1. Innovation Economics
Class 3

2. Technology and Economic Growth
Crucial role of knowledge accumulation
Rise of science related technology
Introduction, diffusion, continuous improvements
Long term pattern of growth
Uneven across countries
Diverging growth trends
Before the industrial revolution, the income gap between the poorest and the richest country was relativey small.
Over the current industrialization, the ratio increased dramatically.

3. Some Stylized Facts on Growth Patterns
Economies have grown in the past two centuries faster than any previous period.
Different and variable rates
Long term pattern show increasing differences
Catching up is rare
Widespread catching up
Falling behind is frequent

4. Post War Growth at World Level
Development path of industrialized economies are dominated by convergence.
“Why do growth rates differ?”

5. Modelling Technological Change and Growth
From old to new growth theory
Old neoclassical growth model (Solow, 1956) was characterized by a set of largely traditional neoclassical assumptions: constant returns production function. K and L as two production factors

6. Growth process represented by: the variation in capital (K) depends on the level of output (Y), since Y and K are linked by functional relationship, the savings ratio (s).
Since the marginal productivity of K in the production of Y decreases with the level of K, the higher this level is, the less capital contributes to increasing production. As a result capital accumulation becomes more and more difficult.
Growth in the long run is possible only if there is an exogenous trend due to technological progress.

7. Using the classical tools of the model, R
Using the classical tools of the model, R. Solow calculated the rates of growth between 1909 and 1949 in the USA. He concluded that average growth was 1.5. However, the actual GDP increased by an average of 3% during this period, i.e. a difference of 1.5%.
This difference called the "residue" is very important relating to the evolution of the well being. Assuming that the population growth rate is 0.8, we find for the growth rates of the GDP per capita 0.7 (1.5-0,8) according to classical calculations and 2.2 (3-0.8) according to the reality.
In the first case, GDP per capita would have doubled in 100 years. In reality it has doubled in 30 years! This illustrates the importance of the "residue"!
it means that the current model cannot explain the economic growth. Of course, economists give a role to technology or human capital but it's quite unclear: Globally, the academic model remains largely based on the scarcity of resources and is inspired by a thought inherited from the past.

8. New Growth Models
Considers determinants of technical change, by which in essence they come up with an endogenous determination of the source of growth.
Endogenous growth models.
1. A first source of endogenous growth lies in investment in a certain factor.
2. A more obvious source of growth is technological innovation, dependent on the amt. Of resources devoted to RD..Creative destructions (Howitt, 1992).
3. Accumulation of human capital
4. Through public goods and infrastructure

9. Emphasis on particular role on investment in physical, RD, human capital..
According to the new growth theory, creativity is the main driver for economic development.
The classic model is out dated. More precisely, the description of the factors of production such as labor and capital is a legacy of the former centuries and its explanation of growth does not apply any more to the modern world characterized by creativity.

10. Mankind is better defined by its mind power than by its physical strength.Then, mind power must come in first before the physical labor in the hierarchy of production factors.
In economics, creativity is the expression of mind power: It is the capacity to produce new ideas such as inventions and innovations.

11. Composition Effect: Is one technology good for every country of every region?
Technological change is substitution of a new technological space forthe old one. New maps of isoquants.
Two consequences:
Change the rate of substitution with given factor prices.
Makes it possible to increase the given laval of output
Composition effects have major implications for the analysis of technological change across different industries and countries because of the strong effects of relative factors prices on actual “measured” total factor productivity growth.

12. Bias in technologies.
The context then plays important role in assessing its effects in terms of total factor productivity growth.
Heterogenous global economy. It cannot be neutral elsewhere.
Only technological changes, characterized by a bias, consistent with the structure of local endowments, can reinforce technological variety.
Asymmetric effects.

13. The effect of technological innovations vary according to the interplay between the direction of technological change, defined in terms of marginal efficiency of each production factor, and the local structure of relative factor prices. = Composition effects.
Consequenced of relative factor prices for each possible direction of technological change... Endowments of each region and the structure of relative prices become powerful factors in explaining the differentiated effects of the introcustionof the same technology across the economic system.

14. New and radical labor saving technologies ===
Relative Factor Prices, the Direction of Technologicl Change and Productivity Growth
Composition effects have strong and direct relevence since a variety of factor markets across continents and regions.
New and radical capital saving technologies == strong positive effects in labor abundant regions
New and radical labor saving technologies ===
Strong positive effects in capital abundant regions.

16. When the two technologies i and j are in such relation, bias effect interacts with shift effect.
Shift effect: leading to an increase in total factor productivity
Bias effect: change in the direction and the new technology is either labor or capital augmenting
Technology matters in terms of the local structure of endowments and hence relative prices.