TECHNOLOGICAL CHANGE AND ECONMIC GROWTH : NEOCLASSICAL AND NEO-SCHUMPETERIAN MODELS

1. TECHNOLOGICAL CHANGE AND ECONMIC GROWTH: NEOCLASSICAL AND NEO-SCHUMPETERIAN MODELS

2. Traditional neoclassical models assume a process ofabsolute convergencetowards an equilibrium level of per capita GDP (steady-state) • However, for endogenous growth models, countries with different initial conditions (technological knowledge, human capital) may converge to different levels of GDP (conditional convergenceor convergence clubs) • Neo-schumpeterian or evolutionary modelsdiscard the idea of steady-state equilibria. In their disequilibrium framework the catching up cannot be taken for granted. The leading countries can shift forward the technological frontier as well as laggard countries can further fall behind: Moses Abramovitz (1986) Catching up, Forging ahead, and Falling behind

4. Alfred Marshall (1890) Principles of Economics. An Introductory Volume Natura non facitsaltum From the preface to the first edition: "The Mecca of the economist lies in economic biology rather than in economic dynamics. But biological conceptions are more complex than those of mechanics; a volume on Foundations must therefore give a relatively large place to mechanical analogies; and frequent use is made of the term "equilibrium," which suggests something of statical analogy. This fact, combined with the predominant attention paid in the present volume to the normal conditions of life in the modern age, has suggested the notion that its central idea is "statical," rather than "dynamical." But in fact it is concerned throughout with the forces that cause movement: and its key-note is that of dynamics, rather than statics."

5. David Orrellrelationship between science and economics In order to make progress, and inspired by the “rational mechanics” of Isaac Newton, neoclassical economists made a number of simplifying assumptions. One was that a collection of people behave much like a single “average” person, so the macro picture could be built up from the micro level. Related assumptions are homogeneity, atomistic and rational (maximising) behaviour. While these assumptions may have seemed reasonable at the time, they have found less use in life sciences such as biology or ecology. […] macro-behaviour cannot be predicted from a knowledge of individuals. An ant colony is not simply a large Also, living systems are not homogeneous. Indeed, as Charles Darwin pointed out in his Origin of Species (1859), diversity, along with competition, is one of the drivers of evolution. If everything were the same, “survival of the fittest” would result in a draw and nothing would change.

6. Similarly, it is diversity in the business world which explains why markets are often dominated by a small number of successful firms, instead of a large number of essentially indistinguishable firms as assumed by neoclassical economics. It also explains how the economy grows and evolves. The result of this evolutionary process is not equilibrium, but a state of dynamic change and continuous adaptation. And while competition plays an important role, so does cooperation. Diversity means that people and firms can often do more when they function as part of a team, than they can individually. Ecological niches appear as a result. All of this complexity poses something of a problem to conventional models, because it is no longer possible to make the simplifying assumptions of the physics-based approach version of a single ant.

8. Joseph Alois Schumpeter (1883-1950) • Born in Moravia (then part of Austria-Hungary, now Czech Republic). From 1925-32, he held a chair at the University of Bonn. With the rise of Nazism, he moved to Harvard where he taught from 1932 until his death in 1950 • Schumpeter Mark I: Theory of Economic Development (published in German in 1911) • Economic development as a discontinuous (out of equilibrium) process due to introduction of innovations. • The crucial role of innovating entrepreneurs (and bankers!)

12. Joseph Alois Schumpeter (1883-1950) • Schumpeter Mark II: Capitalism, Socialism and Democracy (1942, published in the US) • The inventive activity is endogenous: large companies carry out R&D activities and are not obstacles but drivers of technological change and economic development. • Chapter 7: The process of creative destruction (nice oxymoron!) • Capitalism is an evolutionary process that can never be stationary (criticism to the concept of steady state equilibrium). [Biological metaphor of “mutation” versus the Newtonian physics’ metaphor of neoclassical economists] • The fundamental impulse is the introduction of radical innovations

15. Moses Abramovitz (1986) Catching Up, Forging Ahead and Falling Behind, Journal of Economic History Catch-up hpothesis: being backward in level of productivity carries a potential for rapid advance. The growth rates of productivity in the long-run tend to be inversely related to the intial levels The crucial role of “social capability” (for effective economic advance) “A country’s potential for rapid growth is strong not when it is backward without qualification, bur rather when it is technological backward but socially advanced”. “The trouble with absorbing social capability into the catch-up hpothesis is that no one knows just what it means and how to measure it.”(p. 388)

16. Moses Abramovitz (1986) Catching Up, Forging Ahead and Falling Behind, Journal of Economic History Tentative way: education (technical competence) + quality of political/industrial/financial institutions Only catching up? No, also falling behind (UK vs. US) and moving ahead (Japan in the 1980s) “There are, however, still more solid grounds for a renewal of productivity advance in both Europe and the United States. These are their high level of general and technical education, the broad bases of their science, and the well-established connections of their science, technology, and industry. These elements of social capability are slow to develop but also, it seems very likely, slow to decay” (p. 405)

17. Labour productivity (GDP per hour worked) 2005 and average annual real growth 2000-2005 Catching up Convergence between the East and the West.Divergence between the South and the North Moving ahead Falling further behind Losing momentum