Transcript Class 3

Innovation Economics
Class 3
Technology and Economic Growth
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Crucial role of knowledge accumulation
Rise of science related technology
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Introduction, diffusion, continuous improvements
Long term pattern of growth
Uneven across countries
Diverging growth trends
Before the industrial revolution, the income gap
between the poorest and the richest country was
relativey small.
Over the current industrialization, the ratio increased
dramatically.
Some Stylized Facts on Growth
Patterns
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Economies have grown in the past two centuries
faster than any previous period.
Different and variable rates
Long term pattern show increasing differences
Catching up is rare
Widespread catching up
Falling behind is frequent
Post War Growth at World Level
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Development path of industrialized economies
are dominated by convergence.
“Why do growth rates differ?”
Modelling Technological Change
and Growth
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From old to new growth
theory
Old neoclassical growth
model (Solow, 1956) was
characterized by a set of
largely traditional neoclassical
assumptions: constant
returns production function.
K and L as two production
factors
Y  f ( K , L)
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Growth process represented by: the variation in capital
(K) depends on the level of output (Y), since Y and K
are linked by functional relationship, the savings ratio
(s).
Since the marginal productivity of K in the production
of Y decreases with the level of K, the higher this level
is, the less capital contributes to increasing production.
As a result capital accumulation becomes more and
more difficult.
Growth in the long run is possible only if there is an
exogenous trend due to technological progress.
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Using the classical tools of the model, R. Solow calculated the rates of
growth between 1909 and 1949 in the USA. He concluded that average
growth was 1.5. However, the actual GDP increased by an average of 3%
during this period, i.e. a difference of 1.5%.
This difference called the "residue" is very important relating to the
evolution of the well being. Assuming that the population growth rate is 0.8,
we find for the growth rates of the GDP per capita 0.7 (1.5-0,8) according to
classical calculations and 2.2 (3-0.8) according to the reality.
In the first case, GDP per capita would have doubled in 100 years. In
reality it has doubled in 30 years! This illustrates the importance of the
"residue"!
it means that the current model cannot explain the economic growth. Of
course, economists give a role to technology or human capital but it's quite
unclear: Globally, the academic model remains largely based on the
scarcity of resources and is inspired by a thought inherited from the
past.
New Growth Models
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Considers determinants of technical change, by which
in essence they come up with an endogenous
determination of the source of growth.
Endogenous growth models.
1. A first source of endogenous growth lies in
investment in a certain factor.
2. A more obvious source of growth is technological
innovation, dependent on the amt. Of resources
devoted to RD..Creative destructions (Howitt, 1992).
3. Accumulation of human capital
4. Through public goods and infrastructure
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Emphasis on particular role on investment in physical,
RD, human capital..
According to the new growth theory, creativity is
the main driver for economic development.
The classic model is out dated. More precisely, the
description of the factors of production such as
labor and capital is a legacy of the former centuries
and its explanation of growth does not apply any more
to the modern world characterized by creativity.
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Mankind is better defined by its mind power
than by its physical strength.Then, mind power
must come in first before the physical labor in
the hierarchy of production factors.
In economics, creativity is the expression of
mind power: It is the capacity to produce
new ideas such as inventions and
innovations.
Composition Effect: Is one technology
good for every country of every region?
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Technological change is substitution of a new
technological space forthe old one. New maps of
isoquants.
Two consequences:
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Change the rate of substitution with given factor prices.
Makes it possible to increase the given laval of output
Composition effects have major implications for the
analysis of technological change across different
industries and countries because of the strong effects
of relative factors prices on actual “measured” total
factor productivity growth.
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Bias in technologies.
The context then plays important role in assessing its
effects in terms of total factor productivity growth.
Heterogenous global economy. It cannot be neutral
elsewhere.
Only technological changes, characterized by a bias,
consistent with the structure of local endowments, can
reinforce technological variety.
Asymmetric effects.
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The effect of technological innovations vary according
to the interplay between the direction of technological
change, defined in terms of marginal efficiency of
each production factor, and the local structure of
relative factor prices. = Composition effects.
Consequenced of relative factor prices for each
possible direction of technological change...
Endowments of each region and the structure of
relative prices become powerful factors in explaining
the differentiated effects of the introcustionof the
same technology across the economic system.
Relative Factor Prices, the Direction of
Technologicl Change and Productivity Growth
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Composition effects have strong and direct
relevence since a variety of factor markets across
continents and regions.
New and radical capital saving technologies ==
strong positive effects in labor abundant regions
New and radical labor saving technologies ===
Strong positive effects in capital abundant regions.
Yi  A1 f ( K a L1 a )
Y j  A2 F ( K b L1b )
Yi  Y j
ba
A2  A1
Yi
 A1 K a L1 a / L
L
Yj
 A2 K b L1b / L
L
Yi
 A1 ( K / L ) a
L
Yj
 A2 ( K / L ) b
L
A2
( K / L ) b /( K / L ) a  1
A1
A2
( K / L) b  a  1
A1
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When the two technologies i and j are in such
relation, bias effect interacts with shift effect.
Shift effect: leading to an increase in total factor
productivity
Bias effect: change in the direction and the new
technology is either labor or capital augmenting
Technology matters in terms of the local
structure of endowments and hence relative
prices.