Edited by Dominique Foray
Chapter 2: Building Effective ‘Innovation Systems’ versus Dealing with ‘Market Failures’ as Ways of Thinking About Technology Policy
Richard R. Nelson In this chapter I compare two different theoretical frameworks in economics for orienting analysis of issues in technology policy. One is a neoclassical framework that sees appropriate policies as dealing with ‘market failures’. The other framework is provided by an evolutionary and institutional approach to economic analysis that sees appropriate policies as building or maintaining an effective ‘innovation system’. It should be no surprise that I believe the latter framework is the more useful one. I begin by laying out the key general differences between the two broad theoretical frameworks, and how they lead to different perspectives on technology policy. Then I turn to a particular case: technology policy regarding pharmaceuticals. Finally, I comment on the general question of the role of economic theories in framing policy analysis. 2.1 DIFFERENCES IN THE PERSPECTIVES At the broadest level, and possibly the deepest, the difference between the neoclassical theory that has dominated microeconomic theorizing over the last half century, and the evolutionary economic theory that is taking shape, concerns their assumptions about the economic context for action. Neoclassical economics sees the economy as in an equilibrium configuration, at rest, or undergoing well-anticipated change. In such a context the action best suited to the context can be assumed to be one that decisionmakers have learned through relevant experience, or can calculate based on what they know securely. In contrast, evolutionary theory sees the economy as always in the process of change, with economic activity proceeding in a context that never...
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