Implications For Economic Growth

The history of technology clearly demonstrates that crisis-driven radical innovations, as distinct from incremental changes and adjustments, do not often occur at random, as assumed by most economists10 and in some evolutionary economic models (for example, Nelson and Winter 1977, 1982). It is also important to recognize that radical innovations are not costless, even at the societal level. Apart from the costs of research, development and commercialization, such innovations may cause the demise of competing and obsolescent technologies and the businesses dependent on them. Schumpeter coined the phrase 'creative destruction' to characterize this phenomenon.

It is worth adding here that radical innovations typically provide solutions to particular problems that are obvious to industry leaders and sometimes even to the general public. In fact, we argue that experts can, and do, know the likely direction of change, because they - unlike the general public - can foresee the most plausible avenues to search for breakthroughs. Some are temporary: we already know that they can be surmounted by approaches that are easily identifiable and require finite investment along well-defined lines. The space program, culminating with the moon landing in 1969, was an example of this sort of barrier and breakthrough.

An important barrier to progress in some fields is the lack of a market for a technology that is 'needed' but unprofitable to the private sector. Needs of this kind may arise from threats to health and safety, for instance. One historical example was water pollution by sewage, an obvious health (and aesthetic) urban problem since the first cities. Sewer pipes separated well-water from sewage but only transferred the wastes into the rivers. The first practical solution to the water contamination problem arrived in the late 19th century, partly by accident. An electrolytic process had been developed and quickly adopted to produce caustic soda (sodium hydroxide) from salt. Caustic soda was essential for the soap, petroleum-refining, pulp and paper, rayon, aluminum and other growing industries. Chlorine was a by-product of electrolytic alkali production, with few uses at first. But it worked well as a way of decontaminating water. This lucky coincidence prompted the development of chlorination of water, and subsequently of sewage treatment systems.

The carnage of the Crimean War and the US Civil War in the mid-19th century generated public pressure to attack other infectious diseases, and injuries from war. Moreover, increasing wealth prompted the expansion of hospitals, medical services and medical education. These eventually prompted the successful search for causes of infection (especially by Pasteur), and a growing collection of medical innovations, from vaccination to antiseptics, anesthetics and antibiotics. The discovery of the anesthetic properties of nitrous oxide ('laughing gas') was probably accidental, but the subsequent search for more efficient and effective alternatives has never ceased.

Health and safety are now accepted government responsibilities. The bans on DDT and other dangerous pesticides, tetraethyl lead in gasoline and chlorofluorocarbons, due to their role in destruction of the ozone layer, are examples of regulatory barriers. However, up to now, creative responses to regulatory barriers are still comparatively scarce. Institutional barriers are much subtler and more widespread. An example might be the prevalence of building codes prescribing what materials may, or may not, be used in house construction.

Other barriers are more fundamental in nature and may be surmountable by means that cannot yet be described, but which involve no violation of physical laws. An example of this sort might be the unsolved problem of removing trace quantities of copper from recycled steel and recycled aluminum. Until this problem is solved, unwanted copper will accumulate in the recycled steel and aluminum, significantly reducing the quality of recycled metals vis-à-vis virgin metal. There is no existing process for accomplishing this objective at reasonable cost, so it is clearly a barrier. But it is one that will almost certainly be overcome at reasonable cost some day. Only the timing is uncertain.

Some barriers appear to be real, even imminent, but cannot be characterized very precisely. The current example is micro-miniaturization. Almost every electronics expert is convinced that miniaturization has its limits, and there have been many attempts to quantify the limits of silicon-based chips. But for nearly four decades the limits have kept receding into the future. At this point, nobody in the industry is very sure what the limits of silicon technology really are, and consequently, the industry is unsure in what directions it should focus its research.11 But, scientists already know that there are no limits to information technology in principle, until at least the molecular level has been reached. Meanwhile, the composition and design of a microprocessor to be produced in - say 2020 - cannot be forecast with any confidence.

Finally, of course, there are fundamental limits that simply cannot be overcome within the constraints imposed by the basic laws of physics as we know them. Laser swords (as in Star Wars) or 'phaser' pistols, tele-portation ('Beam me up, Scotty'), anti-gravity, or faster-than-light travel - technologies imaginatively illustrated in the TV series Star Trek - are physically impossible, according to our current understanding of the laws of nature.

Reverting to the question of predictability, it is only the details (including timing and costs) that are essentially unpredictable, in the sense of throwing dice. But even there, the process of technical development only appears random to outsiders. It follows that radical innovations can often (but not always) be forecast as to functionality and occasionally as to sources, though rarely as to particulars.12

What cannot be forecast with any confidence at all is the 'spillover' potential of a future technological breakthrough. The term spillover is used by endogenous growth theorists in reference to benefits (or costs) not captured by the innovator, but available to 'free riders' (that is, the rest of the world). For example, the technology of cheap electric power delivered to a user was initially developed by Thomas Edison to facilitate electric lighting. But this innovation soon found a host of other uses from trams and elevators to electric furnaces and electrolytic processes that created new industries and jobs totally unrelated to illumination. Cheap aluminum was one of them. Aluminum, in turn, helped facilitate the modern passenger aircraft and airline industry. None of these downstream impacts was anticipated by Edison or his backers. It is, however, the spillover potential that determines the overall long-run impact of a technological innovation on economic growth.

The 'bottom line' of the discussion in this section is that there is an important difference between technology at the aggregate level, as modeled in neoclassical economic theory, and technological change, as it actually occurs in localized fits and starts. Technology in the theory is a smooth increase in factor productivity. It is often regarded as a stock of useful knowledge, homogeneous, uniform and fungible. The reality is that the most important technological advances are radical breakthroughs that occur initially in a particular sector and subsequently find applications (creating new products and services) in other sectors. But virtually all incremental improvements of existing technologies, and even most breakthroughs, have little or no spillover impact. This point is very important for what follows later in this book.

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