Lecture 1 - The economic impact of technological change and innovation: an historical overview
1. The economics of technological
change and Innovation
UNUMerit course – 2006
Bart Verspagen Eindhoven Center for
Innovation Studies (Ecis), Eindhoven
University of Technology
(former Merit…)
b.verspagen@tm.tue.nl
2. A general outline of the course
The central thing you will learn is how economists
analyze technological change or innovation
The course does not deal very explicitly with
development, but it aims to provide tools and theories
that can be applied to development issues
Topics: history (today, lecture 6), microeconomics
(lectures 2 and 3), macroeconomics (lectures 4-8),
empirical work (lecture 5 and others), policy (lecture
9) and an insight into the scholarly community
(lecture 10)
3. Today’s lecture
Topic: conceptual frameworks used in the
theory of technological change and
innovation
– 1: basic notions, concepts and frameworks (and
stories illustrating them)
– 2: a grand theory of innovation and the economy
(arising out of part 1)
4. 1. Technology as an economic factor
Concepts of technological change
– paradigms
– causation and the chain linked model
Motivation: what is special about technology
and why does it deserve our attention?
– Public good features
– Risk and uncertainty
9. Technological paradigms and
trajectories
Analogy to Kuhn’s philosophy of science
Paradigm: “model and pattern of solution of
selected technological problems, based on
selected principles from the natural science
and on selected material technologies” (Dosi)
Trajectory: ‘normal’ technological change
along a paradigm, closely associated to a
‘goal’ for technological development that
springs from a certain problem
10. Technological paradigms and
trajectories
breakthroughs and incremental innovations
– productivity change
– pervasive technological change (ICT)
– collective innovation
Institutional context (techno-economic
paradigm, Carlota Perez)
Complex interaction between breakthrough
S&T, incremental innovation, economic
motives and institutional context: causality?
11. Causation? Demand pull or technology
push
Who initiates innovation projects: the R&D
department or the marketing department? Is
innovation a reaction to user demand, or
does it create demand?
Technology push
– linear model from technology to market
Demand pull
– linear model from market to technology
12. The laser
Charles Townes on the laser:
“Bell’s patent department at first refused to patent the our amplifier
or oscillator for optical frequencies because, it was explained,
optical waves had never been of any importance to
communication and hence the invention had little bearing on
Bell System interests”
13. Technology push
Example: laser invented without direct
application, now applied in a wide range
(telecom, medical, music, science)
R&D split into basic, applied and
development
– specialization pattern of institutions carrying out
R&D
implications:
– large firms have an advantage because science
takes resources
14. Horseshoes and ‘How the West was
won’
Jacob Schmookler found that the intensified
use of horses when the West of the U.S. was
colonized led to a great increase in the
number of patents on horseshoes
15. Demand pull
Innovation as a response to profit
opportunities
Jacob Schmookler
– patent data
– horseshoes
– statistical analysis of causality investment -
patents
critique: needs and demand
20. IBM vs Apple
Market shares
45
40
35
30
25
20
15
10
5
0
1981
1983
1985
1987
1989
1991
1993
1995
1997
Bron: Harvard Business School Apple case studies 1992 & 1998
21. IBM vs Apple
Winners & losers?
1000
Microsoft
100
Intel
10
Compaq
Apple
1
IBM
0
1985 1987 1989 1991 1993 1995 1997
Bron: Worldscope database
22. Technology a public good?
Recap:
– non-rivalry (or indivisibilities)
– non-excludability
But:
– cumulativeness
– capability to learn
Spillovers and investment (incentives)
25. Strong uncertainty and weak
uncertainty
Neoclassical economic theory can cope well
with weak uncertainty by using stochastic
mathematics (Arrow)
– futures markets for all uncertain outcomes?
– Insurance against failures in innovation?
– moral hazard and agency problem (manager -
stockholder and cost-plus contracts; trade-off
between incentives and buying off uncertainty)
– large firms at an advantage because they
undertake many projects (=insurance)
26. Strong uncertainty and weak
uncertainty
But still, uncertainty leads to underinvestment
And, strong uncertainty (knowing or not
knowing options?)
– systems and paradigms
Evolutionary economic theory can cope well
with strong uncertainty by using bounded
rationality
27. Conclusion
Incentive problem
Theoretical problem (for neo-classical
economics)
– bounded rationality, evolutionary economics
– full rationality, neoclassical economics
– confrontation or convergence?
28. Technological Revolutions and
Economic Development
How do radical technological breakthroughs with
strong uncertainty unfold in historical time?
Long waves
Schumpeter’s theory of long waves
An historical interpretation
29. Long Wave theory
Van Gelderen, Marxian economics
Kondratief
Schumpeter
Neo-Schumpeterians: Mensch, Kleinknecht,
Freeman, Soete
30. Neo-Schumpeterian long wave theory
The story (wave) starts in a depression
– Low (zero) profits, so close to perfect competition
equilibrium
– But entrepreneurs are not happy with this situation
– A solution: innovation
Basic innovations cluster in the depression
– Monopoly rents due to innovation
Bandwagon of imitations: rapid economic
growth and erosion of monopoly rents
– Upswing of the long wave
31. Dis-equilibrium dynamics
Creative destruction (business stealing)
Depletion of technological opportunities and
increase in competition lead the economy
back to a perfect competition equilibrium
– Downswing of the long wave
Primary, secondary and shorter waves
– Speculation (dot.com bubble)
32. Clustering of innovations?
Kuznets critique on clustering hypothesis
– No evidence
– No theoretical explanation
Explanation: depression trigger
Mensch & Kleinknecht vs Freeman, Soete
and Clark
– Clustering of innovations or clustering of diffusion?
33. The empirical evidence
Time series of basic innovations (number of
innovations per year)
8
7
6
5
4
3
2
1
0
1750 1800 1850 1900 1950 2000
34. An historical (Freeman/Soete)
interpretation
Successive technological revolutions since
the Industrial Revolution, for each of these
covering:
– A general impression
– Technological developments in major driving
sectors
– Changes in the organization of the economy
35. Technological Revolutions
1. The Industrial Revolution (1770 - 1840)
2. The age of steam and railways (1840 - 1890)
3. Age of electricity and steel (1890 - 1940)
4. Fordism and Mass-production (1930/40 -
1980)
5. The Information Age (1980/90 - ?)
36.
37. 1. The Industrial Revolution
(1770 - 1840)
Mechanization (process innovation) in a few
leading sectors (iron, textiles) in Great
Britain
Technological developments: textiles, iron,
steam engines
Source of finance: own capital (partnerships
of inventors and entrepreneurs)
38. Technology in Textiles - Spinning
Before the industrial revolution: merchant system:
putting out raw material to hand spinners.
Hargreaves’ ‘spinning jenny’ (1764) was a hand-
powered device that could spin multiple threads, but
was still mainly applied in cottages (home spinners).
Arkwright’s water frame (1769) used multiple (3-4)
pairs of rollers, and yielded a higher quality yarn
more rapidly, the latter because it was operated by
water power (hence its name)
Crompton’s mule (1779) was a combination of the
two previous machines (hence the name ‘mule’), and
was suitable for mass production of high quality yarn
39. Conclusion for spinning
3 innovations in 15 years led to a 50 fold
decrease of hours needed to produce a given
amount of yarn
together with major increases in
transportation technology, this implied that
British textiles industries were able to capture
a large part of world markets
Samuel Crompton
40. Organizational changes associated with
the Industrial Revolution
First wave of mass production through application of
machinery in factories. First these factories were
operated by water power, later on by steam power.
The factory was not only an organizational aspect of
technological change, it also implied a major social
(and later, political) change by creating a proletariat
Increased efficiency of transportation (canals, roads)
made it possible to realize economies of scale in
these factories, and ship manufactured goods to a
large market
41. 2. The age of steam and railways (1840 -
1890)
Diffusion of steam power and its application to
transport: railways, steam ships
Joint stock companies as a new form of corporate
governance which leads to less dependence on
private capital
spread of industrial revolution to other countries than
Britain, such as Belgium, Germany and the United
States
development of electricity, gas, synthetic dyestuffs,
and steel
42. 3. Age of electricity and steel
(1890 - 1940)
Electricity takes over from steam as the main source
of power, steel takes over from iron
Further growth of average firm size, leading to
monopolies, oligopolies and cartels
Take-over of world economic and technological
leadership by the United States, which had a system
based on abundant resources, a large homogenous
market, a capitalist spirit
Shift away from the emphasis on individuals in
innovation proces. towards corporate R&D; this is a
trend that was initiated in the German and US
chemical industries
43. Steel and its impact
Steel was used as an input in a whole range of
industries, such as building, tin cans (food
processing), machinery, weapons, transport
equipment.
44. Technology - electricity
based on scientific advances by Benjamin Franklin, Allesandro
Volta and Michael Faraday in the 1830s
technological use as a power source based on the generator (or
dynamo) and the use of electricity in electric motors, these were
developed in continental Europe in the mid 1800s
application in a wide range of uses, such as lighting, factories,
domestic appliances, transport (metro, trams), Thomas Edison
is the prime inventor and initiator of the use of electric power
in the factory, the electric motor brought flexibility compared to
the steam engine: no longer did the whole factory depend on a
single steam engine, but now each machine tool could have its
own power source (electric motor)
45. 4. Fordism and mass production
(1930/40 - 1980)
Initiated in the US, mass production was based on
the organization of work around an assembly line.
This was first applied in the Ford motor car factory
The success of mass production depends on the
availability of large markets with sufficient demand,
the circumstances in the US (1920s) were right, later
on a worldwide scale in the postwar period
Associated with mass production is the rise of the
multinational company
46. Technology - Internal Combustion
Engine
Developed as an alternative to the steam engine by Lenoir (1859),
commercially implemented by Otto (1878).
The technical director of Otto’s firm was Daimler, who started a firm of
his own in 1882, together with Maybach. They applied internal
combustion engines to a number of vehicles (bicycles, boats,
carriages), which led to the automobile in 1889.
Other sources of power were available for the automobile, such as
steam and electricity
Which power source ‘won’ depended on many factors, among which
infrastructure (gasoline stations, etc.), the range (as in current
discussions around the electric car), but above all in the economies of
scale associated with Ford’s mass production system (lock-in?)
47. Technology/Organization - ‘Fordism’
In the (European) craft-based system, each product was
developed and fit separately; in mass production,
standardization and interchange-ability of parts is
essential (the Colt revolver is an early American
example)
Ford’s assembly line was based on the method of
‘engineering management’ of Taylor, who broke each job
down into its constituent motions, analyzed these to
determine which were essential, and timed the workers
with a stopwatch. With superfluous motion eliminated,
the worker, following a machinelike routine, became
Charlie Chaplin
much more productive.
in ‘Modern Times’
Fordism led to degradation of the quality of work
(boredom)
48. 5. The information Age
(1980/90 - ?)
A shift from material (mass-produced)
products to intangible products (services)
The rise of information processing
machinery
A network society?
productivity paradox (‘we see computers
everywhere, except in the statistics on
Charlie Chaplin in the
productivity’ - R.M. Solow) Information Age
(IBM commercial)
49. Technology - Computers, electronics
and telecom
Computers (developed by both sides in WW II) were
continually improved by developments in electronics:
first based on electron tubes, later on transistors, and
then on integrated circuits and microchips
In the 1980s, technological convergence between
telecommunications, computers and electronics.
Rapid diffusion through almost all sectors of the
economy from the 1980s onwards.
50. Organizational change: A network
society?
An alternative to large scale mass production (Fordism) was launched
in the Japanese automobile industry: Lean Production (or ‘Toyotism’);
this was based on flexible production methods, just-in-time delivery (to
reduce costs of storage), subcontractors networks (small firms),
worker-involvement and skill-development.
With ICTs, communication becomes easier, and networks (e.g.
subcontractors in Lean Production) become more important (Silicon
Valley, Manuel Castells)
51.
52. An attempt at some conclusions
There is a very long lag between invention, and the diffusion of
a major innovation through the economic system, major
innovations introduced in one ‘technology revolution’ may
diffuse on a larger scale only in the next one (e.g., electricity,
steam, internal combustion engine)
There are important qualitative changes in the way in which
technological progress is ‘organized’ (individual inventors,
corporate R&D, networks), as well as differences between
technologies and sectors (R&D arose in chemicals)
Technological developments are linked in a complex causal
mechanism with changes in the organization of the firm,
productive system and the economy/society at large
(infrastructure, Fordism, Toyotism)
Take-over of technological leadership at the level of countries
occurs at the breakpoint of technological revolutions, the
‘innovation system’ of the new leader is an important input to the
new technological wave
