10.3 Economic Growth: Advanced Theories Flashcards
What are the two strands of new research that we go over in this section?
In this section, we give a brief discussion of two strands of this new research—models that emphasize endogenous technological change and models based on increasing marginal returns.
Why do many scholors think of technological change as endogenous, as opposed to exogenous (Neoclassical)
Yet research by many scholars has established that technological change—what we often call innovation—is responsive to such economic signals as prices and profits; in other words, it is endogenous to the economic system.
What typicially drives people to innovate?
Research and development and the innovation necessary to put the results of the R&D into practice are costly and risky activities; firms undertake these activities in the expectation of generating profits. It is not surprising, therefore, that these activities respond to economic incentives.
What is “Learning by Doing”?
In contrast, modern research shows that innovation involves a large amount of “learning by doing” at all of its stages. What is learned downstream then modifies what must be done upstream. The best innovation-managing systems encourage such “feedback” from the more applied steps to the purer researchers and from users to designers.
What is “Knowlage transfer”?
The diffusion of technological knowledge from those who have it to those who want it is not costless. We often think that once a production process is developed, it can easily be copied by others. In practice, however, the diffusion of new technological knowledge is not so simple. Firms need research capacity just to adopt the technologies developed by others. Some of the knowledge needed to use a new technology can be learned only through experience by plant managers, technicians, and operators.
How does market structure affect innovation?
As a general rule, innovation is encouraged by strong rivalry among firms and discouraged by monopoly practices. Competition among three or four large firms often produces a great deal of innovation, but a single firm, especially if it serves a secure home market protected by trade barriers, often seems much less inclined to innovate.
How can economic shocks inspire innovation?
One interesting consequence of endogenous technological change is that shocks that would be unambiguously adverse to an economy operating with fixed technology can sometimes provide a spur to innovation that proves a blessing in disguise. A sharp rise in the price of one input can raise costs and lower the value of output per person for some time. But it may lead to a wave of innovations that reduce the need for this expensive input and, as a side effect, greatly raise productivity.
What is the idea if Increasing marginal returns?
We saw earlier that the Neoclassical growth model assumes that investment in capital is subject to diminishing marginal returns. Some research suggests, however, the possibility of increasing returns that remain for considerable periods of time: As investment in some new geographic area, new product, or new production technology proceeds through time, new increments of investment are often more productive than previous increments. The result of such increasing returns is that growth does not necessarily slow down as capital accumulates—it may even speed up.
For three reasons there may be important costs associated with the initial development of a market. These costs result in increasing marginal returns to investment….
What do successive increments of investment associated with an innovation often yield?
Successive increments of investment associated with an innovation often yield a range of increasing marginal returns as costs that are incurred in earlier investment expenditure provide publicly available knowledge and experience and as customer attitudes and abilities become more receptive to new products.
What is the economics of ideas?
Many of the newer growth theories shift the emphasis from the economics of goods to the economics of ideas. Physical goods, such as factories and machines, exist in one place at one time.
What are two consequences of physical goods existing in one place at one time?
First, when physical goods are used by someone, they cannot be used by someone else.
Second, if a given labour force is provided with more and more physical objects to use in production, sooner or later diminishing marginal returns will be encountered.
What makes the characteristics of ideas different?
Ideas have different characteristics. Once someone develops an idea, it is available for use by everyone.
Are ideas subject to diminshing marginal returns?
Ideas are also not necessarily subject to diminishing marginal returns. As our knowledge increases, each increment of new knowledge does not inevitably add less to our productive ability than each previous increment. Indeed, the reverse is often the case: One new idea may spawn several additional ideas that build on or extend it in some ways.
What is “Knowledge-driven growth”?
Ideas produce what is called knowledge-driven growth. New knowledge provides the input that allows investment to produce increasing rather than diminishing marginal returns. Because there are no practical limits to human knowledge, there need be no immediate boundaries to finding new ways to produce more output by using less of all inputs.
