1 technological revolutions and economic development b. verspagen, 2005 the economics of...

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Technological Revolutions and Economic Development

B. Verspagen, 2005The Economics of Technological

ChangeChapter 3

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Introduction

• The different aspects of the long-run impact of technological change on the economy from the viewpoint of economic history

• Ideal theoretical framework: Schumpeterian theory of economic growth

• Marxian way of analysis in the long-run process of economic growth

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Technological Revolutions: Schumpeterian Theory

• Fluctuations in the rate of economic growth that will span a very long period

• Fluctuations (long waves) or Kondratiev waves• The occurrence of fluctuations in the rate of economic

growth means that periods of relatively high growth rates will alternate with periods of low growth rates

• Four phases: upswing (increasing growth rates), prosperity (the increasing growth rates settling down at a high level), recession (growth rates start to slow down again) and depression (growth rates settling at a relatively low level)– A cyclical pattern spanning a period of 40-60 years

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• What role technology may play in the long waves?

• Schumpeter’s theory was about the role of major (basic) innovations in driving long waves: the analysis of the economic impact of basic innovations

• The starting point of the wave is the occurrence of basic innovation (may also be a set of interrelated innovations like the notion of a technological paradigm)

• These basic innovations provide the upswing of a new long wave

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• The basic innovations introduced by entrepreneurs: visionary business man– who recognizes the commercial opportunities of the

basic innovations when others and consumers do not– who is skilled in terms of running the type of business

that is needed to make the basic innovations into a success or in the art of innovation

• Later, Schumpeter put less emphasis on such personal characteristics of the entrepreneur and the role of the entrepreneur in the innovation process started to be taken over by large firms

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• The commercial opportunities of the basic innovations attract imitators

• The radical innovations tend to cluster because first some then most firms follow in the wake of successful innovation

• This imitation and diffusion process not consist of mere copying of the original innovation but rather as incremental improvements

• The bandwagon of imitations: higher growth rates taking the economy into the upswing

• A multiplier process because as imitators expand their activities, investment in capital and workers required

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• The upswing is not only a process of expansion but also includes the productive capital to be adopting: a choice between adopting new technology or going out of business

• Creative destruction: the dual nature of expansion and substitution taking place during the upswing phase

• The bandwagon of imitation makes the upswing happen but also implies that profit rates of the firms pushing the new technology will gradually be eroded

• Profit rates that were high due to large technological opportunities and the absence of competition, start to decrease as more firms enter increasing the level of competition

• Eventually, profit rates and overall growth rates settling down at the prosperity phase

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• Continuation of competition and erosion of technological opportunities leads to a decline in the growth rates, setting in the recession

• Technology matures and competition between firms takes the form of price competition

• The diffusion of basic innovations gets saturated as all potential users have adopted the technology

• Markets are no longer expanding and depend on replacement of old products

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• The recession turns into a depression when– Saturation gets almost compete– The intensity of price competition reaches a peak– Technological opportunities for further improvements

of the technological paradigm have dried up

• The economy approaches a zero profit level• The need for a new set of basic innovations

becomes very high, that is when the process starts all over again with the next wave of basic innovations: new upswing

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• The description of the rise and fall of a set of basic innovations is called the primary cycle

• This may be re-enforced by a secondary cycle that is driven by investment in financial assets

• How about the timing of the swarms of innovations?• If swarms were spread out evenly over time with short

time intervals between them, a more smooth pattern of economic growth might result

• Kuznet: Schumpeter’s theory need to elaborate on the reasons why swarms of innovations would be spread unevenly over time although Schumpeter pointed out the pervasive nature of some innovations

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• Re-birth of Schumpeter’s theory: 1970s when the economy was slowing down and the depression phase of the long wave had set in

• Mensch: a new theory of the relation between long waves and basic innovations

• Basic innovations cluster during the depression phase of the long wave, contrary to Schumpeter’s original view that swarms of innovations would occur during the upswing due to imitation

• Firms under bounded rationality would display satisficing behavior– Firms will not be actively searching for new basic innovations when

high profit rates leading to a focus of attention on the existing technological paradigm (the upswing or prosperity phase)

– Firms will start searching for basic innovations when profit rates start to decrease (the late stage of recession and the depression phase)

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Technological Revolutions: Freeman’s Interpretation of History

• Interpretation of the Schumpeterian theory of technological revolutions and long waves

• Five technological revolutions in the history of modern capitalism

• Each of these revolutions is characterized by a small number of carrying basic innovations, together constituting a technological paradigm

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Timing

(approximate)

Name Transport

and Communication

System

Energy System

1780-1840 Industrial Revolution:

mechanization of textiles

Canals, carriages Water power

1840-1890 Age of steam power and railways

Railways, telegraph Steam power

1890-1940 Age of electricity and steel

Railways, telephone Electricity

1940-1990 Age of mass production Motor vehicles, radio and TV, airlines

Fossil fuels

1990-? Information Age Digital networks (Internet)

Fossil fuels

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The Industrial Revolution (1780-1840)• Starts with the Industrial Revolution in

Britain• Represented a shift from a small-scale

production system based largely on human and animal power to a mechanized way of production in factories

• The main field of application was the production of textiles and iron

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• In (cotton) textiles industry, 3 major innovations were responsible for the increase in the productivity in spinning– Spinning jenny (1764), water wheel (1769) and

Crompton’s mule that is a cross- over of the jenny and the water wheel (1779)

• The rapid expansion of production had to be met by an improved system for the transportation of the products

• Rapid investment in transport infrastructure, canals and roads

• Shipping over seas (British ports)

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• Iron-making industry• The blast furnace: the supply of wood that was needed

to produce charcoal, a major obstacle• Solution: the usage of coke (technological change) • The other bottleneck: power source • Contrary to what is known: steam power not play a major

role in powering the emerging factories in Britain• Industrial Revolution powered mainly by water wheels,

that factories or blast furnaces had to be located close to a river

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• The increased productivity due to technological innovations in the textile industry did not only lead to increase in the scale of production but also led to a major organizational change

• Before Industrial Revolution, the production system depended on small scale equipment that could be operated by a single worker without special infrastructure

• With large scale machines operated by other means than human power, production concentrated in a central place where many workers would be present at the same time with a power source to operate the machines available

• The birth of modern factory and the Capitalist mode of production that Marx described

• A physical relocation of the workers and the emergence of the proletarian class

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• The factory system, the Capitalist system, dependent on efforts by single individuals both in terms of innovative activity and the financing of start-up firms

• A capital market?• Schumpeter emphasizing the role of entrepreneurship in

industrial revolutions• Preliminary conclusions:

– Technological innovations may lead to rapid increases in productivity, but it will generally take some time to realize their full impact on the economy (linking to the Schumpeterian idea of long waves)

– Technology is accompanied by and conditioned on re-organization of the system of production

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The Age of Steam Power and Railways (1840-1890)• The second wave of major innovations related to

revolutionary developments in transportation and the powering of the factories

• The major innovation: steam power• The application of steam power in factories (flexibility in

terms of choosing location) and in transportation• The new applications of steam saw the spread of

industrialization to the European continent (Belgium, Germany) and the US

• These countries took over part of British technologies and in many cases improved on it (steam engines in the US)

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• The steam power actually an innovation that emerged during the previous long wave

• As steam power taking control of the economy, the technological paradigm that was going to replace steam power, electricity was slowly being invented

• The main application of electricity during the age of steam and railways was the telegraph

• Together with the railways, the telegraph increased communication between different parts of the country

• At the same time there were innovations laying the foundation for the chemical industry that was going to rise during the next waves

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• The institutional changes: the joint-stock company and stock market

• Facilitated the raising of capital for the establishment of new firms and decreased the dependence on personal capital

• The type of speculative behavior by investors having high expectations of firms applying new technologies: that is the main driving force of the Schumpeter’s secondary wave

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The Age of Electricity and Steel (1890-1940)• Both steel and electricity invented decades ago but the full

impact towards 20th century• Both of the new paradigms were most rapidly growing and

spreading in the US• Edison, lamp, dynamo, generators, AC electricity net:

diffusion took off rapidly• For factories, electricity represented a power source that was

more mobile and flexible than steam engine• Space saved, the system of decentralized motors, less

sensitive to breakdowns• In the first years of the 20th century that this system of

decentralized motors have been applied due to habit of doing things the old way and the costs of capital locked up in equipment

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• The diffusion path that takes a technological paradigm to its full potential depends not only on incremental technical innovations but also requires organizational innovations

• Steam and electricity: used in all sectors of economy after long period of diffusion and improvement, increased productivity and growth at macroeconomic level

• The steel was much tougher than pig iron that was the main material used in the first and second industrial waves

• The incremental innovations in steel production lead to increase in productivity and a fall in prices (like phenomenon spinning during the Industrial Revolution)

• The strong performance of American companies in the electricity and steel paradigms led a take-over of economic and technological leadership from Britain by this country

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• Why US leadership?• US possessed a large and homogenous market

– As the new technologies were capital intensive and displayed important scale effects, this led to production costs falling when served to a larger market

• US were abundant in natural resources, including land and minerals– This gave American firms an important cost advantage and

helped them to keep the prices low and hence serve a large market and reap the scale economies of the new paradigm

• The liberal “American spirit” was aimed at entrepreneurship and capitalist investment and was also very much open to change and the introduction of new technologies

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• Changes in the type of firms due to scale economies: the giant management-led firm (DuPont)

• Managerial capitalism: General Electric• The rise of professional manager himself• The growth by means or mergers and take-overs• Taylorism: the principle of division of labor, breaking

down the production process into simple tasks, each of which could be standardized and timed (the amount of work to be optimized)

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• Large managerial companies were well suited to take the advantage of economies of scale (decreasing unit costs resulting from an increase in the scale of production) and scope (knowledge may be used for several product families)

• The giant-management led firm causing to a shift away from the individual inventor in the technological process: introduction of R&D departments

• The first R&D laboratories emerged in Germany in the chemical industry from 1870

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The Age of Mass Production (1940-1990)• Reliance on scale economies and mass-

production in the US spread to Western European countries and NICs

• The adoption of mass-production methods led to significant rise of labor productivity levels relative to the US: Abramovitz ‘catch-up boom’

• The expansion of mass-production depended on application and spread of automobile (internal combustion engine) and (petro) chemical technology, again had been around for some time

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• Henry Ford’s Model T in 1908• Managerial capitalism• Introduction of the assembly line in the production process: a

process innovation that was characteristic of the Taylorist way of producing

• Breaking down the task of assembling an automobile into small parts and giving workers a standard (and small) amount of time to carry out this task

• High productivity, relatively low prices of the final product led to rapid growth of the sales of the Model-T Ford

• Applied in factories producing in mass volumes• Disadvantage: decreased the quality of work, repetition of

tasks and mental stress resulting from the steadily moving belt

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• The unionization: a special mode of regulation of labor relations based on negotiations between employers and unions

• This led to increase in wage levels in the industrialized world, in turn led to increased demand for consumption goods and increased the circle of scale economies and mass-production

• Fordism: the above mode of regulation in the labor relations and the general socio-economic changes associated with it

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• The mineral oil: automobile depended on gasoline derived from mineral oil, ways of cracking, cracking process providing as a stimulus for the development of the synthetic materials: plastic materials

• Thus oil became a main source for both energy and material input in the age of mass production

• The widespread diffusion of the technological paradigm based on oil took place in the period after 2nd WW and the same holds for the process innovation, assembly line

• The organizational changes: large conglomerate firms extended their activities beyond with the help of developments in air travel and telecommunications, multinational firms

• New concepts: International trade and foreign direct investment (FDI)

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The Information Age (1940-?)• The success of the mass production paradigm

broke down in the 1970s when growth rates slowed down significantly

• Two oil crises– The first oil shock (1973-79)– The second oil shock (1979-83)

• The technological opportunities for further increase in the efficiency of mass production systems were coming to an end

• ‘productivity slowdown”

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• In the late 1980s, the productivity slowdown turned into a ‘productivity paradox’

• A potential new technological revolution associated to computers and electronics was not yielding to an upswing: technological paradigms taking a long period to reach their full potential

• The need to connect computers to each other forcing advances in the telecommunications sector

• The convergence between the computer industry and the telecommunications industry led to ICTs

• Computer Integrated Manufacturing (CIM)• The ICTs reached a level of diffusion and application that

gives reason to speak of a new technological revolution beginning to shape up

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• The organizational changes: growing importance of networks

• The early form of networking applied in Japanese firm Toyota, ‘lean production’ from the late 1940s

• The system was aimed at reducing inefficiencies in the assembly line process

• Ohno’s system consisted of adding flexibility to the process (also called flexible production) by– Relying on the skills of the workers who were trained to perform

a large variety of tasks rather than a single task – A large number of suppliers for specialized parts that is a model

of networking firm (consisted of long-term ties between the buying firm and its subcontractors)

• The possibilities of networking between firms have been facilitated with ICTs

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Synthesis• General conclusions that can be related to Schumpeter’s theory of

long waves and basic innovations• In the long-run, technological change and economic growth takes

the character of basic innovations overtaking each other– It is not so much the innovation dates of these major technological

breakthroughs that matters for the growth patterns experienced in the economy

– These innovations require long periods of learning in firms and by consumers, as well as supporting (infrastructural) investment

• It is the diffusion of the technological paradigms which the basic innovations give rise that matters for economic growth, rather than the innovation itself– The major technological characteristics of the subsequent revolutions

are associated with technical breakthroughs that occurred in a previous wave

– The diffusion of basic innovations is a gradual process of incremental change that opportunities from various basic innovations are combined in new ways

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Synthesis

• Basic innovations, or the technological paradigms associated to them, have the capacity to change the economy over long periods– Basic innovations transform the society in a way that goes much

beyond the one-dimensional view of the economy from the point view of growth rates

– Basic innovations change the sectoral composition of the economy

– Key factors associated with the new industries and the new technological paradigms they embody slowly rise while the paradigm develops and such key factors associated to older paradigms see their influence decline at the same time

– This structural change can also be viewed in terms of the organization of the economy, shaping the technological trajectory

1 technological revolutions and economic development b. verspagen, 2005 the economics of...

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