Developments in Major Fields of Economics
Edited by Gilbert Faccarello and Heinz D. Kurz
Chapter 37: Technical change and innovation
The problem of technical change, its causes, forms and effects, has been high on the agenda of economic analysis ever since its systematic inception in the second half of the seventeenth century and its full blooming at the time of the French and English classical political economists. This is hardly surprising, since around the same time Western Europe experienced the Industrial Revolution and in its wake the take-off on a path of sustained growth of income per capita. Technical change was discussed in the writings of François Quesnay and the Physiocrats, who emphasized the importance of education, learning and knowledge. It played a particularly important role in the works of Adam Smith and David Ricardo and an even more important one in that of Karl Marx, who saw the capitalist economic system incessantly in travail because of deep reaching and all spheres of life encompassing technical and organizational revolutions. The concern with economic dynamics and its prime mover, technical progress, lost momentum towards the end of the nineteenth century with the rise to dominance of Marginalism and its focus on the static problem of the allocation of given resources to alternative uses. The issue of innovations – “new combinations” – resurged with Joseph A. Schumpeter’s explanation of the restlessness of capitalism at the beginning of the twentieth century. While Schumpeter, like the classical economists and Marx, understood technical change as an endogenous phenomenon, coming from within the economic system, neoclassical growth theory championed by Robert Solow and Trevor Swan in the late 1950s treated it as exogenous. This was criticized in the 1980s both by advocates of an evolutionary approach to the problem under consideration, especially Richard Nelson and Sidney Winter, and by protagonists of what became known as “new” or “endogenous” growth theory, especially Paul Romer. In more recent times the concepts of “general purpose technologies” and “national systems of innovation” gained prominence in theoretical and applied research on technical change and innovation. Smith defined the task of The Wealth of Nations (1776 , hereafter WN) as consisting of an investigation into “[t]he causes of this improvement, in the productive powers of labour, and the order, according to which its produce is naturally distributed among the different ranks and conditions of men in the society” (WN I.5). Smith saw a virtuous circle at work: the increase in labour productivity is the result of a deepening of the social division of labour, which is propelled forward by a growth of markets. The growth of markets, in turn, is seen to depend on the speed with which capital accumulates; this is why the “frugal man” is the hero in Smith’s story. Higher labour productivity, in turn, implies higher incomes and profits and therefore more capital accumulation, and so on and so forth. According to Young (1928: 529), Smith’s “theorem” is “one of the most illuminating and fruitful generalizations which can be found anywhere in the whole literature of economics”.
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