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LECTURE 6
Knowledge, technology transfer and convergence.
ISSUES DISCUSSED TODAY
The non-rival (and potentially public) nature of
technological knowledge and its impact.
 Industrial Revolution and Science – engagement
rather than marriage.
 The characteristics of modern technological
progress.
 Technology transfer, catch-up and convergence
over the last 150 years.

WAS THERE AN INDUSTRIAL
REVOLUTION IN BRITAIN?
Recent research in economic history says
Perhaps, but…
 The classical period of the I R 1780-1830 was ’…a
period of incubation in which the groundwork to
future growth was laid’ (Joel Mokyr) meaning
that
 Intellectual and institutional preconditions were
created for future growth but initially the growth
record was not that impressive.

SCIENCE AND INDUSTRIAL
ENLIGHTENMENT
Science had little impact on Industrial Revolution
technology.
 Exception: steam engine. See early steam engines
on www.econ.ku.dk/europe

The European Enlightenment of the 18th
century paved the way for 19th century science
based technologies and products.
 It was a uniquely European experience.

OLD
SCHOOL VIEW
‘The Industrial Revolution marked a radical
break with the past’.
 ‘Low or insignificant growth rates were replaced
by substantially higher rates in many (all?)
sectors’.
 ‘A large number of sectors became part of the
modern economy.’
 ‘Science became increasingly important as a
source of technological change.’

NEW VIEW
Growth rates were (just a little) higher than in
the past but initially (1760-1800) only slightly
higher.
 The modern sector was limited to a few initially
small dynamic sectors, such as the cotton
industry.
 Water mills remained an important energy
source in industry.
 Science played a minor role in the advancement
of technological knowledge until mid 19th
century but the knowledge-base increased.
 Innovations relied on skilled workers and
mechanics.

OLD AND NEW ESTIMATES
Table 6.1. TFP growth and new and old estimates of national product growth in Britain
during the Industrial Revolution. Per cent per year.
Revised estimates
TFP
1700-1760
National product
Dean & Cole
Per head
National product
Per head
0.69
0.31
0.66
0.45
1760-1780
0.14*
0.70
0.01
0.65
-0.04
1780-1801
0.14*
1.32
0.35
2.06
1.08
1801-1831
0.41
1.97
0.52
3.06
1.61
WHY DO NEW AND OLD ESTIMATES
DIFFER?
 It’s
the index number problem, stupid!
 We need to estimate the growth in
constant prices.
 To do so we need quantities of goods
produced and prices.
 Choice of base year affects results.
 Fast growing sectors usually experience
falling relative prices.
 As a consequence an early base year
implies higher growth than later base
year.
COTTON AND BEER: AN EXAMPLE
Cotton grows from 10 to 100 units between 1770
to 1800
 Beer from 25 to 50 units
 Cotton price falls from 1 to 0.5
 Beer price is constant at 1
 Increase in output in 1770 prices is 150/35 =4.3
times
 Increase in output in 1800 prices is 100/30 =3.3
times

LOOK AT PANEL B FOR THE BRITISH
CASE!
PANEL A: BEER AND COTTON AGAIN
 Assume
the cotton industry output increases
by 150 percent between 1780 and 1830 and
that beer output increases by 75 percent.
 Assume furthermore that the weight of cotton
in industrial output is 30 per cent in 1780
and 75 percent in 1830.
 With 1830 sector weights total output grows
with
0.75*150 +0.25*75 = 131 per cent, but with
1780 weights only by 97 per cent (0.3*150 +
0.7*75)
WHAT SCIENCE DOES TO
PRODUCTION
Saves resources per unit produced: is there a
labour saving bias?
 Eases the constraints of nature.
 Improves quality of products.
 Introduces new products and production
processes.
 Widens the resource base for industrial use.

SAVING RESOURCES PER UNIT OF
PRODUCTION
Bob Allen maintains that Industrial Revolution
occurred in Britain because of uniquely high
wages and cheap energy.
 Check Bob Allen’s Tawney lecture at
www.econ.ku.dk/europe/videos.html

Labour saving bias is in textile manufacturing.
 Relative factor prices can influence the
‘technology bias’, but technological progress
seems to be neutral in the long run.

NITROGEN FIXING: EASING THE
CONSTRAINTS OF NATURE
The limiting factor in agriculture is nitrogen in
the form of nitrates.
 Bacteria can help fixing nitrogen but the process
is slow.
 Haber-Bosch introduced an industrial method to
produce ammonia and nitrates from nitrogen,
early 20th century.
 Basis for the spectacular increases in yields in
the 20th century.

QUALITY IMPROVEMENTS: LIGHT
AND CALCULATION
 Quality
improvement is difficult to
measure but ignoring it tends to give a
downward bias to real income estimates.
 Price of light has fallen with 3 to 4 percent
relative to conventional estimates of price
of light.
 Cost reduction in calculations with
modern computers compared to manual is
approximately
 7 times 10 to the power of 13!!!!!!!
NEW PRODUCTS
Internal combustion motor
 The electrical motor – thank you Hans Christian
Ørsted for the initial discoveries.
 The telephone, the camera, wireless
communication etc.
 The 19th century gave the first half of the 20th
century (almost) everything.
 The welfare effect of new products is an
unexplored area.

WIDENING THE RESOURCE BASE
New steelmaking processes (Gilchrist Thomas)
made it possible to exploit phosphorous rich iron
ore.
 ‘Pulp fiction’ needs cheap paper made from wood
which changed the resource supply for a 1000
year old production process.
 Nuclear energy, wind and wave energy.

THE PECULIAR NATURE OF
SCIENTIFIC KNOWLEDGE
Technological knowledge is a non-rival good and
becomes a public good when patent restrictions
are lifted.
 It can be easily diffused.
 Patent protection keeps the knowledge in the
public domain but raises access cost only over a
limited period.
 Were intellectual property rights stimulating
R&D? Probably more than inventors wanted to
admit.

THE CONDITIONS FOR CATCH-UP
Poor countries can grow faster than rich for three
distinct reasons:
 1. A possibility to imitate and borrow existing
best practice technology from high-tech
economies.
 2. Structural change: Transfer of resources
(labour) from low productivity sectors to high
productivity sectors.
 3. Low initial capital/labour ratios make for
initially higher investments and growth.

‘THE ADVANTAGE OF
BACKWARDNESS’
Technological gap makes poor countries grow
faster than richer if they adopt new technologies.
 The institutional conditions for absorption and
use of new technologies must be present,
 which historically has been linked to openness to
trade and foreign investment,
 and high scores on educational attainment and
political and legal order.

PATENT APPLICATIONS ARE AN
INTERESTING INDICATOR OF
TECHNOLOGICAL MATURITY
QUESTIONS TO ANSWER IN FIGURES 6.26.4








-convergence: if initially poor the nation will grow faster
than initially rich nations.
What is the expected slope of the regression line?
Identify under-performers and overachievers and analyze
the causes.
Reconstruction effects: France and Germany.
Latecomers: Spain and Greece.
Why is the slope positive in the Interwar years?
What are the costs of being a Tiger economy, that is a latecomer in the catch-up process?
On the horizontal axis: GDP per head in constant 1990
international dollars. On the vertical axis: Annual rate of
growth of GDP per head. (To get to per cent multiply by
100, for example 0.014 means 1.4 per cent.
INVERSE RELATIONSHIP BETWEEN
INITIAL INCOME AND GROWTH
0.018
Romania
0.016
Bulgaria
Yugoslavia
Greece
0.014
0.012
0.010
Hungary
Denmark
Switzerland
Sweden
Czechoslovakia
Norway
France
Spain Italy
Germany
Ireland
Russia
Austria
United Kingdom
Belgium
Netherlands
0.008
0.006
Portugal
0.004
y = 0.0144-0,0000137x
0.002
0.000
0
500
1000
1500
2000
2500
3000
3500
THE 1914-1950 PERIOD WAS AN ERA OF
CLOSED ECONOMIES: NO CONVERGENCE
0.03
0.025
Sweden
0.02
USSR
Portugal
0.015
0.01
0.005
0
-0.005 0
-0.01
-0.015
Finland
Norway
Denmark
Czechoslovakia
France
YugoslaviaPoland
Austria
Ireland
Germany
Greece
Italy
Albania
Hungary
Bulgaria
Spain
1000
Switzerland
2000
Romania
3000
Netherlands
Belgium
4000
United Kingdom
5000
6000
y = 2E-06x + 0.0054
THE EXPECTED RELATIONSHIP
RETURNS IN THE GOLDEN AGE.
0,06
Greece
0,055
Bul gari a
0,05
Romani a
0,045
Spai n
Austri a
Yugosl avi a
Germany
ItalPortugal
y
France
nl and
PolFi
and
Norway
HungaryCzechosl ovaki a
Irel and
0,04
0,035
0,03
USSR
0,025
0,02
0
2000
4000
Netherl ands
Bel giSwi
um
tzerl and
Sweden
Denmark
Uni ted Ki ngdom
6000
8000
y10000
= -3E-06x 12000
+ 0,0501
WHY DID BRITAIN NOT KEEP ITS
INDUSTRIAL LEADERSHIP?
 Low
domestic investments in human and
physical capital.
 Industrial relations not helpful to
technology absorption: Low total factor
productivity growth.
 Relatively high interest rates were hurting
manufacturing but service sector did well in
late 19th century.
 Financial institutions might have neglected
profit opportunities in new technologies?
(More about that in Lecture 7).
 Tables from Angus Maddison coming up.
UK’S INCOME LEAD WAS ERODED
BY SLOW GROWTH
UK INVESTMENT RATIO DOES NOT
CATCH UP UNTIL AFTER WWII
THE DYNAMIC DISADVANTAGE OF
AN EMPIRE
 UK
had favourable access to colonies and
dominions.
 Most of the empire was composed of low
income economies with weak demand for
sophisticated new products.
 UK Export/Import ratio low (high) in
dynamic (traditional) new sectors (=
R.C.A).
 A rank 1 means highest and 16 lowest
sectoral X/M.
REVEALED COMPARATIVE
ADVANTAGE
 - CONVERGENCE STORIES
- convergence means falling dispersion of
income across nations.
 -convergence is a necessary but not sufficient
condition for - convergence.
 Scandinavia converges to US but only after 1950.
 Germany becomes a core industrial economy
before 1914 with science based technologies.
 Argentina starts well but spoils its future by bad
politics.
 Reconstruction effects in Italy, France and
Germany.
 Spain is a latecomer. Closed economy inertia!

THREE  - CONVERGENCE CLUBS
IN EUROPE
Early followers: Germany, France, Benelux and
Scandinavia. Italy almost made it into this club.
 Golden age catch up: Portugal, Greece, Spain.
 Late followers: Ireland (!) and the former socialist
economies.
 The 1990s: The Empire strikes back!

DO NOT CRY FOR ARGENTINA!
THE CELTIC TIGER SLEPT IN THE GOLDEN
AGE!
Czechoslovakia, Italy and Ireland had about the
same per capita income in 1950 and Ireland and
Italy the same in year 2000.
 Italy was growing fast during most of the period.
 Ireland’s much admired catch up started much
later.
 The fact that the Irish and the Italians now share
about the same income does not hide the fact that
the Irish lost in the 1950s and 1960s!
 Czechoslovakia started its catch up only in the
early 21st century.

ITALY STARTS GROWING LATER
THAN GERMANY AND SCANDINAVIA
SPAIN OPENS UP TO EUROPE ONLY
IN THE GOLDEN AGE.
CONCLUSION
Science based technologies are largely a post
1850 phenomenon.
 Catch up to leading economies is conditional on
an adequate institutional set up: openness, bank
depth, a scientific community, technology friendly
industrial relations.
 The start of the convergence processes varied
mostly because of institutional factors.
 Early advantages can be spoilt by bad policies as
Argentina shows over and over again.

ACKNOWLEDGEMENTS
If no source is given the full details are disclosed
in my An Economic History of Europe.
 Slide 10 was published in N.F.R. Crafts, British
Economic Growth during the Industrial
Revolution, Clarendon Press, Oxford 1985.
 Slides 27, 28 and 30 were published in Angus
Maddison, Dynamic Forces in Capitalist
Development, Oxford University Press, Oxford,
1991.
