1. The Origin of Technical Change; Knowledge Generation, Opportunities and Entrepreneurship * Mark Sanders Max Planck Institute for Research on Economic Systems Entrepreneurship, Economic Growth and Public Policy Kahlaische Strasse 10 D-07745, Jena, Germany sanders@mpiew-jena.mpg.de Workshop The Nature of Opportunity, March 2005 Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 1 of 15

2. Motivation Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 2 of 15 Growth Theory as it is Opportunity and the Source of Growth The Structure of Scientific (R)evolution Growth Theory as it will be

3. Growth Theory as it is Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 3 of 15 Rents in Product Markets Effort in R&D New ProductsOld Ideas

4. Knowledge Filter Introducing Opportunity Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 4 of 15 Rents in Product Markets Entrepreneurs New ProductsKnowledge ? ?

5. The Source of Growth Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 5 of 15 Pieces of Knowledge + E. Vision and Talent= Commercial Opportunity

6. Scientific (R)evolution Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 6 of 15 Science generates the Pieces of Knowledge What drives Scientists to do so? Paradigms Normal Science vs. Scientific Crisis

7. Scientific (R)evolution Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 7 of 15 A Model of Scientific Activity where function f(.) is the knowledge filter and n P -n is the universe of opportunities. New products is then proportional to the number of unexploited opportunities and depends on the level of entrepreneurial R&D. This activity is profit driven.

8. Scientific (R)evolution Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 8 of 15 A Model of Scientific Activity where function g(.) captures the role of entrepreneurial vision and talent. Opportunities are recognized and combine a number of scientific ideas. It is therefore positive in the stock of scientific ideas.

9. Scientific (R)evolution Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 9 of 15 Normal Scientific Activity f(0)=0, f’(.)>0, f”(.) 1

10. Scientific (R)evolution Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 10 of 15 Crisis Scientific Activity Alternative Paradigms

11. Scientific (R)evolution Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 11 of 15 Paradigm Switching θ(t)=ψ(A t /K t )*φ(A t )*Pr(K A 0 >K t )

12. Time KtKt AtAt Problems K II 0 K III 0 KI0KI0 IIIIII Scientific (R)evolution Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 12 of 15

13. Growth Theory as it will be Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 13 of 15

14. Growth Theory as it will be Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 14 of 15

15. Growth Theory as it will be Mark Sanders, Max Planck Institute for Research on Economic Systems Seminar at Max Planck Institute Tuesday, March 21 st, 2005slide 15 of 15 Ties institutions to Endogenous Growth Explains long cycles (Kondratieff) Clearly identifies role of Entrepreneurs Explains why Europe and why in 18 th Century Explains transition from stagnation to growth Explains cyclical skill-biases Explains cyclical productivity slowdowns Suggests very different policies In Short: A Steady State Sucks, Cyclical Growth Theory Rocks!!