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STIA305 08

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  • Technology is a Driver of Economic Growth Investment in Education (‘Human Capital’), Information, Research, and Innovation is a Form of Capital Savings Investment in Capital Goods is an Investment in ‘Embodied Technology.’ Knowledge-Based ‘Dynamic Comparative Advantage’ Can be Created by this Investment This Investment Responds to Economic Conditions (Business Climate, Macroeconomics, Markets, Competition, Income Distribution) and to External Inducements (e.g., Taxes, Subsidies) So Technology should be Represented as an Endogenous (Inside the Model) Factor of Growth
  • AN ASIDE: Risk is not a Market Imperfection. It’s a Variable to be Managed , e.g., by Hedging, Diversifying or Obtaining Higher Rate of Return to Compensate for Higher Risk. There is Actually a Market for Risk! It’s Called Finance: Investment, Insurance and Banking. This Market Can Be Imperfect – viz., the Mortgage Crisis
  • Examples of Innovation Induced by Prices Over Time, US Economy has ‘Dematerialized’ in Response to Environmental Restrictions High Raw Materials and Energy Prices of the 1970s It’s Tough (though not impossible) to Push Energy Conservation when Energy was Cheap (An aside: Energy companies haven’t invested in research because energy prices have varyed wildly from year to year.) High Oil Prices have Created Increased Interest in Alternative Energy and Conservation Using Existing Technology If Energy Companies become Convinced that these Prices Seem Here to Stay (Energy Prices Oscillate Wildly), Increased Investment in Research and Development will Follow
  • Transcript

    • 1. The Economics of Technological Innovation
    • 2. Technology Drives Economic Change, but Technology Also Responds to Economics
    • 3. Technology and Economic Growth
    • 4. Technology in Growth Theory: The Branch of Economics that Develops Models to Explain the Factors Underlying the Economic Growth of Nations Model as a Vending Machine: Put in Inputs, and Out Come Outputs. Then Test the Model by Comparing its Results with Data or Proxies)
    • 5. In Classical Growth Theory , Growth in GNP is Ascribed to Increased Capital Investment and Application of Labor. Technology is Assumed to Advance on its own, improving productivity independent of economics, politics or anything else, and is Represented as an ‘Exogenous Factor’ Outside the Model.
    • 6.
      • This Model Fails to Account for About Half of Measured Growth.
      • An Embarrassing “Residual” is Ascribed to Education, Technology, Organization, Market Development, and Learning by Doing or by Using.
      • In Short, It Ignores STIA 305!
      • In Fairness, the Model was Never Intended as a Total Picture of the Sources of Growth – But It Has Shaped the Perceptions of Much of the Economics Profession
    • 7. More Recent Economic Theory Recognizes that
      • Technology is a Driver of Economic Growth
      • Investment in ‘Human Capital’ is a Form of Capital Savings
      • Investment in Capital Goods is an Investment in ‘Embodied Technology.’
      • Knowledge-Based ‘Dynamic Comparative Advantage’ Can be Created by this Investment
      • This Investment Responds to Economic Conditions and to External Inducements
      • So Technology should be Represented as an Endogenous (Inside the Model) Factor of Growth
    • 8. A New Form of Dynamic Comparative Advantage
      • Static Comparative Advantage (Ricardo)
        • Intrinsic to a Country (Port vs. Wool) by Virtue of its Natural Resource Endowments
      • Dynamic Comparative Advantage : Created by a Country by Investments in Research, Innovation, Education
        • Distinct from Competitive Advantage, which is a Characteristic of a Firm
    • 9. US Comparative Advantage is in the Early Part of the Product Cycle, Even Though this is Labor Intensive. Its Productivity is Due to the High Margins (i.e., ‘Economic Rents’) Derived from Technological Monopoly. Technology is Only One of Many Ways to Gain Rents by Control of a Key Link in the Value Chain (cf. Kaplinsky)
    • 10. Technology as an Investment
    • 11. Many Investments in Technology are Risky --
      • Hence Investors Can Demand a Premium for Any Individual Investment in Technology
      • But Investments in Technology are Very Profitable If You Win, or are Big Enough to Spread Your Risk: viz. Pharmaceutical Industry
    • 12. AN ASIDE: Risk is a Variable to be Managed , not a Market Imperfection. There is Actually a Market for Risk! It’s Called Finance: Investment, Insurance and Banking. This Market Can Be Imperfect – viz., the Mortgage Crisis
    • 13. Risk vs. Innovation
      • Innovation Carries Risk
        • Tests Cannot be Complete
        • Only Widespread Use Reveals All Risks
      • So Regulation, or Strict Liability Legislation, Inhibits Innovation but Protects Safety
        • The Debate over Precaution Concerns the Trade-Off Between Risk and Innovation
    • 14. Important Definitions: Rival and Excludable Goods
      • Rival : If I am using it, you can’t
        • Non-Rival: Your use costs me little and doesn’t prevent me from using it
      • Excludable : If I own it, I can prevent you from using it
        • Non-Excludible: I can’t stop you from getting its benefits
    • 15. Rival and/or Excludible
      • Rival and excludable : private goods
        • Example: an apple or an Apple
      • Rival but not excludable : common pool
        • Examples: fisheries, atmosphere’s ability to absorb pollution
        • Problem: free riders on agreed regimes
      • Excludable but not rival : ‘club’ goods
        • Examples: invention subject to patent, missile defense, Panama Canal, country club membership
        • Problem: Marginal cost is very low: How to Price?
    • 16. Rival and/or Excludible (2)
      • Neither rival nor excludible : public goods
        • If anyone can use it, everyone must be able to do so
          • Subject to ‘free riders’ and can’t be priced
        • Examples: disease control, non-toll road, an idea, organizational know-how, basic science, technology for mitigating climate change (?)
        • This quality makes knowledge special: there is no inherent limit on its value as an input.
        • Problem: Requires public support lest there be under-investment
    • 17. Induced Innovation By Prices By Policies By Regulations By Government Demand (Military or Civilian)
    • 18. Innovation Induced by Prices
      • Production Methods Tend to Use Plentiful Factors as Inputs and to Economize on Scarce Ones
        • Ruttan: Japanese Agriculture Underwent the ‘Green Revolution’ Long Before the US Because Fertilizer and Labor were Cheap and Land was Expensive
    • 19. Examples of Innovation Induced by Prices
      • Dematerializion’ of US Economy
      • It was Tough (though not impossible) to Push Energy Conservation when Energy was Cheap
      • Recent Increased Interest in Alternative Energy and Conservation Using Existing Technology
        • If Energy Companies become Convinced that these Prices Seem Here to Stay (Energy Prices Oscillate Wildly), Increased Investment in Research and Development will Follow
    • 20. Yet Contrary to Logic, We Tax What We Want to Encourage (Employment) and Subsidize What We Want to Discourage (Use of Virgin Resources) :( Politics Beats Economics Every Time ):
    • 21. Innovation Induced by Regulations: Policy Standards as a Source of Market Pull (If They’re Enforced)
      • Environment
      • Energy Efficiency
      • Public Health
      • Public Safety
      • Building Codes
      • Worker Health and Safety The Threat of Liability May Have a Similar Effect, If the Courts are Honest
    • 22. So Frame Policy so as to Encourage Innovation
      • Performance Standards are Better than Materials Standards
        • Performance : A Wall Must Support 200 lbs/in 2
        • Materials : A Wall Must be Brick and 6” Thick
        • But Performance Standards are Harder to Enforce
      • Incentives to Improved Performance – e.g., European Subsidies for Deploying Renewable Energy Decrease from Year to Year
      • Support to Research and Monitoring
    • 23. Technology Induced by Government Demand
      • Military as Key Funder of ‘Enabling’ Technologies:
        • Interchangeable Parts, Radar, Nuclear Energy, Computers, Semiconductors, Satellites, Internet . . .
      • Civilian Technology Induced by Government Requirements:
        • Early Computers for Census, Counterfeit-Proof Currency, Cost/Benefit Analysis, Adaptive Management, Analytic Testing Methods to Underpin Environmental Regulation
      • Government Procurement Can Create Demand for Innovation and Help it Attain Economies of Scale for Market Launch
    • 24. Technology Responds to Economics, and Economics Responds to Policy A Segue into ‘Principles of Science and Technology Policy’