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

Revised estimates Dean & Cole

TFP National product Per head National product Per head

1700-1760 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

Table 6.1. TFP growth and new and old estimates of national product growth in Britain during the Industrial Revolution. Per cent per year.

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 6.2-6.4 -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

late-comer 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

AustriaBelgium

BulgariaCzechoslovakia

Denmark

France

Hungary

GermanyGreece Italy

Ireland

Netherlands

Norway

Portugal

Romania

RussiaSpain

SwedenSwitzerland

United Kingdom

Yugoslavia

y = 0.0144-0,0000137x

0.000

0.002

0.004

0.006

0.008

0.010

0.012

0.014

0.016

0.018

0 500 1000 1500 2000 2500 3000 3500

THE 1914-1950 PERIOD WAS AN ERA OF CLOSED ECONOMIES: NO CONVERGENCE

Austria Belgium

Bulgaria

Czechoslovakia Denmark

Finland

France

Hungary

GermanyGreece ItalyIreland

Netherlands

Norway

Portugal

Poland

Romania

USSR

Spain

Sweden Switzerland

United KingdomYugoslavia

Albania

y = 2E-06x + 0.0054

-0.015

-0.01

-0.005

0

0.005

0.01

0.015

0.02

0.025

0.03

0 1000 2000 3000 4000 5000 6000

THE EXPECTED RELATIONSHIP RETURNS IN THE GOLDEN AGE.

AustriaBulgaria

Czechoslovakia

Denmark

Finland France

Hungary

Germany

Greece

Italy

NorwayPoland

Romania

USSR

Spain

Switzerland

United Kingdom

BelgiumIreland

Netherlands

Portugal

Sweden

Yugoslavia

y = -3E-06x + 0,05010,02

0,025

0,03

0,035

0,04

0,045

0,05

0,055

0,06

0 2000 4000 6000 8000 10000 12000

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.