The Economic Impact of Knowledge

Tony Siesfeld, Jacquelyn Cefola, Dale Neef

• Publisher: Routledge
• Year: 2009
• eBook ISBN: 9781136358173
• Topic: Business
• Subtopic: Business General
• Index: Business

First Published in 1998. This text explores how economists and public policy makers are re-thinking the way in which governments monitor, measure and influence an economy in an unbounded global environment where output is largely intangible and organisations are becoming are becoming increasingly non-national in scope. Through a collection of seminal articles written by prominent business people, academics, and public policy makers, this three anthology examines the key issues surrounding the economic impact of knowledge-based growth.

Part One

The Effect of Knowledge on National Economies

1

Uncertainty and Technological Change

Nathan Rosenberg

I would like to begin with two generally accepted propositions about technological change: it is a major ingredient of long-term economic growth, and it is characterized by a high degree of uncertainty. Understanding the nature of these uncertainties and the obstacles to surmounting them is not a trivial matter. Rather, it goes to the heart of how new technologies are devised, how rapidly they diffuse, the ultimate extent of that diffusion, and their eventual impact on economic performance and welfare.

In view of the great uncertainties attached to the innovation process, it is hardly surprising that innovating firms have, historically, experienced high failure rates. Quite simply, the vast majority of attempts at innovation fail. But to describe the high failure rate associated with past innovation is to tell only a part of the story, and perhaps not the most interesting part. Indeed, I want to suggest that the more intriguing part of the story, with which I will be mainly concerned, has been the inability to anticipate the future impact of successful innovations, even after their technical feasibility has been established. This statement remains valid whether we focus upon the steam engine 200 years ago or the laser within our own lifetimes.

I will suggest that uncertainty is the product of several sources and that it has a number of peculiar characteristics that shape the innovation process and therefore the manner in which technological change exercises its effects on the economy. Since I will be primarily concerned with what has shaped the trajectory and the economic impact of new technologies, my focus will be confined to technologies that have had significant impacts. A study that included unsuccessful as well as successful innovations might yield insights of a very different nature.

I should also say at the outset that while I am not primarily concerned with the recent formal literature on growth theory (specifically the “new growth theory”), I am surprised that that literature has, so far at least, omitted any mention of uncertainty. While the rate of innovation is surely a function of the degree to which investors can appropriate the gains from their innovation, a number of central features of the innovation process revolve around uncertainty. At the very least, there is a risk/return tradeoff to be considered when evaluating projects that reflects the uncertainty attaching to appropriability. But the kinds of uncertainties that will be identified here go far beyond the issue of appropriability.

One further caveat seems appropriate. The discussion that follows is “anecdotal” in nature. However, the anecdotes have been deliberately selected to include many of the most important innovations of the twentieth century. Thus, if the characterizations offered below stand the test of further scrutiny, the analysis of this chapter will have captured distinct features of the innovation process for technologies whose cumulative economic importance has been immense.

It is easy to assume that uncertainties are drastically reduced after the first commercial introduction of a new technology, and Schumpeter offered strong encouragement for that assumption. His views have proven to be highly influential. In Schumpeter’s world, entrepreneurs are compelled to make decisions under circumstances of very limited and poor quality of information. But in that world the successful completion of an innovation resolves all the uncertainties that previously existed. Once this occurs, the stage is set for imitators, whose actions are responsible for the diffusion of a technology. Perhaps it should be said that the stage is now set for “mere imitators”. Schumpeter was fond of preceding the noun “imitators” with the adjective “mere”. The point is one of real substance, and not just linguistic usage. In Schumpeter’s view, life is easy for the imitators, because all they need to do is to follow in the footsteps of the entrepreneurs who have led the way, and whose earlier activities have resolved all the big uncertainties.

It is, of course, true that some uncertainties have been reduced at that point. However, after a new technological capability has been established, the questions change and, as we will see, new uncertainties, especially uncertainties of a specifically economic nature, begin to assert themselves.

The purpose of this chapter is to identify and to delineate a number of important aspects of uncertainty as they relate to technological change. These aspects go far beyond those connected with the inventive process alone. In addition, as we will see, they reflect a set of interrelated forces that are at the heart of the relationship between changes in technology and improvements in economic performance.

SOME HISTORICAL PERSPECTIVES

Consider the laser, an innovation that is certainly one of the most powerful and versatile advances in technology in the twentieth century, and one that is still surely in the early stages of its trajectory of development. Its range of uses in the thirty years since it was invented is truly breathtaking. A list of uses would include precision measurement, navigational instruments, and a prime instrument of chemical research. It is essential for the high-quality reproduction of music in compact discs (CDs). It has become the instrument of choice in a range of surgical procedures, including extraordinarily delicate surgery upon the eye, where it is used to repair detached retinas, and gynecological surgery, where it now provides a simpler and less painful method for removal of certain tumors. It is extensively employed in gall bladder surgery. When this chapter was being revised in manuscript, its pages were printed by a laser jet printer. Lasers are widely used throughout industry, including textiles, where it is employed to cut cloth to desired shapes, and metallurgy and composite materials, where it performs similar functions.

But perhaps no single application of the laser has been more profound than its impact on telecommunications, where, together with fiber optics, it is revolutionizing transmission. The best trans-Atlantic telephone cable in 1966 could carry simultaneously only 138 conversations between Europe and North America. The first fiber optic cable, installed in 1988, could carry 40,000. The fiber optic cables being installed in the early 1990s can carry nearly 1.5 million conversations (Wriston, 1992, pp. 43–44). And yet it is reported that the patent lawyers at Bell Labs were initially unwilling even to apply for a patent on the laser, on the grounds that such an invention had no possible relevance to the telephone industry. In the words of Charles Townes (1968, p. 701), who subsequently won a Nobel Prize for his research on the laser, “Bell’s patent department at first refused to patent our amplifier or oscillator for optical frequencies because, it was explained, optical waves had never been of any importance to communications and hence the invention had little bearing on Bell System interests”.

Let me cite some further major historical instances where the common theme is the remarkable inability, at least from a later perspective, to foresee the uses to which new technologies would soon be put. Western Union, the telegraph company, was offered the opportunity to purchase Bell’s 1876 telephone patent for a mere $100,000, but turned it down. In fact, “Western Union was willing to withdraw from the telephone field in 1879 in exchange for Bell’s promise to keep out of the telegraph business”. But if the proprietors of the old communications technology were myopic, so was the patent holder of the new technology. Alexander Graham Bell’s 1876 patent did not mention a new technology at all. Rather, it bore the glaringly misleading title “Improvements in Telegraphy” (Brock, 1982, p. 90).

Marconi, who invented the radio, anticipated that it would be used primarily to communicate between two points where communication by wire was impossible, as in ship-to-ship or ship-to-shore communication. To this day the British call the instrument the “wireless,” precisely reflecting Marconi’s early conceptualization. Moreover, the radio in its early days was thought to be of potential use only for private communication: that is, point-to-point communication, rather like the telephone, and not at all for communicating to a large audience of listeners. Surprising as it may seem to us today, the inventor of the radio did not think of it as an instrument for broadcasting. Marconi in fact had a conception of the market for radio that was the precise opposite of the one that actually developed. He visualized the users of his invention as steamship companies, newspapers, and navies. They required directional, point-to-point communication, that is, “narrowcasting” rather than broadcasting. The radio should therefore be capable of transmitting over great distances, but the messages should be private, not public (Douglas, 1987, p. 34).

The failure of social imagination was widespread. According to one authority, “When broadcasting was first proposed … a man who was later to become one of the most distinguished leaders of the industry announced that it was very difficult to see uses for public broadcasting. About the only regular use he could think of was the broadcasting of Sunday sermons, because that is the only occasion when one man regularly addresses a mass public” (Martin, 1977, p. 11).

The wireless telephone, when it became feasible in the second decade of the twentieth century, was thought of in precisely the same terms as the wireless radio. J. J. Carty, who was chief engineer of the New York Telephone Company, stated in 1915 “The results of long-distance tests show clearly that the function of the wireless telephone is primarily to reach inaccessible places where wires cannot be strung. It will act mainly as an extension of the wire system and a feeder to it” (Maclaurin, 1949, pp. 92–93).

The computer, in 1949, was thought to be of potential use only for rapid calculation in a few scientific research or data processing contexts. The notion that there was a large potential market was rejected by no less a person than Thomas Watson, Sr., at the time the president of IBM. The prevailing view before 1950 was that world demand could probably be satisfied by just a few computers (Ceruzzi, 1987).

The invention of the transistor, certainly one of the greatest inventions of the twentieth century, was not announced on the front page of the New York Times, as might have been expected, when it was made public in December 1947. On the contrary, it was a small item buried deep in the newspaper’s inside pages, in a regular weekly column titled “News of Radio”. It was suggested there that the device might be used to develop better hearing aids for the deaf, but nothing more.

This listing of failures to anticipate future uses and larger markets for new technologies could be expanded almost without limit. We could, if we liked, amuse ourselves indefinitely at the failure of earlier generations to see the obvious, as we see it today. But that would be a mistaken conceit. For reasons that I propose to examine, I am not particularly optimistic that our ability to overcome the ex ante uncertainties connected with the uses of new technologies is likely to improve drastically. If I am right, a more useful issue to explore is what incentives, institutions, and policies are more likely to lead to a swifter resolution of these uncertainties.

Much of the difficulty, I suggest, is connected to the fact that new technologies typically come into the world in a very primitive condition. Their eventual uses turn upon an extended improvement process that vastly expands their practical applications. Thomas Watson, Sr., was not necessarily far off the mark when he concluded that the future market for the computer was extremely limited, if one thinks of the computer in the form in which it existed immediately after the Second World War. The first electronic digital computer, the ENIAC, contained no less than 18,000 vacuum tubes and filled a huge room (it was more than 100 feet long). Any device that has to rely on the simultaneous working of 18,000 vacuum tubes is bound to be notoriously unreliable. The failure in prediction was a failure to anticipate the demand for computers after they had been made very much smaller, cheaper, and more reliable, and when their performance characteristics, especially their calculating speed, had been improved by many orders of magnitude; that is to say, the failure was the inability to anticipate the trajectory of future improvements and the economic consequences of those improvements.

If space permitted, the history of commercial aviation could be told in similar terms, as could the history of many other innovations. With respect to the introduction of the jet engine, in particular, the failure to anticipate the importance of future improvements occurred even at the most eminent scientific levels. In 1940 a committee of the National Academy of Sciences was formed to evaluate the prospects for developing a gas turbine for aircraft. The committee concluded that such a turbine was quite impractical because it would have to weigh fifteen pounds for each horsepower delivered, whereas existing internal combustion engines weighed only slightly over one pound for each horsepower delivered. In fact, within a year the British were operating a gas turbine that weighed a mere 0.4 pounds per horsepower (U.S. Navy, 1941, p. 10).

This is an appropriate place at which to make a very simple, but nonetheless fundamental, observation: most R&D expenditures are devoted to product improvement. According to McGraw-Hill annual surveys over a number of years, the great bulk of R&D (around 80 percent) is devoted to improving products that already exist, rather than to the invention of new products. Thus, it is incorrect to think of R&D expenditures as committed to the search for breakthrough innovations of the Schumpeterian type. On the contrary, the great bulk of these expenditures need to be thought of as exhibiting strongly path-dependent characteristics. Their main goal is to improve upon the performance of technologies that have been inherited from the past. A moment’s reflection suggests that this should not be surprising. The telephone has been around for more than 100 years, but only recently has its performance been significantly enhanced by facsimile transmission, electronic mail (e-mail), voice mail, data transfer, on-line services, conference calls, and “800” numbers. The automobile and the airplane are each more than 90 years old, the camera is 150 years old, and the Fourdrinier machine, which is the mainstay of the papermaking industry today, was patented during the Napoleonic Wars. Clearly the improvement process deserves far more attention than is suggested by Schumpeter’s frequent recourse to the derisory term “mere imitators”. Equally clearly, a world in which most R&D expenditures are devoted to improving upon technologies that are already in existence is also a world in which technological change can hardly be characterized as exogenous.

So far it has been suggested, by citing important historical cases, that uncertainty plays a role in technological change that goes far beyond the uncertainty associated with technological feasibility alone. Indeed, the uncertainty associated with the eventual uses of the laser or the computer might, more appropriately, be characterized as “ignorance” rather than as “uncertainty”. That is to say, along any particular dimension of uncertainty, decision makers do not have access to an even marginally informative probability distribution with respect to the potential outcomes. It is not difficult to demonstrate that ignorance plays a large part in the process of technological change! However, rather than arguing over the differences between Arrovian and Knightian uncertainty (which is how economists phrase this distinction between measurable and unmeasurable uncertainty), the next section of this chapter will outline a number of important dimensions along which uncertainty plays a role in the rate and direction of inventive activity and diffusion. Taken together, we have very little information, even retrospectively, about the relationships among these different dimensions. If uncertainty exists along more than one dimension, and the decision maker does not have information about the joint distribution of all the relevant random variables, then there is little reason to believe that a “rational” decision is possible, or that there will be a well-defined “optimal” investment or adoption strategy.

DIMENSIONS OF UNCERTAINTY

Why is it so difficult to foresee the impact of even technologically practicable inventions? Much of the relevant literature emphasizes the huge uncertainty that has attached to the question “Will it work?” This is clearly a major source of uncertainty, but the fixation upon workability has served to distract attention from several other, more subtle and overlapping sources. We turn now to a consideration of these sources.

First, it is not only that new technologies come into the world in a very primitive condition; they also often come into the world with properties and characteristics whose usefulness cannot be immediately appreciated. It is inherently d...

Table of contents

• Cover Page
• Half Title Page
• Series Page
• Title Page
• Copyright Page
• Contents
• Introduction to Series
• The Effect of Knowledge on National Economies
• A Tool Kit for Businesses in the Knowledge-Based Economy
• The Measurement of Knowledge
• Index