ECON2915 Economic Growth Lecture 5 : Technology. Andreas Moxnes University of Oslo Fall 2016 1 / 44
Productivity Recall Enormous differences in A across countries. 2 / 44
Technology A varies because of differences in technology? What determines the level/adoption of technology in a country? ◮ R&D. ◮ Cross-country spillovers. ◮ Barriers to technology transfer. 3 / 44
Determinants: R&D Capital requires investment. Technology requires research and development (R&D). Top R&D countries, 2009: 4 / 44
R&D spending relative to GDP 0.020# 0.018# 0.016# 0.014# 0.012# Higher#ed# 0.010# Ins7tutes# Private#sector# 0.008# 0.006# 0.004# 0.002# 0.000# 1970#1972#1974#1977#1979#1981#1983#1985#1987#1989#1991#1993#1995#1997#1999#2001#2003#2004#2005#2006#2007#2008#2009#2010#2011#2012#2013# 5 / 44
Determinants: R&D The majority of R&D is performed by the private sector. But the goverment is important ◮ To provide the right incentives: The patent system. ◮ Publicly funded research and linkages to private sector. 6 / 44
What is technology? How is technology different than physical and human capital? Technology is (mostly) about ideas and knowledge. Instructions for mixing together raw materials (labor and capital). ◮ Can be used over and over again (non-rival). ◮ Partly non-excludable. Implications: No diminishing returns. Without legal framework, zero private incentives to innovate but large returns for society. 7 / 44
Patents A patent gives the owner the right to produce, use and sell the invention for a period of time (typically 20 years) − → Temporary monopoly. The patent office requires: ◮ That the invention is novel and non-obvious. ◮ Have technical characteristics (not abstract ideas, laws of nature, etc.) Examples: Pharma, computer technology, zippers, cheese slicer (1925), fertilizer (1903). 8 / 44
Challenges Monopoly. ◮ Firm charges too high prices - limiting benefits of new technology. ◮ May reduce R&D incentives: Costly to copy and build on existing technology. ⋆ Patent wars between Apple, Nokia, Microsoft, Google, Samsung ++ ⋆ E.g. Apple suing Samsung for similar icons for apps. Patent trolls: ◮ Firms collecting patents with no intention of using them. ◮ E.g. Personal Audio LLC patenting “podcasts” in 2012. ◮ Sealed crustless sandwich, http://www.google.no/patents/US6004596 9 / 44
Alternatives to patents Secrecy (e.g. Coca Cola has maintained exclusivity since 1886). Open source (Linux, fashion design). More public R&D (e.g. for global problems such as AIDS). 10 / 44
Technology − → Growth Questions: What is the effect of more R&D on growth? If technology is (partly) non-rival, what are the consequences for poor countries? We will look at two frameworks: Closed economy Open economy (2 countries) - potential for technology transfer. Only factor of production is labor L (no human or physical capital). 11 / 44
Closed economy Definitions: L Y workers employed in manufacturing. L A workers employed in R&D. L = L Y + L A Define γ A = L A / L - the share employed in R&D. 1 − γ A is the share employed in manufacturing. 12 / 44
Output The production function given by Y = AL Y = A ( 1 − γ A ) L y = A ( 1 − γ A ) (intensive form) Higher A − → higher GDP per capita. Higher γ A (more R&D workers) − → Lower GDP per capita (why?) 13 / 44
Technical change Assume that % growth in A , A = L A ˆ µ More R&D workers − → higher growth. Parameter µ − 1 determines how effective R&D is. Rewrite µ = γ A A = L A ˆ µ L . 14 / 44
Growth Recall output is y = A ( 1 − γ A ) If no change in γ A , then growth is A = γ A y = ˆ ˆ µ L Higher growth when Higher share R&D workers γ A . Higher R&D efficiency µ − 1 . Larger population (why?). 15 / 44
Effect of shifting labor into R&D An increase in γ A : (1) Short run: y ↓ , (2) Long run: y ↑ 16 / 44
Transitory and permanent effects Recall Solow model: ◮ More physical investment boosts the level of GDP/capita. ◮ During the transition process, higher growth rates. Here: ◮ More R&D investment permanently boosts the growth rate. 17 / 44
Open economy Countries 1 & 2. L 1 = L 2 = L , γ A 1 > γ A 2 and A 1 > A 2 . Technological progress through innovation (country 1) or imitation (country 2). Production functions y 1 = A 1 ( 1 − γ A 1 ) y 2 = A 2 ( 1 − γ A 2 ) 18 / 44
Innovation and imitation Assumptions: The cost of imitation is � A 1 � µ 2 = f A 2 (recall ˆ A = ( γ A / µ ) L ). µ 2 < µ 1 (imitation cheaper than innovation). f ′ < 0 (imitation cheaper if the technology gap is large). Boundary conditions: ◮ µ 2 → 0 when A 1 / A 2 → ∞ . ◮ µ 2 → µ 1 when A 1 / A 2 → 1. 19 / 44
Imitation costs 20 / 44
Steady state 2 far behind ( A 2 low): 2 growing faster than 1 − → A 1 / A 2 ↓ . 2 close to frontier ( A 2 high): 2 growing slower than 1 − → A 1 / A 2 ↑ . SS: Identical growth rates. 21 / 44
The math In steady state, A 1 = ˆ ˆ A 2 γ A 1 L = γ A 2 L µ 1 µ 2 µ 2 = γ A 2 µ 1 γ A 1 � A 1 � = γ A 2 f µ 1 A 2 γ A 1 Relative level of productivity determined by fundamendal factors γ A 1 , γ A 2 , µ 1 . 22 / 44
More R&D workers in follower country γ A 2 ↑ − → 2 growing faster − → imitation costlier − → growth slows until A 1 = ˆ ˆ A 2 . 23 / 44
More R&D workers in follower country γ A 2 ↑ − → Short-term increase in 2’s productivity growth rate. → Short-term fall in 2’s output. γ A 2 ↑ − 24 / 44
Technology transfer In the model, imitation is cheap if you are far behind the frontier − → rapid catch-up. In practice, many barriers to technology transfer: ◮ Tacit knowledge: Not all knowledge can be codified. ◮ Skill/capital-biased technical change. 25 / 44
Tacit knowledge Description of patents not always sufficient. Learning by doing. Michael Polanyi (1958): light bulb factory in Hungary vs Germany. ◮ Enormous productivity differences with same technology and capital. 26 / 44
Neutral technical change 27 / 44
Capital-biased technical change Higher A only benefits high k and h countries 28 / 44
Cutting edge technology Technological progress thought to be the main source behind economic growth the last 250 years. We will ◮ Document the pace of technological change. ◮ Ask what determines innovation among the frontier. 29 / 44
Growth accounting Using historical data, calculate ˆ A before and after the industrial revolution. Focus on Europe, which was the frontier. Production function Y = AX β L 1 − β , where X is land. Intensive form: � β � X y = A L Growth rates: � � y = ˆ X − ˆ ˆ ˆ A + β L = ⇒ ˆ y + β ˆ A = ˆ L if ˆ X = 0. 30 / 44
Growth accounting Assume β = 1 / 3 (share of land in production). Assume population = workforce ( L ). 31 / 44
Growth accounting Annual growth of 0.033% − → over the 500-1500 period increase is 1 . 00033 1000 = 1 . 39 , i.e. just 39% increase over a millenium . Annual growth of 0.166% − → over the 1500-1700 period, increase is 1 . 00166 200 = 1 . 39 , i.e. same growth over just 200 years . But still minuscule growth rates compared to today. 32 / 44
Growth over the very long run INDEX (1.0 IN INITIAL YEAR) 45 40 Per capita GDP 35 30 25 20 15 10 Population 5 0 200 400 600 800 1000 1200 1400 1600 1800 2000 YEAR Note: Data are from Maddison (2008) for the “West,” i.e. Western Europe plus the United States. A similar pattern holds using the “world” numbers from Maddison. Living standards doubled from year 1 to 1820. Living standards rose by 20x over the next 200 years. 33 / 44
The industrial revolution The period 1760-1830 in Great Britain and later continental Europe and North America. Rapid technological change across a wide range of industries. In particular: ◮ Efficiency improvements in ⋆ textiles production ⋆ iron production ◮ Invention of the steam engine. ◮ Energy: Switch from wood to coal as source of energy. 34 / 44
Britith iron production 1760: 34,000 tons. 1830: 680,000 tons. 1870: 5,960,000 tons. Made possible by vast increase in coal production. 35 / 44
Structural change Structural change in the British economy: Employment share in agriculture down from 48% to 25%. Employment share in manufacturing up from 22% to 44% (1760-1831). Urban population share up from 17% to 50% (1700-1850). Infrastructure: 4000km new canals. 36 / 44
British output and productivity By modern standards, relatively low growth rates. ◮ Industrial revolution confined to a few industries. ◮ IR was the beginning. 37 / 44
U.S. output and productivity Remarkable productivity growth from 1890-1970. Diffusion of technologies to the whole economy: electric lights, refrigeration, telephone, cars, air travel, radio, TV, plumbing. 38 / 44
The production of technology Recall A = L A ˆ µ Not satisfactory because As technology becomes more advanced, new innovation becomes increasingly more difficult (“fishing out effect”). Decreasing returns to scale: A doubling of L A does not double the growth rate ˆ A . 39 / 44
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