Endogenous Invention, Innovation, and Diffusion:

Understanding inequality, growth and the transition from Late

Industrial to Early Informational stages

Technological Advances - by definition:increases in output not due to increases in inputs already discussed

(L, K, H, NR)Because of diminishing returns to other inputs, tech advance is crucial.

Evolution of technology in 3 lines of economic development:– Communications:

• Horse & messenger• Telegraph• Phone• Internet

– New transportation• First horse & buggy 2 centuries ago• Steam engine => ship/river transportation• Internal combustion engine => rail => autos => airplanes

– Analysis• Pen/paper Notice that they complement each other• Abacus We need balanced development• Calculators even within a major category• PC such as new technology.

To advance knowledge:we need to get researchers to the frontier within a line of development or field of

knowledge. They must understand the power and limitations of the latest theories and how new data challenge them.

Part of tech progress in coming up with new knowledge.Also, part of tech progress is adapting new knowledge to more productive methods of

production (innovation)

• Entrepreneurship & management provide1) new products, and 2) new production processes

• Governments can make the environment friendly to entrepreneurship by:1) protecting private property 9) Making other sound public2) being stable investments (transportation,3) allowing markets to allocate resources energy, and other4) ensuring proper level of competition infrastructure) 5) not too high taxes6) strong financial markets7) R & D for basic research8) Financing education

From Harberger (published in the American Economic Review)

• Leaders in tech. change (by industry) before the computer revolution:– 20’s – cars and rubber tires– 30’s – refrigeration– ’48-’58 – pharmaceuticals– ’58-’67 – lumber and railroad transport– ’67-’76 – Finance, insurance, R/E and apparel

He also finds that in any given time period, there tends to be a good part of the economy increasing productivity and anotherdecreasing productivity. (creative destruction)

• There is a lesson here: What is hot today may not be tomorrow.• Be willing to gain new skills even after you graduate.• Be willing to adapt to change.

The Rise in the Relative Wage Since 1980 and The Technological Slowdown Since 1970Now let H represent high skilled workers (estimated by college or more education) let L represent low skilled workers (estimated by HS or less education)

Changes in the Relative Wage, and Technological Change1963-2003

Change in the Technological Relative Wagea wH/wL Changeb

Time-period (Average Annual Percentage Change)

1963-1971 1.0 2.0 1971-1979 -0.9 1.2 1979-1987 1.3 0.5 1987-1995 1.2 0.71995-2003 0.5 1.4___________________________________1963-2003 0.7 1.1

a. College/High-School Wage Ratio. Source: Autor, Katz, and Kearney (2005).b. Source: U.S. Department of Labor, Bureau of Labor Statistics (bls.gov) series MPU 740023

(K), private business multifactor productivity.

 

Skill-Biased Technological Change:

The Leading Theory to Explain the Rising Wage of High-Skilled Workers (H)

Compared to Low-Skilled Workers (L)

New Technologies since 1980 have included Information and Computer Technologies.

The have greatly ↑ the demand of High Skilled Workers.

Analytical, conceptual, and critical thinking skills are in greater demand

while routine skills are in less demand.

Skill-Biased Technological Change and the Labor MarketHigh-Skilled Low-SkilledLabor Market Labor Market

wH wL

H L

Let HD and HS represent demand and supply, respectfully, for high skilledLet LD and LS represent demand and supply, respectfully, for low skilledResult:

wH ↑ or ↓ wL ↑ or ↓

=> wH/wL ↑ or ↓ (wcollege/whigh school)

Wage Inequality ↑ or ↓

Card and DiNardo (2002) Puzzle:Card and DiNardo (2002) Puzzle:

1. The Consensus is that skill-biased tech change is the cause of the increase 1. The Consensus is that skill-biased tech change is the cause of the increase in in wage inequality from 1980-95 while A slowed.wage inequality from 1980-95 while A slowed.

2. Yet from 1995-2004, the increase in wage inequality slowed while tech 2. Yet from 1995-2004, the increase in wage inequality slowed while tech progress grew at a more healthy rate.progress grew at a more healthy rate.

=> So they if tech change accelerated during the last decade and it => So they if tech change accelerated during the last decade and it was skill-biased, why wouldn’t more skill-biased tech change cause was skill-biased, why wouldn’t more skill-biased tech change cause an even greater increase in wage inequality?an even greater increase in wage inequality?

The Technological Slowdown Since the 1970s

It is a Puzzle why technological progress has slowed since 1970. Leading Theories:

1) Some say we are comparing recent decades to the 1950’s and 60’s (technology depletion hypothesis) and those were unusually fast periods technological progress.-Since we had pent-up abilities finally fully implemented after

the Great Depression and WWII.- But this doesn’t explain to decrease in tech. change that occurred again

during the 1980s (compared to the 1970s)

2) Oil shocks of 1970’s-↑ cost of doing business from higer energy costs => -This doesn’t explain to decrease in tech. change that occurred again

during the 1980s (compared to the 1970s) either.

3) Services are harder to measure - the economy is more service based.-Recent studies have improved our ability to measure services and still show a

slowdown in technological change.

Exampes of the 3 Forces of Technological Change

Late 1800s Late 1900sEarly 1900s Early 2000s

Invention electric dynamo computer (electricity usable for technologies,businesses) DOS system

Innovation early plant redesigns Office Software& electrified equipment

Diffusion the spread of more electric applications of equipment and plant designs Office Software

1970s:1970s: Diminishing returns set in to late industrial techniques. Diminishing returns set in to late industrial techniques.

Less Invention with given researchers.Less Invention with given researchers.

Tech progress slows and high skilled workers in less demand at Tech progress slows and high skilled workers in less demand at applying inventions.applying inventions.

Yet easier for low-income households to afford college.Yet easier for low-income households to afford college.

=> expansion of high skills which allows for breakthough => expansion of high skills which allows for breakthough inventions.inventions.

So although invention and innovation remained high, So although invention and innovation remained high, diffusion slowed slowing technological progress.diffusion slowed slowing technological progress. ^^^^

1980-1995:1980-1995:

•Invention and innovation quickens with the extra skills at the multi-Invention and innovation quickens with the extra skills at the multi-perspectival level.perspectival level.

•All the new technologies create demand for high skills.All the new technologies create demand for high skills.

•Low skilled sectors can no longer easily adapt these innovations Low skilled sectors can no longer easily adapt these innovations without higher skills.without higher skills.

•Now tech progress slows due to lack of diffusion Now tech progress slows due to lack of diffusion

• and only high skilled workers are benefiting.and only high skilled workers are benefiting.

1995-2003:1995-2003:

The greater the innovation with given invention:The greater the innovation with given invention:

a. the more user-friendly and a. the more user-friendly and

b. sector-specific these applications becomes. b. sector-specific these applications becomes.

This plus:This plus:

c. the exposure to new technologies in lower levels of education c. the exposure to new technologies in lower levels of education

Finally allows for better diffusion of new technologies.Finally allows for better diffusion of new technologies.

Thus we finally have good deal of all 3 forces of tech change,Thus we finally have good deal of all 3 forces of tech change,

a. Invention, innovation, and diffusion a. Invention, innovation, and diffusion

(healthy measure levels of tech change), and(healthy measure levels of tech change), and

b. workers (high and low skilled) benefit b. workers (high and low skilled) benefit

(first time since 1960s).(first time since 1960s).

2003-2008:2003-2008:

Policies have favored frontier activity while retraining and education lags.Policies have favored frontier activity while retraining and education lags.

Policies that contributed to the bubble economy distorts investments.Policies that contributed to the bubble economy distorts investments.

A split has occurred between production and financial capital as often A split has occurred between production and financial capital as often happens in the middle of the transition to a new general purpose happens in the middle of the transition to a new general purpose technology (Carlota Perez, 2002).technology (Carlota Perez, 2002).

High expected returns in the early phase from new technologies High expected returns in the early phase from new technologies are irrationally extended such that new financial are irrationally extended such that new financial instruments become detached from fundamentals.instruments become detached from fundamentals.

Investments needed to support diffusion of information-age technologies Investments needed to support diffusion of information-age technologies and the human and cultural capital to absorb and apply them to and the human and cultural capital to absorb and apply them to

issues of economic, environmental, and distributional sustainability.issues of economic, environmental, and distributional sustainability.

See case study U.S. vs. Denmark in the Integral Political Economy See case study U.S. vs. Denmark in the Integral Political Economy chapter.chapter.

This explains both the increase in inequality and the slowdown in A.This explains both the increase in inequality and the slowdown in A.

Wage inequality should ease and A will grow faster with the upgrading of skills for low Wage inequality should ease and A will grow faster with the upgrading of skills for low skilled and the proliferation of more user friendly, more general information-skilled and the proliferation of more user friendly, more general information-age applications.age applications.

This also explains the Card and DiNardo (2002) Puzzles:This also explains the Card and DiNardo (2002) Puzzles:

These researchers found it puzzling that:These researchers found it puzzling that:

1. The Consensus is that skill-biased tech change is the cause of the increase 1. The Consensus is that skill-biased tech change is the cause of the increase in in wage inequality from 1980-95 while A slowed.wage inequality from 1980-95 while A slowed.

2. Yet from 1995-2004, the increase in wage inequality slowed while tech 2. Yet from 1995-2004, the increase in wage inequality slowed while tech progress grew at a more healthy rate.progress grew at a more healthy rate.

=> So they if tech change accelerated during the last decade and it => So they if tech change accelerated during the last decade and it was skill-biased, why wouldnwas skill-biased, why wouldn’’t more skill-biased tech change cause t more skill-biased tech change cause an even greater increase in wage inequality.an even greater increase in wage inequality.

BowmanBowman’’s theory explains it since the early part of the transition will be more skill-s theory explains it since the early part of the transition will be more skill-intensive as the new techs are invented. Later growth will come about intensive as the new techs are invented. Later growth will come about

through through innovations that reduce the skill-intensity of the techs as long as low skilled innovations that reduce the skill-intensity of the techs as long as low skilled workers have the minimum skills needed for the diffusion of the innovative workers have the minimum skills needed for the diffusion of the innovative techniques.techniques.

The Tradeoff Between Invention and the Spread of Ideas

• Yet, inventors may not get repayment for all the time and effort to create the invention if others can use it free.

• Patents, by law, allow inventors to use their ideas exclusively for a certain number of years (around 17 years in the U.S.) to allow them to recoup their costs and make a profit.

• This provides an incentive to invent and creates more inventions.• The tradeoff is that at any given point in time, less knowledge is used by the economy

with patents.

Diffusion of knowledge and useful techniques is fostered by:1. the generality of the techniques2) skills of the workforce 3) the user-friendliness and diversified number of applications developed4) Government funded basic research that places frontier techs in the public domain.