Innovation and the production of new goods and services have almost always been a part of economic activity, economic research on innovation has been to some extent scattered among a number of quite disparate economic fields, including industrial organization (the strategies and interactions of innovative firms), macroeconomics (growth accounting), public finance (policies for encouraging private sector innovation), and economic development (innovations systems and technology transfer). However, we have recently been shown, a large and fairly tightly clustered network of economists working on innovation and technical change has developed, a network that includes both those working within the “evolutionary” paradigm and those using more traditional methods of analysis.
Innovation economists owe a great debt to Joseph Schumpeter, who is often called the father of Innovation Economics, and whose work contains much verbal theorizing on the topic that is still influential today.
In the preface to the Japanese edition of his 1937 book The Theory of Economic Development, Schumpeter has sketched out what is probably the most precise and succinct statement of his own intellectual agenda that he ever committed to print. That agenda focuses not only upon the understanding of how the economic system generates economic change but also upon how that change occurs as working out of purely endogenous forces:
“If my Japanese readers asked me before opening the book what it is that I was aiming at when I wrote it, more than a quarter of a century ago, I would answer that I was trying to construct a theoretic model of the process of economic change in time, or perhaps more clearly, to answer the question how the economic system generates the force which incessantly transforms it … I felt very strongly that … there was a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained. If this is so, then there must be a purely economic theory of economic change which does not merely rely on external factors propelling the economic system from one equilibrium to another. It is such a theory that I have tried to build.”
It should be understood that this was published in 1937, when Schumpeter was already at work on his book ‘Capitalism, Socialism, and Democracy’. In fact, Capitalism, Socialism, and Democracy is the fulfilment of precisely the intellectual agenda that Schumpeter articulated in the passage to his Japanese readers that was just quoted.
So How does technology advance?
Modern endogenous growth theory has postulated that innovation is “produced” within the system, subject to economic incentives, and should be regarded as an output, resulting from inputs, where physical capital, human capital, R&D, and economies of scale all play major roles. The economic agents who brought this about were motivated mostly by selfish considerations of advancement, including the natural human drives of greed and ambition. The greatest technological sea change in history, which is being discussed here, supposedly constitutes a ringing affirmation of this view. Technology does not descend down on us like Rain or better perhaps, is not given to us like the religious scriptures. It was produced within the system by men and (rarely) women whose purpose was normally to achieve some kind of improvement to the process or product they were interested in. Yet the neo-neoclassical view of technological progress needs to cope with the historical parameters of technological progress, which govern a phenomenon unlike anything else in history.
In part this is for reasons quite well understood. Technology, like all forms of knowledge, is non-rivalrous (i.e., by sharing it with another person the original owner does not have less), so that the social marginal cost of sharing it is zero. Since the social marginal product is positive, the optimal static solution is one in which it is made accessible freely to all able and willing to use it. Yet under these conditions no one has much of an incentive to engage in the costly and risky R&D in the first place. The resulting dilemma has led to a debate that is now a quarter of millennium old on how best to establish optimal incentives in innovative activity. Patents and other forms of private property on useful knowledge played a role in the Industrial Revolution, but were not as essential to it as was once supposed. Instead, it has become increasingly clear that useful knowledge is often produced under conditions of “open source,” that is, each person who adds to the pool of knowledge does not require or expect to receive some monetary compensation proportional to the social savings of the innovation. He or she insists, however, on receiving credit and recognition for the contribution as part of a signalling game in which the goal is to establish a reputation. Much innovation in the past functioned very similarly. The dichotomy according to which science operated according to open-source systems whereas technology was subject to private property constraints is seriously exaggerated.
Equally important in making innovation a unique topic in economic history is the fact that technology is produced under the kind of uncertainty that can be characterized as a combination of unintended consequences and unknown outcomes. In large part this is the case because technology is normally developed when the exact modus operandi of the physical, biological, or chemical processes on which it is based are at best understood very partially. Many inventions have unforeseen and unforeseeable spill over effects on the environment, human health, or the social fabric. Moreover, many innovations are often combined with other techniques in ways not originally intended, to produce wholly novel hybrid techniques that do far more than the simple sum of the components.
As a consequence, inventors are often surprised by the eventual outcomes of what seems successful innovation. Such surprises can be, of course, positive or negative. The progress of technology has been explained by both internalist and externalist theories. Internalists see an autonomous logic, an evolutionary process in which one advance leads to another, in which contingency plays a major role, in which the past largely determines the future. Externalists think of technological change as determined by economic needs, by necessity stimulating invention, by induced innovation being guided by factor prices and resource endowments. In the same camp, but with a different emphasis are social constructionists who regard technology as the result of political processes and cultural transformations, in which certain ideas triumph in the marketplace because they serve certain special class or group interests and powerful lobbies. The history of technology since the Industrial Revolution provides support as well as problems for all of those approaches. A more inclusive approach would separate the process into interactive components. For instance, there is no question that economic needs serve as a “focusing device” in Rosenberg’s (1976) famous simile, but the popular notion that “necessity is the mother of invention” manages to be simultaneously a platitude and a falsehood. Societies tend to be innovative and creative for reasons that have little to do with pressing economic need; our own society is a case in point. Modern Western society is by and large wealthy enough to not feel any pressing “need,” yet it is innovative and creative beyond the wildest dreams of the innovators of the eighteenth century. There was no “necessity” involved in the invention of ipods or botox. The social agenda of technology is often set by market forces or national needs, but there is nothing ever to guarantee that this agenda will be successful and to make sure what it will lead to.
Technology moves at a certain speed and in certain directions, and the study of innovation helps us understand these laws of motion. Moreover, to come to grips with why technology changes the way it does, we need to be clearer about the way in which prescriptive knowledge (technology) and propositional knowledge (science and general knowledge about nature) affect one another.
Knowledge about the physical environment creates an epistemic base for techniques in use. Technology, in turn, sets the agenda for scientists, creating a feedback mechanism. Why, for instance, do high-pressure engines work at higher thermal efficiency than low-pressure ones? Why does heating fresh food in tins and then vacuum-closing them prevent putrefaction? Why does injecting people with cowpox pus provide them with protection against the much nastier smallpox? These and similar issues came up during the period under discussion here, and their resolution led to further technological advances. Technological change, like all evolutionary processes, was often wasteful, inefficient, and frequently wrong-headed. It was inevitably so, because by definition the outcome of the project was unknown, and so mistakes were made, duplicatory efforts took place, blind alleys were entered. Moreover, a great deal of what seems to us successful innovation was not adopted, often for reasons that ex post seem hard to fathom and at times frivolous. But the degree of inefficiency of the innovative process was not constant over time. The amount of wastefulness in innovation can be substantially reduced if more is known about the underlying process. In that regard, the process has become hugely more efficient in the past quarter millennium. If innovation requires to “try every bottle on the shelf,” an improved epistemic base of the technology can at least reduce the number of shelves. It can avoid looking for things known to be blind alleys like perpetual motion machines and processes that convert base metals into gold. It reduces the amount of intellectual energy spent on occult and other activities that the age of Enlightenment increasingly dismissed as “superstition.” More and better knowledge of what is used elsewhere can also reduce duplicatory research and avoid reinventing some wheels.
The technological component of economic modernity was created in the century before the Industrial Revolution, not through the growth of foreign trade, the emergence of an urban bourgeoisie, or the growing use of coal (as has often been argued) but by a set of intellectual and ideological changes that profoundly altered the way Europeans interacted with their physical environment. By that I mean both how they related to and studied the physical world in which they lived and the ways they manipulated that knowledge to improve the production of goods and services. The net result has been that the technological constraints to which premodern societies were subject simply because they did not know enough were slowly lifted. Modern economic growth has been driven by increasing useful knowledge, which is not, as far as is known, subject to decreasing returns. What makes this possible, as was already realized in the eighteenth century, was the growing “division of knowledge” or specialization, in which each person controlled an ever-declining slice of a rapidly increasing total amount of knowledge. Smith (1757, p. 570) argued outright that “speculation in the progress of society…like every trade, is subdivided into many different branches… and the quantity of science is considerably increased by it.” Because total social knowledge equals the union of all individual pieces of knowledge, the knowledge available for technological advances was increasing, provided that those who could make best use of it were able to access it. Hence the centrality of what has been called access costs. What has assured the decline in access costs is that the technology of access itself has been improving through such discrete leaps as the invention of the printing press and the internet, as well as through many other advances, both institutional and technological in the creation of open science and the placement of useful knowledge in the public realm and its codification in languages that can be understood or translated easily.
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Very insightful.