Innovation In Historical Perspective

Stanley L. Engerman and Nathan Rosenberg*

I

In a conversation with Nathan Rosenberg on the topic of innovation, Kenneth Arrow

pointed out (to paraphrase) that theoretical models do not provide a complete depiction of the

process of innovation, in part because of the impossibility of having “a theory of the

unexpected.”1 Such theoretical modeling has tended to be unsuccessful both in providing guides

to understanding the past and in pointing to future changes. The implication is that it is

necessary to study the historical record concerning the economic nature of technological change,

the constraints it confronts, and the complementarities with other sectors of the economy to fully

understand the nature of innovation. Consideration must be given to the market environment, the

available production facilities, the existing body of knowledge, and to the social and

organizational contexts of the innovation, in addition to the series of required changes within

other sectors, not just to the limited aspects of a narrowly-defined specific innovation. These

points will be discussed in various sections in this paper. In short, since theoretical models

cannot deal with the full complexity of the process of invention, innovation, and the utilization of

new devices, some historical study is required to develop a full understanding of these processes.

Also important is the role of the historical background in influencing economic and

technological developments, what some refer to as path-dependence (or, suggesting a less certain

set of outcomes, both influenced), but where “history matters” (Rosenberg, 1994, 9-23). Without

consideration of past events, it is difficult to understand either the present or the future.

A related set of points about the nature of innovations were made earlier by Simon

1 Neither Nate nor I can find a published source for this claim. Arrow himself is not sure if, and where, it appears in print. The quote is from Arrow (2012, 43). It might be noted that this difference between theoretical models and historical complexity applies generally to all theoretical models.

Kuznets, in two articles published in the 1970’s (1973, 1979). Kuznets described several

important aspects of the nature of innovations, and the difficulties in evaluating their effects.

First, there is the great initial uncertainty concerning the complete set of the ultimate effects of

any one innovation. Second, there is the great importance of complementary positive

adjustments—technologically, ideologically, and organizationally (including social and legal

institutions)—before the full effects (positive and negative) of an innovation can be determined.

These concerns mean that it will often take a long time before all the invention’s impacts can be

represented as “a major transformation of their pattern of living” (1973, 199), as well as adequate

time to adapt to the dislocations affecting productive labor and other resources used in

production and the other social difficulties caused by the introduction of new innovations (1973,

202-208). Most innovations do present negative effects and cause reductions in welfare. Mokyr

(2014), citing Tenner (1996), points to examples of innovations providing positive benefits but

with offsetting costs such as DDT, sugar beets, _____, and asbestos, with Kuznets (1973, 205-

208) points to the impact on the environment and the increase in pollution. Some of these

difficulties, such as possible deterioration of the natural environment can, once recognized, and

with appropriate political and technological developments, be overcome. In some cases these

can be accomplished by appropriate use of price incentives, but in some cases it may require

government-introduced regulatory policy. This, however, can be a lengthy and expensive

process and may offset only some part of the difficulties. Kuznets did believe in the long-run net

beneficial outcome of the cumulative process of innovation, demonstrated in his brief

comparison of what the world of 1960 would have looked like if innovation had actually ceased

one century earlier, particularly in regard to consumer goods (1973, 189-190; 1979, 66-69).

2

II

This paper is intended to draw more attention to certain aspects of the historical study of

technological change and to the contribution of economic history to its theoretical analysis. It

will first give attention to the background to certain innovations and the initial expectations of

what benefits they could provide. Then it will discuss a number of reasons for what is often

regarded as both the relatively slow impact on measured total factor productivity and then

describe why innovations often have significantly greater impacts on the economy than just in

those sectors in which the innovation occurred. Given his major contributions to the study of

these issues, we will draw heavily upon the published works of Nathan Rosenberg, but we shall

extend several of his points and arguments.

The difficulties in “predicting and preparing for” specific innovations and preparing for

all the effects of any innovation have been well-illuminated by Nathan Rosenberg (2010, 15-

173), in an essay entitled “Uncertainty and Technological Change,” dealing with the differences

between the initial expectations of inventors and the ultimate role played by their innovations.

The initial expectations often reflected the very particular problem that the invention was trying

to solve, and even the innovators were unable to anticipate the subsequent improvements and

developments that would take place. Thus the early development of the steam engine was

concerned with providing a means to pump water out of flooded mines (Rosenberg, 2010, 164-

165). The “first railroads were expected to serve only as feeders into the existing canal system

or were to be constructed in places where the terrain had rendered canals inherently impractical”

(Rosenberg, 1996, 162-164; MacGill, 1917, 291). Alexander Graham Bell saw the telephone as

being mainly “improvements in telegraphy,” not as its replacement (Rosenberg, 1996, 156).

Marconi saw the major use of his wireless innovation as being an aid mainly to ships, either for

3

ship-to-ship or ship-to-shore communication (Rosenberg, 1996, 156). More recently, some

believed that the main function of the transistor was expected to be the development of better

hearing aids for the deaf (Rosenberg, 1996, 157). Obviously more examples of such varieties of

incorrect expectations can be given, but it is clear that innovations made in response to particular

needs, or for a specific purpose, will often turn out, when improved and more fully developed, to

have much different and broader uses, with their contribution to economic change being much

larger and often in an unexpected direction than earlier anticipated.

There are several related reasons for the underestimation of the full effect of an

innovation. First, we often date the introduction of an innovation quite early in the development

process, where it can best be described as “primitive” (Rosenberg, 1994, 69). With use—what

we can describe as “learning by using” (Rosenberg, 1982, 120-40)—and with further

experimentation, the specific piece of hardware (the innovation proper) will be improved upon

its initial state, making it more productive, and also may be seen to have further, often

unexpected, uses, which add to the benefits from the initial innovation, benefits not anticipated

when the innovation was introduced.

“Learning-by-using” is to be distinguished from the more familiar concept of “learning-

by-doing” since the latter refers more directly to the gains in productivity in the production

process due to repetitions in the process of production. “Learning-by-using” refers to the

emergence of new problems which arise from the process of production of the new innovation

which must be solved to permit its utilization, problems which cannot be known until production

is begun and are generally unexpected. The importance of “learning-by-using” is that most

innovations, when introduced, are at a rather early stage and therefore require some

improvement. Often the ability and need to make improvements can only be known and

4

accomplished after the new technology is introduced. At an early stage neither theoretical nor

empirical approaches to the analysis of the new technology could anticipate many of the

problems that will arise in the production process, and it is only by observation of the actual

process that the problems are revealed, and the basic information needed to make improvements

known. Thus there may be a considerable time before the benefits are obtained.

“Learning-by-using” can account for a large part of overall productivity change. The

impact of “learning-by-using,” as well as the lag between the introduction of an innovation and

its impact on measured total future production, which, however, lacks the dramatic appearance

that comes from the study of the application of new scientific knowledge or the initial

introduction of the new physical machinery. Further, these adjustments may, unlike the basic

invention, not be patentable, leaving a less observable record. Yet the improvements made in the

process of production are often crucial to making innovations productive and efficient. Given

the inability of any model to describe all the possible operating eventualities, more information

awaits the actual use of the innovation. “Learning-by-using” may be regarded as providing a

joint product with the good produced, with elements of cost shared between the production of the

good and the future benefits derived by the new knowledge, or else as a “free good” resulting

from its production, an externality resulting from the start of production, with all the costs

attributed to the production of the good.

Articles by Jamash (2007) and Stein (1997) present models that incorporate learning in

the innovation process. Stein notes also the spillover of external benefits and costs to other

firms, while Braschchi, Malerba and Orsenigo (2000) point to the possible differs in the nature

and rate of innovation between new and old firms. Jovanovic and Lach (1989) point to the

benefits that accrue to later entrants able to take advantage of what has been learned by earlier

5

producers. Rantisi (2002) looks at learning as a function of similar firms clustering which

provides for sharing of knowledge and practices.

Also important, as described in detail by Kuznets, is that to obtain the full-set of benefits

and to offset the costs of an innovation may take time, as there are often a variety of

complementary adjustments, material and institutional, that must be made (Kuznets, 1973, 185-

201; Kuznets, 1979, 56-99). Two particularly dramatic examples relate to the development of

energy sources for the economy. The initial limited effect of the development of electricity upon

the measured productivity of the economy was due, in large measure, to the need for

technological and institutional changes to permit the widespread use of this innovation. To

obtain more benefits in the manufacturing sector it was necessary to redesign and reshape the

factory floor, as well as to take advantage of the locational flexibility that had not previously

been permitted to factories. The expanded use of electricity permitted new technologies in other

sectors, such as metallurgy and steel production, benefits not immediately apparent when the

basic innovation was introduced. Electricity has, of course, had a dramatic impact upon non-

industrial aspects of the economy, including transportation and the lighting of streets and houses,

and has been the power source for many consumer goods (Mowery and Rosenberg, 1998, 105-

109; Hughes, 1983). To permit the widespread use of electricity by businesses and consumers

required wiring, above and below ground, and this meant the increased ability of the state and/or

the private sector to impinge on the property rights of individuals and businesses. While

governments had long used the power of eminent domain, electrification required a considerably

more extended use of this legal principle, dealing with many more individuals over larger areas,

to be successful.

6

In the early twentieth-century petroleum was to become the important source of energy

in the economy. Petroleum was not then a new product, the earliest major U.S. discovery of oil

had occurred in Pennsylvania in 1859 (Rosenberg, 1982, 185-186). Indeed, so uncertain was

oil’s future at this time that even as shrewd a businessman as Andrew Carnegie, contemplating

the future prospects for oil, tried to corner the market since he expected that the U.S. would soon

run out of oil (Sabin, 1999). Fortunately for himself, Carnegie had a diversified investment

portfolio. It took several decades before new discoveries of oil increased its supply, and

significant increases in the demand for oil for use in various products, before the full impact was

achieved. This required, for example, the innovation and many successful refinements to the

automobile with its internal combustion engine as well as improvements in the airplane, both

depending on oil for fuel (Mowery and Rosenberg, 1998, 47-70; Mowery and Rosenberg, in

Rosenberg, 1982, 163-177; Vincenti, 1990, ____), which is a detailed examination of the role of

“learning-by-using” in airplane invention. To get the full benefits from these transportation

developments, extensive expenditures by federal, state, and local governments, as well as by

firms in the private sector, were necessary. The public sector assumed responsibility for building

highways, roads, and bridges to permit private travel and the business movement of goods. For

air travel, governments provided airports and traffic controls as well as safety regulations. For

the automobile, the private sector provided the production and sale of automobiles and trucks, in

both of which there were relatively rapid technical improvement in production, as well as a

network of private stations to service autos and trucks as well as to make gasoline and oil

available to needy customers. Various credit arrangements, such as installment credit as earlier

pioneered by the Singer Sewing Machine Company, were also introduced to permit individuals

and firms to afford the costs of purchasing cars and trucks.

7

These examples of what is required for all of the effects of an innovation to occur, can be

repeated for many other cases where developments after the initial introduction of an innovation

were important, whether within the same sector as the innovation or elsewhere in the economy,

and whether they were innovations of hardware or of institutions. This latter point has been

raised by Kuznets (1979, 56-66) who states (p. 65), “It is the interplay of technological advance

and organizational, economic, and social adjustments that the crucial feature of the innovation,

the application of new technological element, lies.” As Rosenberg (2010, 46) notes about the

long time before electric power had a large impact on factory production ____technological

innovation))) require significant ____.

III

A particular type of innovation that has a widespread set of uses and effects in several

sectors of an economy has come to be called a General Purpose Technology (see Rosenberg and

Trajtenberg, in Rosenberg, 2010, 97-135; Bresnahan and Trajtenberg, 1995). These have been

described as “a certain type of dramatic innovations” that “has the potential for pervasive use in a

wide range of sectors that drastically change their modes of operation” (Helpman, 1998, 3; see

also Lipsey, et al., 2005). While often these were not expected to have such a wide range of uses

when initially innovated, the General Purpose Technology invariably developed many new

applications after its first adoption, which was intended for a specific purpose. The key

examples discussed are the steam engine in the eighteenth and nineteenth centuries, the electric

motor in the late nineteenth and early twentieth century, and semiconductors, the laser, and the

computer in the late twentieth century. To be fully effective as a general purpose technology,

there must be a large range of complementary innovations as well as related changes in

technology and organization in several different sectors of the economy.

8

The evolving nature of general purpose technologies is one explanation for the

uncertainty of the full impact of new technologies, since the full set of the uses of an innovation

often go far beyond its original intent. While the original incentive may be for an improvement

aimed at one specific use, as new improvements take place there are a wider range of different,

unexpected uses in other sectors. One implication of this is that subsequent advances may take

place in sectors other than the focus of the original innovation, posing issues of coordination

among the different sectors. This problem of decentralized decision-making may result in a

lower rate of overall technical advancement than if changes were more centralized. The time

needed for the development of complementary technologies and other adjustments to take

advantage of network externalities to make full use of the general-purpose technology means that

a long time may be required before marked changes in the measured rate of technological

progress can be observed.

IV

Even more faulty have been the predictions, often by eminent scientists, that the stage of

development had been reached that no further innovations could occur, or at least none that could

have substantial impacts in generating high employment or rapid economic growth. Such

distinguished nineteenth-century economists as John Stuart Mill and Alfred Marshall presented

some similar claims, as did the twentieth-century economist Alvin Hansen, in the Great

Depression of the1930’s (Mill, 1895, II, 334-340; Marshall, 1920, 67-68, 242-244; Hansen,

1939). For more optimistic expectations by Mill see Hollander (1985 I, 223, II 881-888). Unlike

many others, Mill regarded the stationary state as a desirable outcome. Indeed, most periods of

economic decline have provided proponents of such a decline of innovation, as John Taylor has

recently pointed out (Taylor, WSJ, 2014). Most recently such a claim has been made by

9

economists such as Benjamin Friedman and Robert Gordon, despite the body of past evidence to

the contrary (Gordon, 2012, 2014; Friedman, NYRB, 2013; see, however Mokyr, 2014).

V

Given the nature of the economy, it is to be expected that new methods and innovations

will emerge in competition with older technologies. The persistence of earlier technologies can

often be the cause of delays in benefits for the new innovation slowing the rate of introduction of

the new methods. Some of this may be due to improvements made to older technology, which

keep them competitive with the new for at least a longer period of time. The long-term existence

of a capital stock based on the older technology, which no longer needs to cover fixed costs,

means that relatively lower prices may lead to some continued use of the older technology.

Some of the lag may be due to the investors of the old technology who may, via the use of

market forces or government action, work to reduce or exclude its use. Similarly, laborers who

prefer the economic conditions under the old technology may use the market or the government

to prevent or delay the introduction of new methods, such as containization (Levinson, 2006).

The late nineteenth century political commentator Henry Sumner Maine (1897), in his argument

against democracy, claimed that if workers had been able to vote on the introduction of

innovations, the Industrial Revolution could not have taken place. Other delayed impacts may

reflect government-chosen policies, at times in response to citizen’s wishes. Tariffs (or their

absence) have long played a major role in the timing of the introduction of a new technology.

The nature of the patent system and its changes, over time will affect the incentive to innovate as

well as their diffuse___ (Khan, 2005).

In the early days of the introduction of railroads in New York State, in competition with

the Erie Canal, there were several attempts to reduce the railroad’s competitive edge, such as

10

limiting railroad operations to times when the canals were closed, requiring railroads to pay a toll

equivalent to that of canals for freight carried, and a requirement that the railroad freight charge

be the same as canal charges (MacGill, 1917, 291-294, 316-322, 344, 353-356, 368, 389, 398-

400, 489, 495, 533-557; Engerman and Sokoloff ,2006, 110-112). Other states and nations

introduced lines to limit expansion of railroads at the expense of canals. Pennsylvania

introduced a tax on the Pennsylvania Railroad in 1896 to “guarantee the states against loses that

might be sustained as a result of competition between the new railroads and the public works

(Hartz, 1948, 267-271; Dunlevy, 1994). Ohio, similarly, had passed legislation to require

railroads “to reimburse the state for half the canal tolls lost in all freight that the road carried

between cities located on the Ohio Canal, as well as other limiting regulations” (Scheiber, 1969,

270-317). None of these state legislations lasted very long, , but they do indicate the type of

problems confronted by innovations in competing with entrenched interests who were able to use

governmental power.

Another consideration affecting the timing and magnitude of the introduction of an

innovation and its full accomplishments is the cyclical nature of the economy, reflecting

expectations of the future path of profitability as well as the availability of capital for

investments required (Rosenberg and Frischtak, in Rosenberg, 1994, 62-84). The influence of

cyclical changes can explain the clustering of innovations, as well as the lag between innovation

and introduction into production, a point stressed by Schumpeter (Rosenberg, 1982, 5-7).

VI

In determining the benefit-cost ratio of all the expenditures on research and development

leading to innovations, it is important to remember that we should not look only at successful

innovations and ignore the costs of failed attempts to develop new techniques, often in direct

11

competition with those methods that have been successful. Thus estimating the return to the

antebellum canal network should not stop with the measured benefits from the Erie Canal, but

need also deal with the losses of the six other cities that, at roughly the same time, unsuccessfully

competed against the Erie Canal (Engerman and Sokoloff, 2006, 97-98, 112. See also

Rosenberg, 2010, 275-279; 1982, 55-62).

An important consideration relating to estimates of the benefits of an innovation is what

Robert Fogel called the Axiom of Indispensability (Fogel 1964, 10; cf. Rosenberg, 1982, 27-29).

Fogel claimed that in the absence of the innovations that made the railroad successful, resources

could possibly have been devoted to seeking other means of overland transport, such as the

automobile, which might then have been introduced earlier than it was, and which, as did the

railroad, could improve its efficiency over time. Thus Fogel denies that the railroad was

necessarily indispensable for U.S. economic growth. Given some limitation upon the magnitude

of resources that society will devote to innovating and improvements, the expenditures on a

particular set of innovations and improvements will reduce expenditures on alternatives which,

even if not ultimately as effective as the successful innovation was, may have been nearly so

successful as was the adopted successful innovation. That such a possibility is not fanciful can

be seen in current debates as to whether the pattern of change in the internal combustion engine

came at the expense of devoting resources to developing such possible alternatives as the electric

car, leaving us far behind in adapting to the current climate crises.

A further issue raised by Fogel’s Axiom of Indispensability is the possibility that

alternative innovations could have been made to replace any one specific innovation or several

related innovations. This points to a broader set of questions concerning the possibility of

alternative innovation in different parts of the world. This has been most frequently discussed in

12

the context of arguing about the differences between East and West and the causes of the

economic rise of the West. Most studied has been the nature and also the impact of innovation in

China compared to that in Europe. There are several questions. One is the contention made by

Needham (1969; see Winchester 2008) about the greater early successes of China in innovations

than in Europe, an early lead that over centuries disappeared as economic and other expansions

in Europe came to exceed those of China. Second, why, in many cases, did early modern Europe

do more to make these innovations practical and useful than did China—whether due to cultural

factors; or taste differences; the range of usable knowledge; differences in relative factory prices

and resource scarcities; or of some limits of technological skills (For this discussion see Allen

2011; Landes, 1996; Jones, 1981; Rosenberg and Birdzell, 1986; and Mokyr, 2002) among those

discussing this point. Third, suggested most directly by the Axiom of Indispensability, is it

possible or probable that East and West pursued different technological and institutional means

to achieve the same general aim? Given differences in historical background and resources,

were there differences in technological development that emerged before large-scale contact

between these societies? In today’s world with rapid communication and much day-to-day

contact among scientists and inventors, the possibility of major divergences might seem

doubtful. Nevertheless, the examination of the existence of such differentials at earlier stages of

science and technical development should prove to be of importance and of interest.

VII

Despite his important role for economists and economic historians in pointing to the

importance of technological change in accounting for economic growth, Schumpeter’s story is in

some ways still incomplete (Rosenberg, 2000). He distinguishes between the major innovation

13

and the subsequent improvers, whom he describes as “mere imitators.” Thus he downplays the

importance of those improvements made after the introduction of the innovation. These

“imitators” can be heavily involved in enhancing the productivity of an innovation (Rosenberg,

2000, 55-78). The “imitator ” may not get the glory that goes to the innovator, but it is often the

imitators who reap the largest financial rewards. The “first mover” innovator may not be the

greatest financial beneficiary of change, a phenomenon true not only for innovators but also for

the economic growth of nations, as pointed out in an article by Ames and Rosenberg (1963; also

Engerman and Sokoloff, 2012).

Schumpeter further argues that the importance of major innovations plays a great role in

contributing to the maintenance of the capitalist system (Rosenberg, 1994, 47-61). Capitalism

creates new structures, new commodities, new technologies, new sources of supply, new

markets, and new forms of organization—which drive out existing structures by the process he

calls “creative destruction” (Schumpeter, 1942, 81-86), the mechanism by which new

innovations drive out older systems. To Schumpeter it is by the major innovations and in big

jumps in the innovations intro study, rather than by minor changes, that, he argues, capitalism is

able to keep expanding (Rosenberg, 1982, 3-33).

One customary view of the innovation process, which has been called the linear model,

suggests a rather “smooth, well-behaved linear process” from new developments in science to

invention to innovation to production to marketing. This model allows for no feedbacks and no

interactions among the various steps, and is compatible with a Schumpeterian emphasis on

innovation as an exogenous process and with technological change being regarded as

discontinuous. Distinctions are made between the current scientific frontier and the past

accumulation of scientific knowledge. The reality of the innovation process clear, however to

14

those who study the historical process of innovation, has been better described as a chain-linked

model, “complex, variegated, and hard to measure.” This can include feedbacks and temporal

interactions among accumulated science, innovation, production, and marketing (Kline, 1985;

Kline and Rosenberg in Rosenberg, 2010, 173-202). Developments at each stage influence, and

are influenced by what happens at the other stages, and, for example, the contribution of

technological improvements to the progress of science. This view is compatible with recent

studies of innovation that regard it as being incremental and continuous, with attention given to

the importance of small improvements based primarily on experience and “learning by using,”

with the prototypical case being the aircraft industry (Vincenti, 1990; Rosenberg, 2010, 153-172;

Rosenberg, 1982, 120-140; Mowery and Rosenberg, 1982, 161-177).

The introduction of innovations and improvement do not necessarily begin with new

scientific information, but often are based on a pre-existing state of knowledge. It is often that

developments in technology, as with the microscope, permit new scientific discoveries. These

may result from “learning-by-using,” with the benefits that result from solving problems that

arise in the production process.

For these and other reasons, such a linked-chain model is more realistic than the linear

model, and serves to highlight the difficulties and complexities of the innovation process as it

actually takes place. Innovations may not be based only on the newest science but can draw on

the accumulations of past scientific development. This linked-chain model has been seen to be

quite useful for describing productivity changes in the airplane, as well as the increased

importance of electricity in the economy (Vincenti, 1990; Kline, 1985).. In both cases there

were many unanticipated difficulties, necessitating modifications in product design as well as in

operating and maintenance procedures. And, as seen in the case of nineteenth century America

15

and twentieth-century Japan, the technologically advancing nations can benefit from imitating

the developments in the scientifically more advanced nations, and need not themselves develop

new innovations.

VIII

This paper is intended to draw together some aspects of technical change and innovation

that have been understated in the recent literature. The studies of the historical process by which

innovations are made, introduced, and contribute to economic growth demonstrate the

complexity of the process which is masked in some theoretical discussions.

The complexity of the process by which innovations occur, are introduced and diffused

throughout the economy has become recognized and the importance of what seem relatively

minor adjustments relative to those large-scale technological steps that have long been the

primary focus in the examination of technological change has led to some shift in emphasis in

historical and economic studies. This has led to a greater understanding of the great uncertainty

in forecasting future technological changes, of the often long-delayed measured achievements of

what are regarded as new major technologies, of the need to bring in the s___ of institutions into

the analysis of technological change. Consideration of these factors will not only increase our

historical studies but also serve to enrich our theorizing about these questions.

Stanley Engerman

Nathan Rosenberg

*We wish to thank Philip Hoffman, Zorina Khan, Joel Mokyr, and the editors of this volume for

very helpful comments on earlier drafts.

16

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