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Description
Concern over lagging growth in living standards over many years, growing awareness of the looming pressure of demographic change on government and private budgets, and the rise of vigorous new competitors in the world have turned Canadians' attention to the question of economic dynamism and the factors that support growth. Happily, a new generation of endogenous growth theory based on Joseph Schumpeter's concept of "creative destruction" yields a number of insights of value to Canadians. The new theory portrays a free enterprise economy that is constantly being disturbed by technological innovations from which some people gain and others lose, an economy in which competition is a Darwinian struggle whose survivors are those that succeed in creating, adopting, and improving new technologies. This Schumpeterian point of view is particularly relevant to the current Canadian and global situation, in which technological revolutions in information, communications, and biology are transforming national economies.
This Commentary discusses some of the insights that the new endogenous growth theory offers into contemporary issues. The discussion touches on competition policy, the protection of intellectual property, the role of universities in an economic system, domestic research and development (R&D) in a world of innovation and open borders, the importance of openness, globalization and the gap between rich nations and poor, the macroeconomic costs of technological paradigm shifts, and rising wage inequality.
The new theory leads to several broad conclusions that are relevant for current policy debates:
* Competition policy should not be relaxed in hopes of boosting innovation, because more competition actually strengthens the incentive to innovate.
* Canada needs to be wary of further extensions of patent protection, which could serve to discourage innovation more than stimulate it.
* Canadian universities should continue developing ties with private enterprise, but without sacrificing academic values that sometimes conflict with commercial interests.
* Openness to international trade is crucial for keeping pace with global technological change, as is a favourable R&D environment.
* The effects of innovation on income inequality can be mitigated by strengthening the educational system and reducing mobility barriers.
New Theories of Technology and Economic Growth
Economists traditionally have viewed the relationship between technology and the economy as a one-way street. Introductory economics textbooks tell the student that the state of technology forms part of the background conditions--for scientists and engineers to analyze, perhaps, but for economists to take as given. According to the neoclassical growth model of Solow (1956) and Swan (1956), technological change has a profound influence on our well-being--indeed, the economy's long-run growth rate is determined exclusively by the rate of technological progress--but it emanates from a scientific process that operates outside the realm of economics.
This mainstream view of technology has never been accepted universally. In particular, specialists in economic history and the economics of technology have argued that technological progress comes in the form of new products, new techniques, and new markets, which do not spring directly from the scientific laboratory but come from discoveries made by private profit-seeking business enterprises. For example, the transistor, which underlies so much recent technological progress, was discovered by scientists working for AT&T on the practical problem of how to improve the performance of switch boxes that were using vacuum tubes. (1)
The New Growth Theory
Until 20 years ago, this dissenting view had little influence on the mainstream of economic thinking. Then came the introduction of "endogenous growth theory" by Romer (1986) and Lucas (1988), which showed that mainstream economics can be used to analyze the two-way relationship between economics and technology, including the feedback from the economy to technological change.
In the first generation of the new growth theory to enter the economics mainstream, technological progress is just another form of capital accumulation. That is, technological progress consists of the accumulation of knowledge, which is a kind of intellectual capital, much like physical or human capital except that it is not embodied in machines or people. Technological knowledge, like other forms of capital, can be accumulated with the expenditure of current economic resources (R&D expenditures) and can be used to augment future production possibilities.
In this theory, technological progress, like capital accumulation, arises from decisions to save. Some saving goes to finance the accumulation of physical and human capital, and some goes to finance the R&D that causes technological knowledge to accumulate. Thus, if society saves a larger fraction of national income, the pace of technological progress rises, permitting a higher rate of economic growth to be sustained indefinitely.
Besides bringing endogenous technological change into the mainstream of economics, the new growth theory revived interest in long-term economic growth as an objective of economic policy. The old theory presented a pessimistic view of what economic policy could do in this regard, arguing that, in the long run, economic growth is limited by progress in physics, biology, and engineering, rather than by economic forces. But the new growth theory says that an economy's long-run growth rate depends on people's willingness to save, which is very much affected by economic policy. Moreover, standard cost-benefit analysis shows that a policy that produces even a tiny increase in long-term economic growth can generate benefits whose discounted present value are enormous.
The New New Growth Theory
The first-generation endogenous growth theory portrays economic growth as basically a private activity: economies become richer in the same way an individual might, by saving at a rate determined by how thrifty they are. This simple theory is useful for many purposes, especially for analyzing government policies that affect national saving. But by portraying technological change as a uniformly beneficial process that raises everyone's standard of living, it ignores a critical social aspect of the growth process: technological change is a game with losers as well as winners.
From the handloom weavers of early 19th-century Britain to the former giants of mainframe computing in the late 20th century, workers' skills, capital equipment, and technological knowledge are devalued and rendered obsolete by the same inventions that create fortunes for others. The conflict between winners and losers from new technologies is a recurrent theme in economic history, and the difficulty of mediating the conflict presumably affects society's willingness to foster economic growth. Yet first-generation new growth theory supposes that growth will take place as if the conflict did not exist.
More recently, however, a second wave of endogenous growth theory has broken on the economics shore, which Philippe Aghion and I call Schumpeterian theory (elaborated in Aghion and Howitt 1998a). This new new theory emphasizes the distinction between technological knowledge and capital, and analyzes the process of technological innovation as a separate activity from saving. The new wave is explicit about who gains from technological progress, who loses, how the gains and losses depend on social arrangements, and how such arrangements affect society's willingness and ability to create and cope with technological change. (Box 1 describes a simple economic model that captures the essential features.)
The distinguishing feature of Schumpeterian theory is what Schumpeter called "creative destruction"--the process whereby each innovation creates some new technological knowledge that advances our material possibilities, while rendering obsolete some of the technological knowledge that was created by previous innovations. Creative destruction offers a new view of how competitive markets work,... |
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