diversity, efficiency and economic development
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Diversity, efficiency and Economic Development. Pier Paolo Saviotti, UMR GAEL, Grenoble, and CNRS GREDEG I2C, Sophia Antipolis, France. Acknowledgments. Andreas Pyka Koen Frenken Jackie Krafft. Econ Dev, Stylised facts. STF1) Economic development is characterised by qualitative change . - PowerPoint PPT PresentationTRANSCRIPT
Diversity, efficiency and Economic Development
Pier Paolo Saviotti, UMR GAEL, Grenoble, and CNRS GREDEG I2C, Sophia Antipolis,
France.
Acknowledgments
Andreas Pyka Koen Frenken Jackie Krafft
Econ Dev, Stylised facts
STF1) Economic development is characterised by qualitative change.
STF2) The efficiency of existing processes increases in the course of economic development.
STF3) The diversity/variety of the economic system rises during the process of economic development.
Efficiency vs diversity
Efficiency grows when the same type of output is produced with (a) decreasing quantities of all inputs or (b) decreasing costs of all inputs
What happens if the nature of the output changes? Is a pair of shoes costing 100 € produced five times less efficiently than a pair of shoes costing 20 €?
Efficiency vs diversity
In a strict sense comparisons of efficiency are only possible at constant output
The 100€ pair of shoes has higher quality
Efficiency at constant quality
Qualitative and Structural Change
Qualitative change: emergence of new entities, qualitatively different (distinguishable) from the pre-existing ones.
Structural change: change in the structure of the economic system (components + linkages/interactions). Defined at the level of aggregation of industrial sectors. But:
Structural change can occur at lower levels of aggregation.
Qualitative and Structural Change (2)
Structural change can occur for activities and actors as well as for outputs.
Thus also for knowledge, and institutions.
Qualitative change broader than structural change.
Importance of qualitative/structural change.
They affect the composition of the economic system. They are determinants of system performance.
Economic development is a process of transformation, involving both quantitative/efficiency change at constant composition and qualitative change.
Variety
Definition: number of actors, activities and objects required to describe the economic system at a given time
Variable to represent analytically changes in composition.
Diversity Stirling
Diversity overarching phenomenon with three components:
Variety: number of distinguishable entities in a system
Balance: distribution of distinguishable entities in a system
Disparity: extent of difference between any two distinguishable entities
Diversity
All else being equal, the greater the variety the greater the diversity
All else being equal, the more even is the balance the greater the diversity
All else being equal, the more disparate are the represented elements the greater the diversity
Modern phenomena
Most people could only purchase the bare essentials to survive until the end of the XIXth century, and many people still do today
Diversity existed only for the rich But in the XXth century change
Efficiency and Diversity Two complementary forces/trajectories :
growing efficiency growing diversity
Hypothesis 1: The growth in diversity is a necessary requirement for long-term economic development.
Hypothesis 2: Diversity growth, leading to new sectors, and productivity growth in pre-existing sectors, are complementary and not independent aspects of economic development.
Compensation
At constant output growing efficiency + saturating demand possibility to produce all demanded output with declining fraction of resources (labour force) Marxian trap
Emergence of new sectors compensates for the falling capacity of existing sectors to create employment
Growing diversity avoids Marxian trap.
Economic development by the creation of new sectors
A model in which the number of new sectors varies endogenously during economic development
Sector created by an important innovation establishing an adjustment gap (size of the potential market)
Model
First entrepreneur enters the market (expectation of a temporary monopoly) imitators enter rising intensity of competition inducement for further entry falls until exit starts dominating entry. Innovation has become part of the ‘circular flow’ (Schumpeter, 1912-1934)
Sector oligopoly or monopoly Adjustment gap gradually closed (saturated market) Industry life cycle Decline of mature sectors induces entrepreneurs to
look for new opportunities of temporary monopoly, to be found by exploiting new important innovations leading to new niches and sectors.
Competition
Both intra- and inter-sector: Intra- sector: density of product/output
population. Inter- sector: different sectors can provide
comparable services. Entrepreneur induced by expectation of
temporary monopoly to enter. If innovation successful imitation increasing intensity of competition decreasing inducement to enter exit
Model equation
)3(**1 iiiii MAICAGFAk
dt
dN
Search activities
)1
,5exp(1
41 t
iaccDkkt
iSE
Mergers and acquisitions
t
i
t
i
t
it
i AGMCN
kMA11
9
Demand function
i
iii p
YYD
*
Demand (2)
)exp(1
1
1514 ii SEkkY
)exp(1
1
1716 ii SEkkY
)exp(1 1918 ii SEkkp
Number of firms (2)
Life cycle: in each sector Ni first increases rapidly, reaches a maximum, and then falls (oligopoly, monopoly)
But, life cycle driven purely by dynamics of competition and demand (See ILC models).
Shape of life cycle affected by several variables (AGi, Di etc).
-
5
10
15
20
25
30
35
40
45
50
1 101 201 301 401
number of firms
Adjustment gap
-
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1 101 201 301 401 t
Adjustment Gaps
Intensity of competition
-
1
2
3
4
5
6
1 101 201 301 401 t
Intensity of Competition
Employment
li = ki/Qia = ki/Qi/Ni = (ki*Ni)/Qi
li = Li/Qi
Aggregate employment
-
10
20
30
40
50
60
70
80
90
100
1 101 201 301 401
Aggregate Employment
t
Aggregate employment
0
25
50
75
100
1 251 501 751
Employment trend vs rate of growth of services
-
25
50
75
100
1 101 201 301 401
0.1
0.125
0.25
0.375
0.5
Employment trend for variations of k015
Demand experiments (2)
Increasing the rate of growth of Yi (level of services supplied) Speeds up development raises demand, increases AGi, Changes the shape of the ILC and leads to a more positive employment
growth path.
Compensation
The emergence of new sectors (growing variety) can compensate for the falling ability of mature sectors to create employment (Hypothesis 1)
Economic development can be sustainable in the long run.
The internal dynamics of each sector counts as well
Creative destruction
Process of industrial mutation that-if I may use that biological term- incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one ….
….essential fact about capitalism….(p.83) ….perennial gale of creative destruction…
(p. 84) (Capitalism, Socialism and Democracy)
Interpretations
Possible interpretations of creative destruction
For every new innovation created a previous one disappears (Aghion and Howitt), considered by AH the true Schumpeterian character of their model.
This implies: (i) Complete substitution of old by new, (ii) constant output diversity
Diversity and creative destruction
They are not incompatible, but, if variety grows there must be more creation than destruction.
However, even old sectors which survive are not unaffected by the creation of the new. Old sectors/activities are transformed by new ones.
Influence of competition on system performance
Two (ideal) (opposite) types of competition (extremes of a range):
Schumpeterian: do what no one else can do (radical innovation) temporary monopoly
Classical: do the same thing as other competitors but better (i), (ii) (i) more efficient cheaper output (ii) better quality
Intensity of competition
totIIi
totiICi NRN
NNkIC
*
toti
totii NkNk
NNIC
76
*
Overall IC vs IC + Inter-intra balance
0.6
0.7
0.8
0.9
1
0 0.005 0.01 0.015 0.02 0.025 0.03 0.035 0.04 0.045 0.05
5
6
7
8
9
intensity of competition
kIC
Rii
Rate of employment growth vs balance inter-intra-sector competition (Rii) for values of kIC.
-0,005
0
0,005
0,01
0,015
0,02
0,025
0 0,02 0,04 0,06 0,08 0,1
2
3
4
5
6
7
8
9
10
trend of employment
Rii
kIC
Trade-offs
Inter-intra: predominance of intra-sector competition higher probability of temporary monopoly in niches elsewhere than in established sectors.
If only Schumpeterian competition once sector created no imitation
Classical competition production of the new good/service + efficient (cheaper) increased economic weight
Industry life cycle
In our model natural consequence of the dynamics of competition and of demand but not exclusive of other cyclical influences
Different from other ILC models (Process R&D, Dominant designs, Refinement innovation)
Demand - Search activities
)1
,5exp(1
41 t
iaccDkkt
iSE
Demand - Search activities (2)
)exp(1
1
1514 ii SEkkY
)exp(1
1
1716 ii SEkkY
)exp(1 1918 ii SEkkp
Industry life cycle
-
10
20
30
40
50
60
70
80
90
1 251 501 751
k4 = 5 k4 = 7.5 k4 = 10 k4 = 12.5 k4 = 14
-
10
20
30
40
50
60
70
80
90
1 251 501 751 1001
0.01 0.005 0.0075 0.025 0.0125
-
20
40
60
80
100
120
1 251 501 751k14 = 0.1 k14 = 0.5 k14 = 1 k14 = 1.5 k14 = 2
-
20
40
60
80
100
120
140
1 251 501 751
k15 = 0.1 k15 = 0.25 k15 = 0.5 k15 = 0.75 k15 = 1
Industry Life Cycle
The shape, duration and existence of the industry life cycle is greatly affected by parameters affecting demand and search activities
In some cases the shake out virtually disappears (existence)
Micro-Macro dynamics
0
20
40
60
80
100
120
1 251 501 751 1001
0.01 0.005 0.0075 0.025 0.0125
- 10 20 30 40 50 60 70 80 90
1 251 501 751
k5 = 0.005 k5 = 0.0075 k5 = 0.01
k5 = 0.0125 k5 = 0.025
30
35
40
45
50
55
60
1 251 501 751 1001
Linear (0.005) Linear (0.0075) Linear (0.025)
Linear (0.01) Linear (0.0125)
Micro-Macro dynamics (2)
The shape and duration of the ILC affects the macro-economic performance of the economic system
Model parameters affecting demand and search activities can affect (i) the rate of creation of new sectors (ii) the number of firms in each sector (iii) the rate of growth of industrial concentration
Micro-Macro dynamics (3)
As consequence the effects of parameters affecting demand and search activities are often non-linear
Ex: trade-off between faster rate of creation of new sectors and smaller number of firms in each sector.
Efficiency vs diversity
All these (and many other) phenomena are made possible by the complementary combination of efficiency and diversity
More creation than destruction vs growing diversity
Trade-off Schumpeterian (Diversity) classical (efficiency) competition
Influence of ILC (shape etc) on macro dynamics rate sectors + sector size