Summary

The standard neoclassical model of the world assumes growth in perpetual equilibrium driven by an external driving force called 'technological progress'. The latter is assumed to be exogenous, rather like 'manna from heaven'. Goods and services in this model are abstractions. When there is excess demand for goods, prices rise, profits increase, there is more competition for labor, and wages rise. Higher wages result in increased demand, which accelerates the economy still further. However, higher wages induce producers to become more efficient. They increase labor productivity by investing in new capital equipment incorporating new technology. The creation of new technology is not really explained by the model.

These new investments take some time to come on stream. When they do, wages stop rising and demand stops increasing. The result is excess supply, such as the present situation in the industrialized world for most products. In a competitive 'free market' prices start to fall, but in a world of oligopoly and cartels, prices do not fall, or very little. Nevertheless, older factories become less profitable, or unprofitable, and eventually they close (unless governments step in to prevent it). In the ideal competitive world supply finally declines and demand increases due to falling prices, unless fear of unemployment causes consumers to stop spending, thus making the problem worse. Both expansion and contraction tend to feed on themselves, to some extent. Note that this idealized description does not depend in any way on natural resources, as such, except insofar as they are supplied like other goods subject to market demand.

Needless to say, the real world is not much like the idealized free market world where there are no unions, no cartels, no regulators, no taxes and no subsidies. However, even in the neoclassical paradigm the microeco-nomic role of new technology is straightforward, provided the incentives for investment and the sources of profits to re-invest are not questioned: Progress results from investment aimed at cutting costs so as to reduce prices or to increase the performance or consumer appeal of products or services. Either way, the purpose is to hold or increase market share, which is the surest way to increase the profits of the firm.

The macroeconomic role of R&D in the neoclassical model is much less clear. As mentioned before, the majority of simple models assume that technological progress occurs automatically, in equilibrium, and that its effect is to increase productivity at a steady rate. Some recent models equate technology with knowledge and call it 'human capital' or (equiva-lently) 'knowledge capital'. But these models cannot be quantified or used for forecasting purposes, lacking a reliable measure of knowledge/human capital. As we have said before, the neoclassical model has no convincing explanation of why technological progress should not be uniform or continuous (in fact it isn't), or why R&D and radical innovation should occur at all.

In the alternative disequilibrium paradigm the macroeconomic role of technology is still straightforward: When products become cheaper (due to technological improvements in production) or more attractive to consumers by virtue of improved performance, the result is to increase aggregate demand. Increased demand leads to increased output, higher wages, lower costs (thanks to economies of scale and learning), increased capital investment and more R&D. All of these combine in a positive feedback cycle that drives overall economic growth.

More important, new technology in any given sector may have unexpected spillover effects on others. We could mention a number of examples. For instance, cheap electricity made a number of new materials available for the first time (for example, synthetic abrasives, chlorine, aluminum, stainless steel, tungsten). These, in turn, opened the door to other important innovations, such as high speed grinders, chlorinated water, PVC, incandescent lamps, X-rays and the aircraft industry. These spillovers are difficult to predict, and they have uneven impacts across the spectrum. Thus, not only is new technology created as an essential part of the positive feedback cycle, it is far from uniform in its impacts.

These differential impacts result in significant departures from equilibrium. For instance, when a new technology creates a demand for some product that displaces another older one, there is an automatic imbalance: demand for motor vehicles left buggy-whip manufacturers and wooden wheel manufacturers with excess capacity and declining markets. Electric lighting left candle and kerosine lamp manufacturers with excess capacity, while demand for electric light bulbs grew explosively. The role of technology is (in effect) to create a perpetual disequilibrium.

The other key conclusions of this chapter can be summarized in several related propositions.

1. The process of invention, including (but not limited to) formal R&D is usually (but not always) driven by economic incentives. These incentives may be as simple as the Schumpeterian desire to obtain a temporary monopoly (by means of patents, secrecy or 'first mover' advantages) in some growing field. The fields where opportunities for such gains exist tend to be relatively new ones, often resulting from a scientific 'breakthrough' of some sort. However, resource scarcity (or anticipated scarcity) also provides a major incentive for innovation. Military conflict provides a powerful but non-economic incentive that has triggered a number of important innovations in the past.

2. Technological breakthroughs presuppose barriers. Barriers may be absolute physical limits, but much more often they result from limits of a particular configuration or 'trajectory' consisting of a sequence of modifications of an original basic idea. Barriers can also arise from a variety of causes, ranging from wars to geo-political developments, to problems arising from the adoption of a pervasive technology (such as motor vehicles), including resource scarcity or environmental harms. Radical innovations overcome these barriers by opening new 'morphological neighborhoods' to exploration. Breakthroughs can rarely be predicted in advance, either as to timing or direction. The probability of a breakthrough is essentially proportional only to the intensity of the search for it. If the need is great, the problem will be solved sooner rather than later.

3. Once a barrier has been breached, gradual improvements, based on investment in R&D, are relatively smooth and predictable in the short run. Indeed, they tend to follow a standard pattern that is common to many processes, including diffusion, namely the elongated S-shaped curve. The parameters of the curve can be determined from its history and from a forecast of the ultimate limits of the particular technological trajectory.

4. Breakthroughs tend to have unexpected impacts in fields (sectors) other than the one where the barrier originally existed. The greater the range and scope of the spillovers, the greater the growth-promoting impact. The most important breakthroughs have impacts far beyond the original objective, resulting in new opportunities in other sectors. Breakthroughs tend to create imbalances and disequilibrium. These 'spillover effects' are major contributors to long-term economic growth.

We still lack a useful measure of the past and current state as a whole. We also lack a quantifiable link between past change and future resource consumption. These topics will in the next several chapters.

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