Science and Technology Dynamics

1
Science and Technology Dynamics

• Evolutionary perspectives on the role of
  technology in economic development
• Introduced by Andreas Reinstaller

2
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.

3
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!

4
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)

5
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.

6
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_at_merit.unimaas.nl). Dont
  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

7
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

8
Consequences (?) of growth. Uneven distribution
of wealth
Source Pianta (1995), Cambridge Journal of
Economics 19, 175-87
9
Consequences (?) of growth. Catching up and
falling behind
From Temple (1999), JEL 37 (1), p.115
10
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 growth
• Social equity

11
Consequences of growth. Structural change.
12
First part of the presentation is over

• See you in five minutes!!

13
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)

14
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

price
quantity
If for a given income the price of a commodity
falls, more is asked for consumers maximize
utility
15
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. capitalmachines, 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)

From this the market supply is derived
price
quantity
At a given technology producers want to increase
output at higher prices. Curve slopes up due to
increasing costs.
16
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 Says 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.

price
p
q
quantity

• 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!

17
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).

yY/L
A
Labour productivity
kK/L
Capital intensity
Curve is concave because of increasing
costs. Technical change (A) shifts the schedule
up labour productivity increases.
18
What is the optimal rate of accumulation? The
Neoclassical growth model.

• Change of capital stock
• Savings investment (sf(k))
• Decreasing returns
• Population growth (n)
• Depreciation rate (?)
• Fixed amount of capital is needed
• per capita ergo (nk)

In 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.
19
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 -gt and
  derive TFP

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.
20
Evidence switch to other show
21
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 -gt 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
22
Knowledge as a factor of production Human
Capital (i)

• How to overcome the problems? Knowledge seems to
  be -gt 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

23
Knowledge as a factor of production Human
Capital, the characteristics of the stock (ii)
From OECD (2000), Human Capital Investment, Paris
24
Knowledge as a factor of production Human
Capital, the characteristics of the stock (iii)
From OECD (2000), Human Capital Investment, Paris
25
Knowledge as a factor of production Research and
Development (i)
From OECD (2000), Human Capital Investment, Paris
26
The failure of equilibrium models to explain why
RD 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.

27
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.