Transcript neoclassical and neo-schumpeterian models

TECHNOLOGICAL CHANGE
AND ECONMIC GROWTH:
NEOCLASSICAL AND NEOSCHUMPETERIAN MODELS
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Traditional neoclassical models assume a process of absolute
convergence towards an equilibrium level of per capita GDP (steadystate)
However, for endogenous growth models, countries with different
initial conditions (technological knowledge, human capital) may
converge to different levels of GDP (conditional convergence or
convergence clubs)
Neo-schumpeterian or evolutionary models discard the idea of
steady-state equilibria. In their disequilibrium framework the catching
up cannot be taken for granted. The leading countries can shift forward
the technological frontier as well as laggard countries can further fall
behind: Moses Abramovitz (1986) Catching up, Forging ahead, and
Falling behind
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NEOCLASSICAL OLD
(SOLOW MODEL)
NEOCLASSICAL NEW NEO-SCHUMPETERIAN/
(ENDOGENOUS
EVOLUTIONARY
GROWTH)
Technology as information Technology as knowledge Technology as knowledge
(exogenous, public good) (endogenous; non rival, but (endogenous; codified and
partially excludable;
tacit)
increasing returns)
Equilibrium
Multiple equilibria
Disequilibrium
Dynamic analysis of
steady state
Dynamic analysis of
steady states
Absolute convergence
Conditional convergence
Dynamic analysis with
discontinuities and
cumulativeness (pathdependence)
Convergence and
Divergence
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Alfred Marshall (1890) Principles of Economics.
An Introductory Volume
Natura non facit saltum
From the preface to the first edition:
"The Mecca of the economist lies in economic biology rather than in
economic dynamics. But biological conceptions are more complex than
those of mechanics; a volume on Foundations must therefore give a
relatively large place to mechanical analogies; and frequent use is made
of the term "equilibrium," which suggests something of statical analogy.
This fact, combined with the predominant attention paid in the present
volume to the normal conditions of life in the modern age, has suggested
the notion that its central idea is "statical," rather than "dynamical." But
in fact it is concerned throughout with the forces that cause movement:
and its key-note is that of dynamics, rather than statics."
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David Orrell relationship between science and economics
In order to make progress, and inspired by the “rational mechanics” of
Isaac Newton, neoclassical economists made a number of simplifying
assumptions. One was that a collection of people behave much like a
single “average” person, so the macro picture could be built up from the
micro level. Related assumptions are homogeneity, atomistic and rational
(maximising) behaviour.
While these assumptions may have seemed reasonable at the time, they
have found less use in life sciences such as biology or ecology. […]
macro-behaviour cannot be predicted from a knowledge of individuals.
An ant colony is not simply a large
Also, living systems are not homogeneous. Indeed, as Charles Darwin
pointed out in his Origin of Species (1859), diversity, along with
competition, is one of the drivers of evolution. If everything were the
same, “survival of the fittest” would result in a draw and nothing would
change.
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Similarly, it is diversity in the business world which explains why
markets are often dominated by a small number of successful firms,
instead of a large number of essentially indistinguishable firms as
assumed by neoclassical economics. It also explains how the economy
grows and evolves.
The result of this evolutionary process is not equilibrium, but a state of
dynamic change and continuous adaptation. And while competition plays
an important role, so does cooperation. Diversity means that people and
firms can often do more when they function as part of a team, than they
can individually. Ecological niches appear as a result.
All of this complexity poses something of a problem to conventional
models, because it is no longer possible to make the simplifying
assumptions of the physics-based approach version of a single ant.
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Joseph Alois Schumpeter (1883-1950)
• Born in Moravia (then part of Austria-Hungary, now Czech
Republic). From 1925-32, he held a chair at the University of
Bonn. With the rise of Nazism, he moved to Harvard where he
taught from 1932 until his death in 1950
• Schumpeter Mark I: Theory of Economic Development
(published in German in 1911)
• Economic development as a discontinuous (out of equilibrium)
process due to introduction of innovations.
• The crucial role of innovating entrepreneurs (and bankers!)
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Joseph Alois Schumpeter (1883-1950)
• Schumpeter Mark II: Capitalism, Socialism and Democracy
(1942, published in the US)
• The inventive activity is endogenous: large companies carry
out R&D activities and are not obstacles but drivers of
technological change and economic development.
• Chapter 7: The process of creative destruction (nice
oxymoron!)
• Capitalism is an evolutionary process that can never be
stationary (criticism to the concept of steady state equilibrium).
[Biological metaphor of “mutation” versus the Newtonian
physics’ metaphor of neoclassical economists]
• The fundamental impulse is the introduction of radical
innovations
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Moses Abramovitz (1986) Catching Up, Forging Ahead and
Falling Behind, Journal of Economic History
Catch-up hpothesis: being backward in level of productivity
carries a potential for rapid advance. The growth rates of
productivity in the long-run tend to be inversely related to the
intial levels
The crucial role of “social capability” (for effective economic
advance)
“A country’s potential for rapid growth is strong not when it is
backward without qualification, bur rather when it is technological
backward but socially advanced”.
“The trouble with absorbing social capability into the catch-up
hpothesis is that no one knows just what it means and how to
measure it.”(p. 388)
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Moses Abramovitz (1986) Catching Up, Forging Ahead and
Falling Behind, Journal of Economic History
Tentative way: education (technical competence) + quality of
political/industrial/financial institutions
Only catching up? No, also falling behind (UK vs. US) and
moving ahead (Japan in the 1980s)
“There are, however, still more solid grounds for a renewal of
productivity advance in both Europe and the United States.
These are their high level of general and technical education,
the broad bases of their science, and the well-established
connections of their science, technology, and industry. These
elements of social capability are slow to develop but also, it
seems very likely, slow to decay” (p. 405)
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Labour productivity (GDP per hour worked) 2005 and average annual real growth
2000-2005
Catching up
Convergence between
the East and the West.
Divergence between
the South and the
North
Moving ahead
Falling further behind
Losing momentum
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