Lecture 7

Knowledge, technology transfer and convergence.

Issues discussed today

• The non-rival nature of technological knowledge and its impact.

• Industrial Revolution and Science – engagement rather than marriage.

• The characteristics of technological progress.

• Technology transfer and comnvergence the last 150 years.

Was there an Industrial Revolution in Britain?

• Recent research in economic history says No, but…

• The classical period of the I R 1780-1830 was ’…a period of incubation in which the groundwork to future growth was laid’ (Joel Mokyr) meaning that

• Intellectual and institutional preconditions were created

Science and Industrial Enlightenment

• Science had little impact on Industrial Revolution technology.

• Exception: steam engine.

• The European Industrial Enlightenment of the 18th century paved the way for 19th century science based technologies and products

Old school view

• The Industrial Revolution marked a radical break with the past

• Low or insignificant growth rates were replaced by substantially higher rates in many (all?) sectors

• A large number of sectors became part of the modern economy

• Science became increasingly important as a source of technological change

New view

• Growth rates were (just a little) higher than in the past but initially only moderately higher

• The modern sector was limited to a few initially small dynamic sectors, such as the cotton industry

• Water mills remained an important energy source in industry

• Science played a minor role in the advancement of technological knowledge until mid 19th century but the knowledge-base increased

• Innovations relied on skilled workers and mechanics

Old and new estimates

Revised estimates Dean & Cole

TFP National product Per head National product Per head

1700-1760 0.69 0.31 0.66 0.45

1760-1780 0.14* 0.70 0.01 0.65 -0.04

1780-1801 0.14* 1.32 0.35 2.06 1.08

1801-1831 0.41 1.97 0.52 3.06 1.61

Table 6.1. TFP growth and new and old estimates of national product growth in Britain during the Industrial Revolution. Per cent per year.

Why do new and old estimates differ?

• It’s the index number problem, stupid• We need to estimate the growth in constant

prices• To do so we need quantities of goods produced

and prices • Choice of base year affects results • Fast growing sectors usually experience falling

relative prices• As a consequence early base year implies

higher growth than later base year

Cotton and beer

• Cotton grows from 10 to 100 units between 1770 to 1800

• Beer from 25 to 50 units• Cotton price falls from 1 to 0.5• Beer price is constant at 1• Increase in output in 1770 prices is 150/35

=4.3 times• Increase in output in 1800 prices is 100/30

=3.3 times

Lock at panel b for the British case!

A beer and cotton sector example

• Assume the cotton industry output increases by 150 percent between 1780 and 1830 and that beer output increases by 75 percent.

• Assume furthermore that the weight of cotton in total output is 30 per cent in 1780 and 75 percent in 1830.

• With 1830 sector weights total output grows with

0.75*150 +0.25*75 = 131 per cent, but with 1780 weights only by 97 per cent (0.3*150 + 0.7*75)

What science does to production

• Saves resources: is there a labour saving bias?

• Eases the constraints of nature.

• Improves quality of products.

• Introduces new products and production processes.

• Widens the resource base for industrial use.

No long run bias

• Bob Allen maintains that Industrial Revolution occurred in Britain because of high wages and cheap energy

• Labour saving bias in in textile manufacturing .

• Technological progress seems to be neutral in the long run.

Nitrogen fixing: nature vs. science

• The limiting factor in agriculture is nitrogen in the form of nitrates.

• Bacteria can help fixing nitrogen but the process is slow.

• Haber-Bosch introduced an industrial method to produce ammonia and nitrates from nitrogen, early 20th century.

• Basis for spectacular increases inin yields.

Quality improvements: light

• Quality improvements are difficult to measure and tend to give a downward bias to real income estimates.

• Price of light has fallen with 3 to 4 percent relative to conventional estimates of price of light.

New products

• Internal combustion motor

• The electrical motor – thank you Hans Christian Ørsted

• The telephone, the camera, wireless communication etc

• The 19th century gave the first half of the 20th century (almost) everything.

Widening the resource base

• New steelmaking processes (Gilchrist Thomas) made it possible to exploit phosphorous rich iron ore.

• Pulp fiction needs cheap paper made from wood which changed the resource supply to a 1000 year old production process.

The peculiar nature of scientific knowledge.

• Technological knowledge is a non-rival good.

• It can be easily diffused.• Patent protection keeps the knowledge in

the public domain and raises access cost only over a limited period.

• Were intellectual property right stimulating R&D? Probably more than inventors concede.

Technology transfer makes for catch up

• Technological gap makes poor countries grow faster than richer

• if the institutional conditions for absorption and use of new technologies are present,

• which requires openness to trade and foreign investment

• and high scores on educational attainment

Patent applications is an interesting indicator

Guide to Figures 6.2-6.4

• Look at under-performers below the negative slope of the regression line.

• Identify the over-achievers, above the line.

• Reconstruction effects: France and Germany.

• Latecomers: Spain and Greece

Inverse relationship between initial income and growth

AustriaBelgium

BulgariaCzechoslovakia

Denmark

France

Hungary

GermanyGreece Italy

Ireland

Netherlands

Norway

Portugal

Romania

RussiaSpain

SwedenSwitzerland

United Kingdom

Yugoslavia

y = 0.0144-0,0000137x

0.000

0.002

0.004

0.006

0.008

0.010

0.012

0.014

0.016

0.018

0 500 1000 1500 2000 2500 3000 3500

The 1914-1950 period was an era of closed economies.

Austria Belgium

Bulgaria

Czechoslovakia Denmark

Finland

France

HungaryGermanyGreece Italy

Ireland

Netherlands

Norway

Portugal

Poland

Romania

USSR

Spain

Sweden Switzerland

United KingdomYugoslavia

Albania

y = 2E-06x + 0.0054

-0.015

-0.01

-0.005

0

0.005

0.01

0.015

0.02

0.025

0.03

0 1000 2000 3000 4000 5000 6000

The expected relationship returns in the Golden Age.

Austria

Belgium

Bulgaria

Czechoslovakia

Denmark

Finland France

Hungary

Germany

Greece

Italy

Ireland

NetherlandsNorway

Portugal

Poland

Romania

USSR

Spain

SwedenSwitzerland

United Kingdom

Yugoslavia

y = -3E-06x + 0.05010.02

0.025

0.03

0.035

0.04

0.045

0.05

0.055

0.06

0 2000 4000 6000 8000 10000 12000

And why did Britain not keep its industrial leadership?

• Low domestic investments in human and physical capital

• Industrial relations not helpful to technology absorption: Low total factor productivity growth

• Relatively high interest rates were hurting manufacturing but service sector did well

• Financial institutions might have neglected profit opportunities in new technologies? (compare previous lecture)

UK:s income lead was eroded by slow growth

UK investments ratios do not catch up until after WWII

The dynamic disadvantage of an Empire

• UK had favourable access to colonies and dominions

• Most of the empire was composed of low income economies with weak demand for sophisticated new products

• British industry was not compelled to enter into new fast growing product industries

• UK Export/Import ratio low (high) in dynamic (traditional) new sectors (= R.C.A)

Revealed comparative advantage

Three convergence stories

• Scandinavia converges to US but only after 1950.

• Argentina starts well but spoils its future.

• Reconstruction effects in Italy, France and Germany.

• Spain is a latecomer.

Three convergence clubs in Europe

• Early followers :Germany, France, Benelux and Scandinavia. Italy almost made it to this club.

• Golden age catch up: Portugal, Greece, Spain.

• Late followers: Ireland and the former socialist economies.

• The 1990s: The Empire strikes back!

Do not cry for Argentina!

Italy starts growing later than Germany and Scandinavia

Spain opens up to Europe only in the Golden Age.

Land scarcity was solved by land reclamation