunities?



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Global warming , now an accepted reality, will: cause serious problems in the near future as the artic ice continues to melt.

cause catastrophic effects unless it is soon checked.

the point of no return is near, if not already past, after which, whatever we do,

the melting of major ice accumulations, including the Greenland ice cap, will

be inevitable.

once increases in the level of the oceans come to be measured in meters rather in millimetres, catastrophe becomes hard to avoid.



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PERSPECTIVES ON HOW THE ECONOMY IS

EVOLVING AT THE MICRO LEVEL

The ICT revolution has transformed the economyaltering among other things: the way businesses are organized and run

the way goods are designed, how they are produced on the shop floor,and how they are distributed and marketed.

the way scientific and social research is done. the location of economic activity by allowing the globalization of

production based on a degree of world-wide coordination that wasimpossible 60 years ago.

personal communications, and in combination with the internet,allowing NGOs to recruit and organise masses of people and to be

effective (for better and for worse) in influencing policy. and so on ad infinitum.

My list of the transforming effects of the CIT revolution fills 10 closely printed pages in one publication.



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Common after the dotcom crash to argue that the force had

gone out of the ICT revolution. Not so, as will be seen from a study that Ken Carlaw and I are currently

doing for Industry Canada to determine where ICTs are on their efficacy and

applications curves relative to earlier GPTs, such as electricity.

Many tend to look at ICTs as being just the hi-tech sector.

That sector could not exist without computers.

But the ICTs brought a revolution precisely because they were used

throughout the entire economy.

It is the stream of continuing applications of computers and related ICTs

that is driving much of the modern economic growth.

Much of future growth will continue to be driven by ICTs. The structure of the economy is pretty well adopted to them and they are still

being used to create many new products, new processes and new forms of

organization.

These development need to be encouraged by policy not

ignored.



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Biotechnology is beginning to alter things dramatically as seenfor example in criminology and in food production. Over the next decades its rate of penetration into other sectors of the economy

will accelerate with profound changes in many if not all sectors.

How much it will affect social and political structures is less clear, but

probably not anything like as much as the ICTs did. N ano-technology will begin to impact in significant ways in

a decade or so and will probably cause as profound a

transformation of our economic and social life as did

ICTs.



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Canada¶s productivity performance has been poor relative tothe US

the resulting gap between the average income of the US and Canada has been

widening for several decades,

raising worries about continued competitiveness and a possible brain drain.

Low levels of overall R&D compared with our major competitors has been a persistent worry in Canadian policy

circles and many relate it to our poor productivity

performance.

Not easy to judge its importance, given the large amount of technology transfer that occurs in modern industrialised

economies.



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Nonetheless there is some cause for concern. A much higher proportion of Canadian R&D takes place in the public sector than in

other countries.

Taking the US and Finland for comparison, the ratio of private/public R&D in the two

years 1997/8 and 2002/3 was

1.94 and 2.46 for Finland

2.82 and 2.70 for the US

1.48 and 1.18 for Canada

The Canadian public/private ratio is much lower than the American or the Finish.

While it is stable in the US and rising in Finland, it is falling in Canada.

The number of new product opportunities that is produced per dollar or R&Din the private sector is about 15 times that of the public sector.

Thus the payoff in terms of product opportunities per dollar of Canadian R&Dis less than in other countries.

Over the two periods in question, 1997/8 and 2002/3, the three countries hadthe following product opportunities created per million dollars of R&D

expenditure: Finland, rising from 0.45 to 0.49;

The US, steady at 0.50

Canada, falling from 0.42 to 0.38.

Thus the effect of our R&D on our immediate competitiveness seems to be significantly less than would appear from a mere look at the total R&D

figures.



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Skilled labour shortages, will become an increasing problemwhen the baby boomers start to retire in about five years.

By 2010, there will be serious shortfalls in the jobs now occupied by senior

workers,

the shortages will grow for at least two decades after that.

Already, Canadian employers are finding difficulty filling jobs for sales andcustomer service representatives, customer support, engineers, and so on down

a long list mentioned in the Globe and Mail of February 21.



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China and India¶s evolution towards becoming economic powerhouses presents:

competitive threats and

new market opportunities for Canadian business.

Is enough effort is going into reacting to these developments

in both the private and public sectors. Every effort should be

made to encourage students to acquire foreign language

abilities. Firms should be exploring possibilities in the expanding markets of these and

other developing countries.

Because these markets are not easy to enter for cultural and bureaucratic

reasons there is scope for private-public sector cooperation here.



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Not too much is known about how well preparedboth the infrastructure and firms are and, failing

a detailed commissioned study, only a fewgeneral points can be made.

Virtually all nations provide for public sector

assistance to invention and innovation. Canada has a number of initiatives in this direction but they

need full government commitment plus careful and continued comparisons with design and performance of such schemes in

other countries.

TO WHAT EXTENT ARE CANADA¶S ECONOMIC ENTERPRISES AND INFRASTRUCTURE EQUIPPEDTO MEET AND COMPETE IN THIS RAPIDLY

SHIFTING ENVIRONMENT?



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Procurement is a major tool for technological advance in many countries.

It is not clear that Canada has used this tool as effectively as the US.

What if, for example, instead of buying a submarine, the money had been put

into R&D to develop a superior all-weather vehicle for operating in the artic? Is the education infrastructure doing everything it can to encourage the

training needed in coming decades and to inculcate an ethos of

entrepreneurship and scientific investigation?

With respect to personnel we need to operate the margin rather than rewarding

those who would go on to train anyway, as many of the Millennium

Scholarships probably do.

What is needed if change is sought is to support those who are on the

border of doing what policymakers want and doing something else.

Typically these will not be the very best students.

Also, we need not just to start with stated objectives � what we are want

to accomplish�

and then ask if given measures, such as a scholarship

fund, will actually do that job efficiently, or even do it at all.

It is not clear to me, for example, that the designers of the millennium

scholarships engaged in such a cost benefit calculation.



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We urgently need to improve our infrastructure of health care. The well off are likely to receive better and more timely health care in the US

than under the Canadian Health Act.

But it is those who are successful at business, science and engineering that we

most wish to keep in Canada.

If we fail to do improve our system significantly we risk a brain drain of those

we most want to held in Canada



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Are Canadian firms aware of the importance of

keeping up with the cutting edge of

technological advances?

For larger Canadian firms, the answer seems to be yes. But

how about small and medium sized firms?

Surveys continue to show that many Canadian managers seem

to be more risk adverse and less willing to accept the

uncertainties that go with major innovations than their US

counterparts.

If so, it is not clear what can be done about this, other than the

long-term strategy of trying to work through the education

system with courses, scholarships and workshops onentrepreneurship.

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