The Changing Determinants of Economic Performance in the World Economy
New Horizons in Institutional and Evolutionary Economics series
Chapter 8: Technological innovation and diffusion
At a given point in time, the competitiveness and welfare of an economic system is determined by technology in two important ways. First, the efficiency and costs with which the system transforms its productive resources into welfare-creating outputs is shaped by the available process technologies. Second, the existing product technologies are important determinants of consumer value, firms’ product market competitiveness and the economy’s value-added. As a result technology influences both the price and non-price competitiveness of firms and economic systems. From a dynamic perspective the importance of technological innovation for economic performance has been recognized at least since Joseph Schumpeter’s seminal works (Schumpeter 1934, 1939).1 Schumpeter was particularly critical of the prevailing neoclassical theory of the early twentieth century which explained economic growth in terms of resource accumulation: The slow and continuous increase in time of the national supply of productive means and of savings is obviously an important factor in explaining the course of economic history through the centuries, but it is completely overshadowed by the fact that development consists primarily in employing existing resources in a different way, in doing new things with them, irrespective of whether those resources increase or not (Schumpeter 1934, p. 68). Both Schumpeter and Keynes’s critiques of the neoclassical paradigm were published in the turbulent 1930s. During the postwar years the stabilization of economic environment and the relatively smooth evolution of technologies provided a more fertile ground for the elaboration and policy application of the Keynesian macroeconomic theories than the Schumpeterian innovation...
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