Transcript The Economics of Technological Change

Technological Revolutions and
Economic Development
B. Verspagen, 2005
The Economics of Technological
Change
Chapter 3
1
Introduction
• The different aspects of the long-run
impact of technological change on the
economy from the viewpoint of economic
history
• Ideal theoretical framework:
Schumpeterian theory of economic growth
• Marxian way of analysis in the long-run
process of economic growth
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Technological Revolutions:
Schumpeterian Theory
• Fluctuations in the rate of economic growth that will span
a very long period
• Fluctuations (long waves) or Kondratiev waves
• The occurrence of fluctuations in the rate of economic
growth means that periods of relatively high growth rates
will alternate with periods of low growth rates
• Four phases: upswing (increasing growth rates),
prosperity (the increasing growth rates settling down at a
high level), recession (growth rates start to slow down
again) and depression (growth rates settling at a
relatively low level)
– A cyclical pattern spanning a period of 40-60 years
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Technological Revolutions:
Schumpeterian Theory
• What role technology may play in the long
waves?
• Schumpeter’s theory was about the role of major
(basic) innovations in driving long waves: the
analysis of the economic impact of basic
innovations
• The starting point of the wave is the occurrence
of basic innovation (may also be a set of
interrelated innovations like the notion of a
technological paradigm)
• These basic innovations provide the upswing of
a new long wave
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Technological Revolutions:
Schumpeterian Theory
• The basic innovations introduced by
entrepreneurs: visionary business man
– who recognizes the commercial opportunities of the
basic innovations when others and consumers do not
– who is skilled in terms of running the type of business
that is needed to make the basic innovations into a
success or in the art of innovation
• Later, Schumpeter put less emphasis on such
personal characteristics of the entrepreneur and
the role of the entrepreneur in the innovation
process started to be taken over by large firms
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Technological Revolutions:
Schumpeterian Theory
• The commercial opportunities of the basic innovations
attract imitators
• The radical innovations tend to cluster because first
some then most firms follow in the wake of successful
innovation
• This imitation and diffusion process not consist of mere
copying of the original innovation but rather as
incremental improvements
• The bandwagon of imitations: higher growth rates taking
the economy into the upswing
• A multiplier process because as imitators expand their
activities, investment in capital and workers required
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Technological Revolutions:
Schumpeterian Theory
• The upswing is not only a process of expansion but also
includes the productive capital to be adopting: a choice
between adopting new technology or going out of
business
• Creative destruction: the dual nature of expansion and
substitution taking place during the upswing phase
• The bandwagon of imitation makes the upswing happen
but also implies that profit rates of the firms pushing the
new technology will gradually be eroded
• Profit rates that were high due to large technological
opportunities and the absence of competition, start to
decrease as more firms enter increasing the level of
competition
• Eventually, profit rates and overall growth rates settling
down at the prosperity phase
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Technological Revolutions:
Schumpeterian Theory
• Continuation of competition and erosion of
technological opportunities leads to a decline in
the growth rates, setting in the recession
• Technology matures and competition between
firms takes the form of price competition
• The diffusion of basic innovations gets saturated
as all potential users have adopted the
technology
• Markets are no longer expanding and depend on
replacement of old products
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Technological Revolutions:
Schumpeterian Theory
• The recession turns into a depression when
– Saturation gets almost compete
– The intensity of price competition reaches a peak
– Technological opportunities for further improvements
of the technological paradigm have dried up
• The economy approaches a zero profit level
• The need for a new set of basic innovations
becomes very high, that is when the process
starts all over again with the next wave of basic
innovations: new upswing
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Technological Revolutions:
Schumpeterian Theory
• The description of the rise and fall of a set of basic
innovations is called the primary cycle
• This may be re-enforced by a secondary cycle that is
driven by investment in financial assets
• How about the timing of the swarms of innovations?
• If swarms were spread out evenly over time with short
time intervals between them, a more smooth pattern of
economic growth might result
• Kuznet: Schumpeter’s theory need to elaborate on the
reasons why swarms of innovations would be spread
unevenly over time although Schumpeter pointed out the
pervasive nature of some innovations
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Technological Revolutions:
Schumpeterian Theory
• Re-birth of Schumpeter’s theory: 1970s when the economy
was slowing down and the depression phase of the long wave
had set in
• Mensch: a new theory of the relation between long waves and
basic innovations
• Basic innovations cluster during the depression phase of the
long wave, contrary to Schumpeter’s original view that
swarms of innovations would occur during the upswing due to
imitation
• Firms under bounded rationality would display satisficing
behavior
– Firms will not be actively searching for new basic innovations
when high profit rates leading to a focus of attention on the
existing technological paradigm (the upswing or prosperity
phase)
– Firms will start searching for basic innovations when profit rates
start to decrease (the late stage of recession and the depression
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phase)
Technological Revolutions:
Freeman’s Interpretation of History
• Interpretation of the Schumpeterian theory
of technological revolutions and long
waves
• Five technological revolutions in the
history of modern capitalism
• Each of these revolutions is characterized
by a small number of carrying basic
innovations, together constituting a
technological paradigm
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Technological Revolutions:
Freeman’s Interpretation of History
Timing
(approximate)
Name
Transport
and
Communication
System
Energy System
1780-1840
Industrial Revolution:
Canals, carriages
mechanization of textiles
Water power
1840-1890
Age of steam power and Railways, telegraph
railways
Steam power
1890-1940
Age of electricity and
steel
Railways, telephone
Electricity
1940-1990
Age of mass production
Motor vehicles,
radio and TV,
airlines
Fossil fuels
1990-?
Information Age
Digital networks
(Internet)
Fossil fuels
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Technological Revolutions:
Freeman’s Interpretation of History
The Industrial Revolution (1780-1840)
• Starts with the Industrial Revolution in
Britain
• Represented a shift from a small-scale
production system based largely on
human and animal power to a mechanized
way of production in factories
• The main field of application was the
production of textiles and iron
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Technological Revolutions:
Freeman’s Interpretation of History
• In (cotton) textiles industry, 3 major innovations were
responsible for the increase in the productivity in
spinning
– Spinning jenny (1764), water wheel (1769) and
Crompton’s mule that is a cross- over of the jenny and
the water wheel (1779)
• The rapid expansion of production had to be met by an
improved system for the transportation of the products
• Rapid investment in transport infrastructure, canals and
roads
• Shipping over seas (British ports)
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Technological Revolutions:
Freeman’s Interpretation of History
• Iron-making industry
• The blast furnace: the supply of wood that was needed
to produce charcoal, a major obstacle
• Solution: the usage of coke (technological change)
• The other bottleneck: power source
• Contrary to what is known: steam power not play a major
role in powering the emerging factories in Britain
• Industrial Revolution powered mainly by water wheels,
that factories or blast furnaces had to be located close to
a river
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Technological Revolutions:
Freeman’s Interpretation of History
• The increased productivity due to technological innovations in
the textile industry did not only lead to increase in the scale of
production but also led to a major organizational change
• Before Industrial Revolution, the production system depended
on small scale equipment that could be operated by a single
worker without special infrastructure
• With large scale machines operated by other means than
human power, production concentrated in a central place
where many workers would be present at the same time with
a power source to operate the machines available
• The birth of modern factory and the Capitalist mode of
production that Marx described
• A physical relocation of the workers and the emergence of the
proletarian class
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Technological Revolutions:
Freeman’s Interpretation of History
• The factory system, the Capitalist system, dependent on
efforts by single individuals both in terms of innovative
activity and the financing of start-up firms
• A capital market?
• Schumpeter emphasizing the role of entrepreneurship in
industrial revolutions
• Preliminary conclusions:
– Technological innovations may lead to rapid increases in
productivity, but it will generally take some time to realize their
full impact on the economy (linking to the Schumpeterian idea of
long waves)
– Technology is accompanied by and conditioned on reorganization of the system of production
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Technological Revolutions:
Freeman’s Interpretation of History
The Age of Steam Power and Railways (1840-1890)
• The second wave of major innovations related to
revolutionary developments in transportation and the
powering of the factories
• The major innovation: steam power
• The application of steam power in factories (flexibility in
terms of choosing location) and in transportation
• The new applications of steam saw the spread of
industrialization to the European continent (Belgium,
Germany) and the US
• These countries took over part of British technologies
and in many cases improved on it (steam engines in the
US)
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Technological Revolutions:
Freeman’s Interpretation of History
• The steam power actually an innovation that emerged
during the previous long wave
• As steam power taking control of the economy, the
technological paradigm that was going to replace steam
power, electricity was slowly being invented
• The main application of electricity during the age of
steam and railways was the telegraph
• Together with the railways, the telegraph increased
communication between different parts of the country
• At the same time there were innovations laying the
foundation for the chemical industry that was going to
rise during the next waves
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Technological Revolutions:
Freeman’s Interpretation of History
• The institutional changes: the joint-stock
company and stock market
• Facilitated the raising of capital for the
establishment of new firms and decreased the
dependence on personal capital
• The type of speculative behavior by investors
having high expectations of firms applying new
technologies: that is the main driving force of the
Schumpeter’s secondary wave
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Technological Revolutions:
Freeman’s Interpretation of History
The Age of Electricity and Steel (1890-1940)
• Both steel and electricity invented decades ago but the full
impact towards 20th century
• Both of the new paradigms were most rapidly growing and
spreading in the US
• Edison, lamp, dynamo, generators, AC electricity net: diffusion
took off rapidly
• For factories, electricity represented a power source that was
more mobile and flexible than steam engine
• Space saved, the system of decentralized motors, less
sensitive to breakdowns
• In the first years of the 20th century that this system of
decentralized motors have been applied due to habit of doing
things the old way and the costs of capital locked up in
equipment
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Technological Revolutions:
Freeman’s Interpretation of History
• The diffusion path that takes a technological paradigm to its
full potential depends not only on incremental technical
innovations but also requires organizational innovations
• Steam and electricity: used in all sectors of economy after
long period of diffusion and improvement, increased
productivity and growth at macroeconomic level
• The steel was much tougher than pig iron that was the main
material used in the first and second industrial waves
• The incremental innovations in steel production lead to
increase in productivity and a fall in prices (like phenomenon
spinning during the Industrial Revolution)
• The strong performance of American companies in the
electricity and steel paradigms led a take-over of economic
and technological leadership from Britain by this country
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Technological Revolutions:
Freeman’s Interpretation of History
• Why US leadership?
• US possessed a large and homogenous market
– As the new technologies were capital intensive and displayed
important scale effects, this led to production costs falling when
served to a larger market
• US were abundant in natural resources, including land
and minerals
– This gave American firms an important cost advantage and
helped them to keep the prices low and hence serve a large
market and reap the scale economies of the new paradigm
• The liberal “American spirit” was aimed at
entrepreneurship and capitalist investment and was also
very much open to change and the introduction of new
technologies
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Technological Revolutions:
Freeman’s Interpretation of History
• Changes in the type of firms due to scale economies: the
giant management-led firm (DuPont)
• Managerial capitalism: General Electric
• The rise of professional manager himself
• The growth by means or mergers and take-overs
• Taylorism: the principle of division of labor, breaking
down the production process into simple tasks, each of
which could be standardized and timed (the amount of
work to be optimized)
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Technological Revolutions:
Freeman’s Interpretation of History
• Large managerial companies were well suited to
take the advantage of economies of scale
(decreasing unit costs resulting from an increase
in the scale of production) and scope
(knowledge may be used for several product
families)
• The giant-management led firm causing to a
shift away from the individual inventor in the
technological process: introduction of R&D
departments
• The first R&D laboratories emerged in Germany
in the chemical industry from 1870
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Technological Revolutions:
Freeman’s Interpretation of History
The Age of Mass Production (1940-1990)
• Reliance on scale economies and massproduction in the US spread to Western
European countries and NICs
• The adoption of mass-production methods led to
significant rise of labor productivity levels relative
to the US: Abramovitz ‘catch-up boom’
• The expansion of mass-production depended on
application and spread of automobile (internal
combustion engine) and (petro) chemical
technology, again had been around for some
time
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Technological Revolutions:
Freeman’s Interpretation of History
• Henry Ford’s Model T in 1908
• Managerial capitalism
• Introduction of the assembly line in the production process: a
process innovation that was characteristic of the Taylorist way
of producing
• Breaking down the task of assembling an automobile into
small parts and giving workers a standard (and small) amount
of time to carry out this task
• High productivity, relatively low prices of the final product led
to rapid growth of the sales of the Model-T Ford
• Applied in factories producing in mass volumes
• Disadvantage: decreased the quality of work, repetition of
tasks and mental stress resulting from the steadily moving
belt
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Technological Revolutions:
Freeman’s Interpretation of History
• The unionization: a special mode of regulation of
labor relations based on negotiations between
employers and unions
• This led to increase in wage levels in the
industrialized world, in turn led to increased
demand for consumption goods and increased
the circle of scale economies and massproduction
• Fordism: the above mode of regulation in the
labor relations and the general socio-economic
changes associated with it
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Technological Revolutions:
Freeman’s Interpretation of History
• The mineral oil: automobile depended on gasoline derived
from mineral oil, ways of cracking, cracking process providing
as a stimulus for the development of the synthetic materials:
plastic materials
• Thus oil became a main source for both energy and material
input in the age of mass production
• The widespread diffusion of the technological paradigm based
on oil took place in the period after 2nd WW and the same
holds for the process innovation, assembly line
• The organizational changes: large conglomerate firms
extended their activities beyond with the help of developments
in air travel and telecommunications, multinational firms
• New concepts: International trade and foreign direct
investment (FDI)
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Technological Revolutions:
Freeman’s Interpretation of History
The Information Age (1940-?)
• The success of the mass production paradigm
broke down in the 1970s when growth rates
slowed down significantly
• Two oil crises
– The first oil shock (1973-79)
– The second oil shock (1979-83)
• The technological opportunities for further
increase in the efficiency of mass production
systems were coming to an end
• ‘productivity slowdown”
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Technological Revolutions:
Freeman’s Interpretation of History
• In the late 1980s, the productivity slowdown turned into a
‘productivity paradox’
• A potential new technological revolution associated to
computers and electronics was not yielding to an
upswing: technological paradigms taking a long period to
reach their full potential
• The need to connect computers to each other forcing
advances in the telecommunications sector
• The convergence between the computer industry and
the telecommunications industry led to ICTs
• Computer Integrated Manufacturing (CIM)
• The ICTs reached a level of diffusion and application that
gives reason to speak of a new technological revolution
beginning to shape up
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Technological Revolutions:
Freeman’s Interpretation of History
• The organizational changes: growing importance of
networks
• The early form of networking applied in Japanese firm
Toyota, ‘lean production’ from the late 1940s
• The system was aimed at reducing inefficiencies in the
assembly line process
• Ohno’s system consisted of adding flexibility to the
process (also called flexible production) by
– Relying on the skills of the workers who were trained to perform
a large variety of tasks rather than a single task
– A large number of suppliers for specialized parts that is a model
of networking firm (consisted of long-term ties between the
buying firm and its subcontractors)
• The possibilities of networking between firms have been
facilitated with ICTs
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Synthesis
• General conclusions that can be related to Schumpeter’s theory of
long waves and basic innovations
• In the long-run, technological change and economic growth takes
the character of basic innovations overtaking each other
– It is not so much the innovation dates of these major technological
breakthroughs that matters for the growth patterns experienced in the
economy
– These innovations require long periods of learning in firms and by
consumers, as well as supporting (infrastructural) investment
• It is the diffusion of the technological paradigms which the basic
innovations give rise that matters for economic growth, rather than
the innovation itself
– The major technological characteristics of the subsequent revolutions
are associated with technical breakthroughs that occurred in a previous
wave
– The diffusion of basic innovations is a gradual process of incremental
change that opportunities from various basic innovations are combined
in new ways
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Synthesis
• Basic innovations, or the technological paradigms
associated to them, have the capacity to change the
economy over long periods
– Basic innovations transform the society in a way that goes much
beyond the one-dimensional view of the economy from the point
view of growth rates
– Basic innovations change the sectoral composition of the
economy
– Key factors associated with the new industries and the new
technological paradigms they embody slowly rise while the
paradigm develops and such key factors associated to older
paradigms see their influence decline at the same time
– This structural change can also be viewed in terms of the
organization of the economy, shaping the technological trajectory
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