Tag: Schumpeter

When did global technological leadership migrate across the Atlantic?

HT: theatlantic.com/a-short-history-of-american-invention/385279/ via Mikko Packalen and Jay Bhattacharya

Who wins from the perennial gale of creative destruction

  • In 1900, <10% of families owned a stove, or had access to electricity or phones
  • In 1915, <10% of families owned a car
  • In 1930, <10% of families owned a refrigerator or clothes washer
  • In 1945, <10% of families owned a clothes dryer or air-conditioning
  • In 1960, <10% of families owned a dishwasher or colour TV
  • In 1975, <10% of families owned a microwave
  • In 1990, <10% of families had a cell phone or access to the Internet

HT: The Atlantic

The Schumpeterian view of business cycles

David Andolfatto argues for the Schumpeterian view of economic development where the distinction between growth and business cycles is artificial. Everyone agrees that long-run growth is the product of technological advancement. The Keynesian school views trend growth as being stable with new technologies unfolding at a smooth rate.

In the Schumpeterian view, there is no reason to believe that the process of technological advancement is smooth. It is more reasonable to suppose that new technologies appear in clusters.

There will be incremental innovations, and from time to time, grand innovations that transformed the entire economy. These grand innovations require the economy to slow down while it invests in a whole range of secondary innovations to make the most of these great new technologies. Writing workable software for new computers is an example.

These technology shocks may cause fluctuations in the growth rate through what Schumpeter called a process of creative destruction. Innovations cluster in specific industries and this generates the boom. When the cluster of innovation comes to an end in a particular sector, there is a generally increased risk of failure as old and new firms and entrepreneurs and investors adapt themselves to the new situation.

If business cycles come from innovation, they are an essential feature of economic development. They cannot be eliminated without harming innovation so we should not be too quick to smooth out the business cycle.

Technological advancements that ultimately lead to higher productivity may, in the short run, induce cyclical adjustments as the economy restructures: resources flow out from declining sectors to the expanding sectors, and people retrain and learn the next technologies and invest in the secondary innovations to make, for example, new computers to be of practical application. The first innovators will find the job a difficult one, later innovators will find things very easy, and the last to adopt the innovation will find not much to do. Faster or slower adoption of new technologies will have important implications for production, investment and consumption.

Diffusionrates

There is no guarantee that all new technologies will work out as planned. What may have looked promising may turn out to be a disappointment.

This leads to the role in news on the business cycle. Obviously, people form expectations about future technologies and invest and consume in the expectation of better or worse times ahead. They will adjust investor and consumer expectations as new information of varying and conflicting quality becomes available about technological prospects and the success of technological developments to date.

Output and employment will go up and down on the basis of these shifting expectations. These shifts in expectations are perfectly rational and are made on the basis of new information about the prospects and performance of new and existing technologies. Of course, some of these forecasts will turn out to be a disappointment and there will be a slowdown in the economy as people regroup.

The problem is not a lack of accurate forecasting by both the old and new firms. If technologies come in clusters, and are clustered in industries, there will be an above and below average number of forecasting errors with resulting consequences for business failures and new investment.

The productivity slowdown in the 1970s is attributed by some to a doubling of technology adoption costs because of the ICT revolution. This doubling in the cost of adopting new technologies was not measured as investment in the national accounts when constructing GDP data.

Boyan Jovanovic argues that the share market crash in the early 1970s may have been driven by an expectation by investors that a lot of existing capital had become obsolete because of the ICT revolution. investors wrote down the value of the companies with the soon-to-be obsolete capital and the stock-market incumbents of the day which were not ready to implement it.  Product-market entry of new firms and new capital takes time, and their stock-market entry takes even longer. In the meantime, the stock market declines.

Why do people assume the trend growth is stable? Economic growth is no more than a random collection of innovations that are adopted across the economy each year.

Economic Theory and the Meaning of Competition

As it is, it is one of the great paradoxes of economic science that every act of competition on the part of a businessman is evidence, in economic theory, of some degree of monopoly power, while the concepts of monopoly and perfect competition have this important common feature: both are situations in which the possibility of any competitive behaviour has been ruled out by definition

Paul J McNulty, Economic Theory and the Meaning of Competition

HT: spontaneousorder.blogspot

Academics and their bias against the market

The expansion of jobs for graduates from the 1960s onwards increased the choices for well-educated people more disposed to the market of working outside the teaching profession. Those left behind in academia were even more of the Leftist persuasion than earlier in the 20th century.

Dan Klein showed that in the hard sciences, there were 159 Democrats and 16 Republicans at UC-Berkley. Similar at Stanford. No registered Republicans in the sociology department and one each in the history and music departments. For UC-Berkeley, an overall Democrat:Republican ratio of 9.9:1. For Stanford, an overall D:R ratio of 7.6:1. Registered Democrats easily outnumber registered Republicans in most economics departments in the USA. The registered Democrat to Republican ratio in sociology departments is 44:1! For the humanities overall, only 10 to 1.

The left-wing bias of universities is no surprise, given Hayek’s 1948 analysis of intellectuals in light of opportunities available to people of varying talents:

  • exceptionally intelligent people who favour the market tend to find opportunities for professional and financial success outside the universities in the business or professional world; and
  • those who are highly intelligent but more ill-disposed toward the market are more likely to choose an academic career.

People are guided into different occupations based on their net agreeableness and disagreeableness including any personal distaste that they might have for different jobs and careers. There is growing evidence of the role of personality traits in occupational choice and career success.

The theories of occupational choice, compensating differentials and the division of labour suggest plenty of market opportunities both for caring people and for the more selfish rest of us:

  • Personalities with a high degree of openness are strongly over-represented in creative, theoretical fields such as writing, the arts, and pure science, and under-represented in practical, detail-oriented fields such as business, police work and manual labour.
  • High extraversion is over-represented in people-oriented fields like sales and business and under-represented in fields such as accounting and library work.
  • High agreeableness is over-represented in caring fields like teaching, nursing, religion and counselling, and under-represented in pure science, engineering and law.

Schumpeter explained in Capitalism, Socialism, and Democracy that it is “the absence of direct responsibility for practical affairs” that distinguishes the academic intellectual from others “who wield the power of the spoken and the written word.”

Schumpeter and Robert Nozick argued that intellectuals were bitter that the skills so well-rewarded at school and at university with top grades were less well-rewarded in the market.

  • For Nozick, the intellectual wants the whole society to be a school writ large, to be like the environment where he or she did so well and was so well appreciated.
  • For Schumpeter, the intellectual’s main chance of asserting himself lies in his actual or potential nuisance value.

Richard Posner also had little time for academics who say they speak truth to power:

  • The individuals who do so do it with the quality of a risk-free lark.
  • Academics, far from being marginalized outsiders, are insiders with the security of well-paid jobs from which they can be fired with difficulty.
  • Academics flatter themselves that they are lonely, independent seekers of truth, living at the edge.
  • Most academics take no risks in expressing conventional left-leaning (or politically correct) views to the public, which is part of the reason they are not regarded with much seriousness by the general public.