Taking Stock
In this chapter, we had our first look at models of endogenous technological progress. The distinguishing feature of these models is the fact that profit incentives shape R&D spending and investments, which in turn determines the rate at which the technology of the economy evolves over time.
At some level, there are many parallels between the models studied here and the Romer (1986a) model of growth with externalities studied in Section 11.4 in Chapter 11; both have a mathematical structure similar to the neoclassical AK models (constant long-run growth rate, no transitional dynamics) and both generate externalities causing an equilibrium growth rate less than the Pareto optimal growth rate (because of physical capital externalities in the Romer (1986a) model, because of aggregate demand externalities in the lab-equipment model of Section 13.1 here, and because of a mixture of these in the other models studied in this chapter). The difference between the Romer (1986a) model and the endogenous technological change model should not be understated, however. While one may interpret the Romer (1986a) model as involving “knowledge accumulation,” the accumulation of knowledge and technology is not an economic activity—it is a byproduct of other decisions (in this particular instance, individual physical capital accumulation decisions). Hence, while such a model may “endogenize” technology, it does so without explicitly specifying the costs and benefits of investing in new technologies. Since, as discussed in Chapter 3, technology differences across countries are likely to be important in accounting for their income differences, understanding the sources of technology differences is a major part of our effort to understand the mechanics of economic growth. In this respect, the models presented in this chapter constitute a major improvement over those presented so far.The models studied in this chapter, like those of the previous chapter, emphasize the importance of profits in shaping technology choices. We have also seen the role of monopoly power and patent length on the equilibrium growth rate. In addition, the same factors that influenced the equilibrium growth rate in the neoclassical AK model also affect equilibrium 500
economic growth here. These include the discount rate, ρ, as well as taxes on capital income or corporate profits. Nevertheless, the effect of the market structure on equilibrium growth and innovation rates is somewhat limited in the current models because the Dixit-Stiglitz structure and expanding product or input varieties limit the extent to which firms can compete with each other. The models of quality competition in the next chapter will feature a richer interaction between market structure and equilibrium growth.
While the models in this chapter highlight certain major determinants of the rate of technological progress, another shortcoming of these models should be noted. The technology stock of a society is determined only by its own R&D. Thus technological differences will result simply from R&D differences. In our current world of relatively free knowledge-flows, many countries will not only generate technological know-how by their own R&D but will also benefit from the advances in the world technology frontier. Consequently, in practice, technology adoption decisions and the patterns of technology diffusion may be equally important as, or more important than, R&D towards the invention of new technologies (see Chapter 18 below). Therefore, the major contribution of the approaches studied in this chapter to our knowledge may be not in pinpointing the exact source of technology differences across countries, but in their emphasis on the endogenous nature of technology and in the perspective they provide for modeling technological investments.
In addition, even if technology adoption and imitation may be more important than innovation for the growth of some countries, models of endogenous technological change are essential for understanding world economic growth, since presumably the world technology frontier does largely advance because of R&D. Therefore, for our purpose of understanding that world economic growth, the new perspectives on the determinants of technological progress are important. Nevertheless, the AK structure of these models implies that they may have relatively little to say about why R&D investments and rapid technological progress has been a feature of the past 200 years and why the stock of knowledge and output per capita did not exhibit steady growth before the 19th century. Some of these questions will be addressed later in the book.
13.6.