1 Economics of Innovation Historical underpinnings: Smith, Schumpeter, Mokyr Manuel Trajtenberg

2 Adam Smith: the pin factory Work is divided into 18 different tasks, each worker perform 2 – 3 tasks. They manage to produce 4,800 pins per worker/day If each worker would work in isolation (i.e. do all the tasks himself), then would produce just 1 – 20 pins per day! Productivity gains: at least 280 times higher!!!

3 Adam Smith - continued Productivity gains from specialization due to (notice different from trade): Increased dexterity Time savings (from one task to the next) (but increased boredom, alienation, lack of concentration?) Invention of new machines, due in turn to specialization – the “philosophers” (now R&D) [think of it as “learning by doing”] “The division of labor is limited by the extent of the market”

4 Employment and Output in Agriculture

5 Productivity in Agriculture

6 Digression: Further on Structural Changes

7 Structural Changes: employment & productivity

8 Employment in Industry: International Data

9 On Joseph Schumpeter The centrality of technical change, driving progress (and hence making capitalism viable?) The typical “roles” needed: the entrepreneur, the inventor, the capitalist (finance, risk taking). Emphasis on the entrepreneur, lure of “extraordinary profits”. See Edison, Gillette, Ford, Steve Jobs, Gates, Dell. Business cycles Recall context: ideological debate socialism vs. capitalism; the great depression, the rise of the Soviet Union (“can capitalism survive?”). Schumpeter extolled virtues of capitalism, but NOT as perfect competition.

10 On Schumpeter – cont. Monopoly power and innovation – the “Schumpeterian hypothesis”… “Evolutionary dynamics”, the “Process of Creative Destruction” History of Economic Analysis – monumental work. On balance, a great deal of inspiration, not of precise modeling.

11 Schumpeter – cont.2 When assessing capitalism as a system, look at its actual performance – stunning! Brings “statistics”, forecast… That’s only part of the story: increased leisure, new and better products, not reflected in the GDP! The improvement particularly marked for the lower classes, not for “kings”…Mass production, that’s the big thing! The success of capitalism allows for social legislation, to take care of the ills its causes, e.g. unemployment, poverty; predicts that growth will allow protection to the elderly and the sick, education, etc.

12 Schumpeter’s forecast Schumpeter’s computations, for something like GDP-Investment = ~ Total Consumption: Annual Growth rate : 2% What if it will continue from 1928 to 1978? => C78/C28= 2.7 Relies on forecast for population of 160 M by 1978, gets to: (per capita C78/per capita C28) = 2

13 Schumpeter: The process of creative destruction To what extent does monopoly/oligopoly power hinder growth? Argues that it does not: Lots of growth at a time of increasing concentration of monopoly power (around 1900s) (but not good argument, perhaps could have had much more growth…); Lots of technical change precisely in concentrated sectors (well, needs cross-sectional evidence, lots of work on that since).

14 Creative destruction – cont.2 Key: capitalism is primarily a dynamic system, cannot be judged by static notions (such as monopoly power, affects static efficiency). Capitalism as a mechanism for endogenous change: basic impulse not from exogenous shocks, population growth or capital accumulation, but from New consumer goods New methods of production & transportation New markets New forms of organizations…that capitalism creates.

15 Creative destruction – cont.3 These innovations bring about the process of “creative destruction”: new products rendering old ones obsolete, new knowledge replacing old one, etc. Considers the possibility of trade-offs between static and dynamic efficiency. “The problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them.”

16 Mokyr: The Lever of Riches More change in the past 200 years than in the previous 7,000… The first industrial revolution: GPD/per capita grew slowly, but large increase in population! Fundamental changes in: Power technology (increases in fuel efficiency from 1% Newcomen, to 7.5% with compounding, to 17% with the Corliss) Metallurgy Textiles Others: Machine tools, gaslight, ballooning, etc. [Landes: also in organizational forms, the factory system]

17 Mokyr – cont.: Textiles Key inventions from 1750 on: the throttle, the spinning jenny, the mule. Allowed widespread use of cotton, led to factory system. How long it took to spin 100 lb. of cotton? hand spinner would have taken 50,000 (!) hours The mule: 300 hours (1790) The self actor: 135 hours (1830) Cotton was the key in the 1st Industrial Revolution: the price of cotton cloth declined by 85% in !