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January 16, 2011
David Warsh, Proprietor

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Savoring the Horse and Rabbit Stew

Will technological innovation be cranked up to tackle the problem of climate change? To anyone who thinks about the course of events since, say, 1939, it is obvious that innovation policy can be a very powerful tool in emergencies that involve a common enemy. The list of technologies that governments pioneered includes nuclear energy, jet engines, satellites, modern medical technologies, computers and the Internet.

Only recently, though, have economists begun thinking systematically about directed technical change as a major weapon against global warming. One of the most interesting sessions at the economic meetings in Denver last week, organized by Nicholas Stern, author of an influential report on global warming for the British Treasury, had to do with such measures. Here were three good investigations, built around a theory paper, “The Environment and Directed Technical Change,” by Daron Acemoglu (of the Massachusetts Institute of Technology), and Philippe Aghion, Leonard Bursztyn and David Hemous (all of Harvard), fifteen experts altogether engaged in a lively discussion of something that really matters.

Thus John Van Reenen, of the London School of Economics, and several co-authors considered whether a high tax on carbon might touch off a race of sorts between internal combustion and electric and hybrid technologies that could, depending on the history, tip decisively in favor of the clean technology. (Michael Greenstone, of MIT, had his doubts about the strength of the evidence.)  Per Krussel and two co-authors, all of Stockholm University, found striking evidence that innovation in energy-saving technologies had accelerated sharply after the oil shocks in 1973, at the expense of measures to economize on capital and labor. And Nick Johnstone and Ivan Haščič, of the OECD, argued that public support for generic storage technologies might have a bigger impact than the same money devoted to a range of generating technologies – wind, solar and ocean/tides.

The talk took me back to an unusual conference last autumn in Virginia, when Acemoglu and Richard R. Nelson, of Columbia University, had sat side-by-side one afternoon at lunch. The Virginia conference was celebrating a famous conference held half a century before, also under the auspices of the National Bureau for Economic Research, in the spring of 1960, at the University of Minnesota:  The Rate and Direction of  Inventive Activity, Economic and Social Factors.

Acemoglu, 43, is a familiar figure in today’s economics profession. He is the thought-leader of the next generation at MIT, intellectual inheritor of Paul Samuelson, Robert Solow and Peter Diamond.  Winner of the John Bates Clark Medal in 2005 (“His unparalleled combination of originality, thoroughness and prolificacy (not profligacy, as in an earlier version! dw) has propelled him to the frontier of each field he has explored,” wrote Robert Shimer, of the University of Chicago, at the time), it was Acemoglu who recently reignited the current discussion of directed technical change and the environment. To the meeting in Virginia he had brought a paper titled “Diversity and Technological Progress,” in which he argued that overmuch conformity in research was a natural outgrowth of the patent system. Government needs to promote diversity of researchers, meaning the investigation of alternative paths, he said.

Nelson, 80, requires more of an introduction. It was he who organized the famous Minnesota conference fifty years before.  He had been only 27 when he was hired at RAND Corp. to work on the economics of research and development.

RAND was itself an early innovation of the Cold War, put in business by the Army Air Force as a “university without students” to study – only study – a wide range of problems of the global competition with the Soviet bloc. (The joke was that the acronym derived not from Research ANd Development, but from Research And No Development.)  Its managers hired young experts in economics, game theory, systems analysis, operations research and various other intellectual excitements of the day. Among most influential were Armen Alchian, a UCLA professor, and Burton Klein, an eccentric visionary who eventually would join the faculty at Caltech. (The RAND story is laid out in considerable detail by historian David Hounshell in “The Medium is the Message, or How Context Matters: The RAND Corporation. builds an economics of innovation 1945-1962,” in Systems, Experts and Computers, edited by Agatha and Thomas Hughes.)

At a certain point Alchian and a colleague (Reuben Kessel) concluded that, in choosing among possible weapons systems to develop, “the amount of diversity will probably be too small,” owing to organizational and institutional biases. To check their intuition, they consulted Kenneth Arrow, a young genius from Stanford University who spent the summers in Santa Monica at RAND. Arrow responded in 1955 with a memo “Aspects of Military Research and Development”  “This suggests [a la Alchian] at least the importance of having a wide variety of studies to begin with, gradually eliminating the less promising as more information is accumulated. At each stage we have information which will suggest expansion of certain lines of development and the curtailment or elimination of others.”  Case studies, Arrow suggested, would be helpful; so would a careful perusal of the literature.

It was to do this that Nelson was hired, only a couple of years out of Yale and, before that, Oberlin College. The survey became a famous paper. The case studies eventually ran to more than fifty, prepared by Nelson and many others.  The public face of the program appeared in a widely-circulated article in Fortune magazine in May1958, “A Radical Proposal for R&D:” “We need more competition, duplication and ‘confusion’ in our military research and development programs, not less,” it argued. Behind the scenes, Nelson began to organize the Minnesota conference. All the grandees of innovation would be there, everyone from Simon Kuznets, Fritz Machlup and Jacob Schmookler among the older generation, to Zvi Griliches, F.M. Scherer and William Meckling, among the rising one.  Nelson contributed a case study of the transistor. Even the not-yet-famous Thomas Kuhn was there.

Ironically, it was the last paper in the conference volume that eventually appeared which soon eclipsed all the rest.  Kenneth Arrow’s eight-page memo had become “Economic Welfare and the Allocation of Resources for Invention,” which became a famous paper.  It established (along with a parallel paper on “Learning by Doing”) the framework with which macroeconomists thought about innovation as a policy objective for the next thirty years.  And in an age when the giant corporations of the Fortune 500 reigned supreme, it included these prescient sentences at the end: “There is really no need for the firm to be the fundamental unit of organization in invention:  there is plenty of reason to suppose that individual talents count for a good deal more than the firm as an organization.”  Bill Gates was in kindergarten.

Arrow went to the Council of Economic Advisers in the Kennedy administration in 1961; so did Nelson. Arrow returned to Stanford, then moved to Harvard; Nelson returned to Yale. The failure of the mathematics employed in Arrow’s paper to capture the dynamics of innovation became apparent in the late 1960s.  The result was that in the 1970s economics had relatively little to say to say about the deep changes that were beginning to take place in the American economy.

The emphasis was on inflation and unemployment, Vietnam and OPEC, the dollar and gold. All the while various government agencies were going about their work:  the Defense Advanced Projects Agency, the National Institutes of Health, National Aeronautics and Space Administration and the administrators of the National Defense Education Act. In the universities, departments of molecular biology and computer science were established with government support and began turning out PhDs.

Nelson, on the other hand, went right on working. For a time, he remained within the bounds of neoclassical economics; an influential 1966 paper with Edmund Phelps argued that education greatly speeded the diffusion of more productive new technologies.  By 1970, he had begun to work outside the mainstream tradition.  In 1982 he and Sidney Winter published An Evolutionary Theory of Economic Change. The reviews were mixed. It was true that evolutionary models had things to say that couldn’t be said by standard models, wrote one reviewer in the Journal of Political Economy; but neither were they sufficiently powerful to lure converts from the mainstream in significant numbers. (What’s become of evolutionary economics since then is a topic for another day.) Ten years later, National Systems of Innovation: A Comparative Analysis appeared, a massive study of fifteen nations directed by Nelson, who by then had moved to Columbia, and Nathan Rosenberg, of Stanford

In The Moon and the Ghetto, a series of lectures published in 1977, Nelson laid out the case for an outsider’s perspective. The problems of organizing and controlling economic activity were various and intricate, he argued, as implied by familiar complaint:  if we can land a man on the moon, why can’t we solve the problems of the ghetto? Tunnel vision and intellectual imperialism were a major problem.  Political scientists saw reasons for government intervention everywhere they looked; economists habitually and thoughtlessly argued government away: economists in particular had oversold their narrow perspective. He recalled Robert Dorfman’s story about how descriptions of the flavor of horse and rabbit stew tend to dwell exclusively on the contribution of the rabbit.

There haven’t been many others like Nelson.  A comparable figure is Stanford’s Rosenberg, who also has gone on working:  a two-volume handbook, Economics of Innovation, edited with Bronwyn Hall, appeared last year.  So did another collection of essays, Studies on Science and the Innovation Process. But the ranks of the great historians of institutions and technology are dwindling. Fernand Braudel died in 1985; Zvi Griliches in 1999; Alfred Chandler in 2007. Thomas Hughes, David Landes and “Mike” Scherer are on the sidelines. Nelson is the only one left in full fighting trim.

The Virginia conference last autumn o was a strange affair, both festive and strained, steeped in that quality sometimes described as melancholy joy. Arrow came. So did Paul Romer, of Stanford’s Institute for Economic Policy Research, who twenty-five years ago restored innovation to center stage in economic theory before going off to advocate for new cities that would out-source their governance as a promising approach to conflict resolution and economic growth. Paul David, of Stanford, who put on the map the concept of “path dependence” (meaning that, even in economics, history matters) was there.  The organizers, Scott Stern, of MIT, and John Lerner, the Harvard Business School, turned out several dozen other students of entrepreneurship and technical change as well

Acemoglu presented the latest version of diversity as the key to economic progress – not really very different from the RAND recommendations of fifty years before. Nelson read a crisp dissent from mainstream traditions and recommended evolutionary approaches to the study  of technical change instead.)  The volume will appear later this year, and Nelson will have his well-deserved day in the sun. He retains some of the asperity that was characteristic of him years ago when he noted “the faith, and the arrogance” of John Maynard Keynes’ celebrated boast – “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood” — before adding “But surely Abe Lincoln was right when he made his remark about not being able to fool all of the people all of the time.”

When I went to the library last week to look for the RAND Corp. article in Fortune from 1958, I found that someone long ago had ripped it out. What remained, however, was an photo-spread in the issue of the magazine just before, the Congressional leadership, especially those members with oversight of defense spending. There were a series of beautiful black and white photographs of House Speaker Sam Rayburn and Senate Majority Leader Lyndon Johnson, and a perhaps a dozen others, liberals and conservatives, serious men (there were no women among them) able to agree long enough to pass legislation sufficiently far-reaching to ultimately win, decisively, the competition with the Soviet Union – a challenge as daunting in its day as is the threat of climate change today.

I spent a long time looking at those photographs. The funny thing is, I don’t really think the leadership then was very different from the Congressional leadership today. Nor do I think that government-led innovation policy is any less promising (though there is the added complication of economic competition with other nations, especially China).  What’s missing in the United States – so far – is a shared sense of urgency.

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