Science and Technology Dynamics

Evolutionary perspectives on the role of technology in economic development

Introduced by Andreas Reinstaller

Aim of the course

Give an overview on the evolutionary perspective on the economics of innovation;

Introduce some of its fields of application.

Beware: The economics of innovation is not SCOT or ANT applied to economic issues. There are overlaps, but differences are considerable in terms of methodology and subject matter.

Structure of the course Four units introducing the most important concepts of the

evolutionary approach to innovation and growth Four units on specific topics of interest: knowledge

economy (IPRs), development, sustainability, measurement of innovative activities

Each unit consists of a lecture (normally two days before the course takes place) and classes. Aim of lectures is to give a first introduction to the literature to be discussed during the classes.

Classes are there for the students to understand and discuss the readings. The tutor is there just to help you to develop an understanding and avoid mistakes.

The success of the classes depends on the participation of the students!

Lecture team

Andreas Reinstaller (truly yours): units 1-4 and post-discussion. Topic: Evolutionary Perspectives on the Economics of Innovation

Elad Harison: unit 5. Topic: Intellectual property rights

Ute Pieper: unit 6. Topic: Development economics and issues of globalization

Rene Kemp: unit 7; Topic: Evolutionary perspectives on sustainable economic development

Hugo Hollanders: unit 8. Topic: Indicators of innovation and growth (Skills training)

Evaluation procedure: Presentation

Every student presents at least once (two papers) Everybody reads all the literature indicated as compulsory (2-

3 papers per unit) The person presenting compiles a short summary of his/her

presentation and sends it via e-mail to the others The presentation has to be short (max 10 minutes) as

everybody is supposed to have read the related paper. The person presenting acts as discussion leader in the

discussion after his/her presentation. What has to be discussed? i) the study questions, ii) the

relation of the paper to STS iii) other issues you think are important iv) unclear concepts have to be explained

Presentations are valued (marks 5 to 10) and weighted as 45% of the final mark. If you are interested to know how I evalued the presentation send me a mail.

Evaluation procedure: Essay

Aim: i) let you work with the concepts studied during the course and apply them analytically, ii) train you to write a short and concise report.

Topics are already given at the end of the course book, so there is plenty of time for you to think about it.

Requirement: Shortness! Scientific accuracy! Some degree of originality! Plagiarism is punished!

The 9th meeting is for a post-discussion, where unclear concepts or questions related to the essay should be discussed.

Due date: December 2nd 2002 9h sharp, in electronic form (in word or text format) e-mailed to me (a.reinstaller@merit.unimaas.nl). Don‘t hand them in to Rien Peeters, as written in the course book, but send them to me!

Beware: Essays handed in after that date will not be accepted! Your essay is weighted as 55% of the final mark

What is economics?

The social science that studies the allocation of scarce resources among uses by rational and well informed economic agents (Neoclassical definition)

The social science that studies the nature and the causes of the wealth of a society and how it is redistributed among social classes (Classical definition)

Evolutionary Economics: has no specific definition, but relies more on the “classical” definition (in its broadest sense), hence, it focuses on how economic growth is achieved and what effects it has on society.

At the center of any economic enquiry is how single persons, a community or a nation try to make themselves better off through trade, productive or cultural activities, science, etc.

Switch to other presentation

Consequences (?) of growth. Uneven distribution of wealth

Source: Pianta (1995), Cambridge Journal of Economics 19, 175-87

Consequences (?) of growth. Catching up and falling behind

From: Temple (1999), JEL 37 (1), p.115

The consequences of growth: environmental damage and sustainability I

Sustainability:In 1987 the Brundtland

Report “Our Common Future” defined sustainable development as

“ development that meets the needs of the present without compromising the ability of future generations to meet their own needs”

This should be achieved through:

Environmental protection

Economic growthSocial equity

Consequences of growth. Structural change.

GDP share of different sectors

Country agriculture industry services1960 1981 1960 1981 1960 1981

India 50% 37% 14% 20% 26% 37%Italy 12% 6% 41% 42% 47% 52%Germany 6% 2% 53% 46% 41% 52%France 11% 4% 39% 35% 50% 61%USA 4% 3% 38% 34% 58% 63%

Share of sectors in total working population

Country agriculture industry services1960 1981 1960 1981 1960 1981

India 74% 71% 11% 13% 15% 16%Italy 31% 11% 40% 45% 29% 44%Germany 14% 4% 48% 46% 38% 50%France 22% 8% 39% 39% 39% 53%USA 4% 2% 48% 42% 48% 56%

First part of the presentation is over

See you in five minutes!!

How is the “growth phenomenon” explained? The classics.

Adam Smith (1776)income per capita „must in every nation be regulated

by two different circumstances; first, by the skill, dexterity, and judgement with which its labour is generally applied;...“(WN I.3)

The division of labour is a powerful device to increase labour productivity: through i) the improvement and dexterity of workers, ii) time saving achieved in passing the work on, and iii) the invention of specific machinery (WN I.i.6-8)

„The division of labour is limited by the extent of the market“ (WN I,iii.1)

increasing income per capita through accumulation is the aim

David Ricardo (1815)the fall of the profit rate: „The natural tendency of the

profits then is to fall; for, in the progress of society and wealth, the additional quantity of food required is obtained by the sacrifice of more and more labour. This tendency [...] is happily checked at repeated intervalls by the improvements of machinery, connected with the production of necessaries...“, (Ricardo (1951), p.120)

The Neoclassical framework, I: Market demand

Utility: defined over a preference relation, which is Complete, i.e., agents have full

information on the available commodities and which they prefer over which

Non-satiated: people are greedy, they want more of each good in their consumption basket

…and some other properties… This implies:

consumers will absorb every new commodity on the market

They will value more of a same commodity less than a new commodity (decreasing marginal utility)

Preferences are independent of other social actors

From this market demand is derived

pri

cequantity

If for a given income the price of a commodity falls, more is asked for: consumers maximize utility

The Neo-classical framework, II: Market supply Market supply:

Producers know all available technologies

A technology is a combination of factors of production (i.e. capital=machines, labour, land)

These factors can be combined at wanton to any possible technology (assumption of separability)

Factors are combined to maximize output at lowest possible cost, at a given price this maximizes profits

Costs of production increase with output (increasing marginal cost – decreasing returns)

pri

cequantity

From this the market supply is derived

At a given technology producers want to increase output at higher prices. Curve slopes up due to increasing costs.

The Neo-classical framework, III: Market equilibrium

Market equilibrium is achieved, when supply fully satisfies demand. Welfare is maximised!

Remind: each increase in output will be absorbed by demand. This is called Say’s law. Producers maximize profits and consumers utility.

This depends also on the presence of perfect competition. The market equilibrium can be distorted under the presence of monopolies or oligopolies.

Market failure arises when markets cannot clear at given prices.

Technical change is conceptualised as pure cost reduction – this shifts the supply curve outwards. More can be produced at lower cost: technical change increases welfare as it increases real income!

pri

cequantity

p*

q*

The Neoclassical framework, IV: the production function

The supply curve related output to price.

The production function is an alternative view for it. It captures explicitly the technology of production consisting of two factors, capital (K) and labour (L), and relates it to a specific output (Y).

1

( , )

. .

,

Y f K L

e g

Y AK L

y=Y/L

k=K/LLa

bour

pro

duct

ivit

yCapital intensity

Curve is concave because of increasing costs.

Technical change (A) shifts the schedule up: labour productivity increases.

A

What is the optimal rate of accumulation? The Neoclassical growth model.

( ) ( ) 0

( ) ( )

k sf k n k

sf k n k

Change of capital stock:Savings = investment (sf(k))Decreasing returnsPopulation growth (n)Depreciation rate ()Fixed amount of capital is needed

per capita ergo: (nk)

( ) ( )k sf k n kIn equilibrium

Or in words: Accumulation determines growth. The optimum accumulation is such that investment equals the rate of population growth plus the rate of depreciation. New capital is added as long as its productivity outweighs the replaced stock.

Measuring growth in the Neoclassical framework. Total factor productivity (TFP).

The production function is used to estimate statistically the contribution of the factors of production to growth.

Everything that cannot be explained by the factors of production is “technical progress” not due to accumulation

Decompose growth rate into its elements -> and derive TFP

log log log log

log log log log

log

Y A K L

Y K L A

TFP A

Conclusion: Theoretically growth is explained only through accumulation. The empirical evidence shows (next slides), that growth is not explained in this model. It rains “like manna from heaven”.

Evidence: switch to other show

Problems...

Empirical: Able to explain only a

small fraction of growth:(from A. Young (1995))

Theoretical: Just one sector:

economic reality is different. Many economic sectors interact. Diffusion of novelty is slow.

Decreasing returns: this is empirically and theoretically debatable. New neo-classical growth theory (endogenous growth theory) assumes increasing returns -> critique by Solow: infinite growth in finite time...

1966-1990

Hong Kong

Singa-pore

South Korea

Taiwan

Growth rate

7,3 8,7 10,3 8,9

Explain-ed by

model

2,3 0,2 1,7 2,1

Not ex-

plained

5,0 8,5 8,6 6,8

Knowledge as a factor of production: Human Capital (i)

How to overcome the problems? Knowledge seems to be -> thus widen capital concept in Solow model to include “Human capital”

“Human capital are the knowledge, skills and other attributes embodied in individuals that are relevant to economic activity”, OECD (2000), Human capital investment, Paris

Measured by: Educational attainment:

highest level of education Measure presence of

economically relevant characteristics (literacy level: prose (understanding information), quantitative (apply mathematical operations), document(use and locate information in forms))

Problems: measurement Causality may run the other

direction

Knowledge as a factor of production: Human Capital, the characteristics of the stock (ii)

Fro

m: O

EC

D (

2000

), H

uman

Cap

ital

Inv

estm

ent,

Par

is

Knowledge as a factor of production: Human Capital, the characteristics of the stock (iii)

From: OECD (2000), Human Capital Investment, Paris

Knowledge as a factor of production: Research and Development (i)

From: OECD (2000), Human Capital Investment, Paris

The failure of equilibrium models to explain why R&D is done…

If human capital, invention and innovation are the driving forces behind technical change, then the equilibrium framework collapses

If knowledge conceived as information, then it has the following properties: its production is risky – we do

not know whether we are able to gain new knowledge if we engage in research

it cannot be easily appropriated by who produces it; patents do not guarantee perfect protection

The generation of new knowledge builds on existing knowledge. It is cumulative

This has the following consequence on the investment into invention and research:

In a free enterprise economy there will be underinvestment in research and invention because it is risky, its revenue can only be appropriated to a limited extent, and due to its cumulativeness it puts off inventive activities by competitors.

The way out of the dilemma – one (two) new paradigm

New Growth Theory New theories that

integrate the R & D process, knowledge spillovers, human capital accumulation, learning by doing

They move nevertheless in the Neoclassical framework and are empirically not more explicative than the established Growth theory

Evolutionary Economics More about it next

time…. Unit of analysis is

the firm and not an aggregate

Knowledge is the defining criterion for firm behaviour, growth and competition.