>	Econ 100b Created 4/30/1996 Go to Brad De Long's Home Page

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Lecture Twenty Nine

Research and Development; Determinants of Technological Change
(Economics 100b; Spring 1996)

Professor of Economics J. Bradford DeLong
601 Evans, University of California at Berkeley
Berkeley, CA 94720
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net

April 10, 1996

• The Golden Rule again: MPK = r = n + g + d

How can we see that this is the golden rule? Well, suppose we boost the steady-state capital/effective labor ratio k* by a small amount--and keep it boosted forever. our gain to production is MPK (=r); but we have to boost investment by n+g+d in order to maintain the higher k*.

So consumption changes by Dc = r - (n+g+d). Hence the "Golden Rule"

• Where is the U.S. today? r is approximately 10% (real, pretax, risky); n=1%; g=1.5% (if we are lucky); d=4%. We would have to boost our capital-output ratio (or our steady-state savings rate) by 50% to get to the "golden rule".
• Should we do so? How much do we care about future generations? (They are, after all, going to be richer [we think]).

Policies to boost economic growth through accumulation:

• The savings side:
  • deficit reduction
  • IRAs
  • lower capital gains taxes
• The investment side:
  • R&D
  • infrastructure
  • equipment/embodiment

• Vertical axis plots economic growth (.03 = 3% per year; with the effects of higher-than-average (or lower-than-average) population growth, initial GDP per worker level, and overall non-machinery-and-equipment investment subtracted).
  
  
• Horizontal axis plots investment in machinery and equipment (.08 = 8% of GDP on average; with the systematic relationship between richer countries and higher equipment shares, and between machinery investment and population growth or non-machinery investment, subtracted out).
  
  
• Called a "leverage plot." Straight line gives slope of linear relationship. Dotted lines give 95% confidence interval for true structural linear relationship.

Conclusion?: If you want to grow rapidly, make it very easy to import machinery and equipment...

• We already talked (briefly, too briefly) about embodied technological progress.
  
  
• Now I'm going to talk about research.
  
  
• And then I'm going to talk about development.

Note that none of this is in Mankiw's textbook</BLINK> (although it is in David Romer's brand new Advanced Macroeconomics textbook (New York: McGraw Hill, 1996; ISBN 0-07-053667-8).

Basic research (quantum mechanics; the germ theory of disease)

Intermediate knowledge (how to organize an assembly line; how to build semiconductor chips)

Specific knowledge (starting a lawn mower)

All these factors have the potential, at least, to boost the efficiency of labor (sometimes when embodied into the proper organizations or pieces of physical capital).

All types of knowledge have a peculiar property: they are nonrival. Just because one person uses it doesn't mean that someone else can't use it too.

Excludability: if a kind of knowledge isn't excludable, it is hard to see why anyone would spend time and energy developing it (unless subsidized by the government or some organization interested in the advancement of knowledge as an end in itself).

If a kind of knowledge is excludable, then monopoly power: many fewer people will make use of it than could.

• Conclusion?: Support for basic research (which is nonexcludable in the highest degree).

Case of applied research more difficult to untangle:

• Market-restriction effects
• Consumer-surplus effects
• Business-stealing effects
• Promotion of other kinds of R&D as well

Our patent and copyright system tries to strike a balance--to provide sufficient incentives for innovation without strangling the use of productive technologies.

• The allocation of talent and rent-seeking
• Learning-by-doing (and learning-by-using)

Every reason to believe that the most important fact about knowledge construction is its non-rival nature. Thus two people should produce scientific and technological knowledge twice as fast as one--and modern technologies that make communication and research faster have the potential to amplify this still further...

Some (indirect) evidence that this is the case. For most of human history human population has been "Malthusian": better technology means nota higher standard of living but instead a higher populaoin supported on the same resource base because the population has been in rough demographic balance.

Look at human populations since "1 million B.C.," as Michael Kremer puts it. The larger the number of people on earth, the faster has population grown. An extra billion people increases the population growth rate by 0.7% per year or so (or did until large chunks of the third world began going through their demographic transitions in this century). Since 1900 the rate of population growth has slowed (indeed, some projections are now showing earth's population peaking around the end of the next century).

Possible to be very optimistic about the human future: more people doing more research than ever before--hence the pace at which knowledge improves must increase.


Possible to be more pessimistic: is useful technological knowledge to be discovered unbounded? Will natural resource scarcity get us in the end?