CLASS I –CLASS I –THE DRIVERS BEHIND SCIENCE AND

TECHNOLOGY SUPPORT

William B. BonvillianWilliam B. Bonvillian

Director, MIT Washington Director, MIT Washington OfficeOffice

Seminar FUNDAMENTALS OF SCIENCE AND

TECHNOLOGY PUBLIC POLICYMAKING

Opening -Opening -• Class Organization:Class Organization: Aim of class – summary of syllabus Aim of class – summary of syllabus• Your backgrounds, interests; Mine Your backgrounds, interests; Mine • What do you want to get from class?What do you want to get from class?• One Key – you talk, you don’t learn unless you talk, and One Key – you talk, you don’t learn unless you talk, and

talk to each other not just me – talk to each other not just me – • have to read - need you in the discussionhave to read - need you in the discussion--------------• Innovation is about peopleInnovation is about people – people not institutions – people not institutions

innovate - Craig Venter storyinnovate - Craig Venter story--------------• Points in Class OnePoints in Class One: review Solow and Romer – basic : review Solow and Romer – basic

growth theory; Jorgenson – role of innovation in 90’s; growth theory; Jorgenson – role of innovation in 90’s; • Merrill Lynch – way investors look at innovation for Merrill Lynch – way investors look at innovation for

investmentinvestment• Note emerging debate on comparative advantage of Note emerging debate on comparative advantage of

competitor nationscompetitor nations• Review 2 elements of DIRECT innovation policy – R&D and Review 2 elements of DIRECT innovation policy – R&D and

EducationEducation• Review elements of INDIRECT innovation policyReview elements of INDIRECT innovation policy• Look at Innovation as an ecosystemLook at Innovation as an ecosystem• Look at the “valley of death” between R&DLook at the “valley of death” between R&D

General Background - General Background - DefinitionsDefinitions• ScienceScience – understanding the natural world – out of “natural – understanding the natural world – out of “natural

philosophy” of the 16philosophy” of the 16thth-19-19thth centuries – observes natural world – centuries – observes natural world – discovery orienteddiscovery oriented

• TechnologyTechnology – System to organize scientific and technical – System to organize scientific and technical knowledge to achieve a practical purpose – “systems” include knowledge to achieve a practical purpose – “systems” include technical advance plus models to implement that advance – moves technical advance plus models to implement that advance – moves from observation to implementationfrom observation to implementation

• ResearchResearch – increasing scientific – increasing scientific OROR technical knowledge or both technical knowledge or both• InventionInvention – applying research knowledge to create a practical – applying research knowledge to create a practical

idea/deviceidea/device• InnovationInnovation – built on scientific discovery and breakthrough – built on scientific discovery and breakthrough

invention(s) – is the invention(s) – is the systemsystem of Research, Invention, & of Research, Invention, & Development using both science and technology to commercialize Development using both science and technology to commercialize (spread advances into societal use) – (spread advances into societal use) –

• or: “intersection of invention and insight leading to the or: “intersection of invention and insight leading to the creation of social and economic value” (NII) creation of social and economic value” (NII)

• Innovation SystemInnovation System – the ecosystem for developing innovation – – the ecosystem for developing innovation – operates at 2 levels: the institutional actors, and the face-to-operates at 2 levels: the institutional actors, and the face-to-face groups \face groups \

• Innovation WaveInnovation Wave – 40/50 year cycle of innovation based on – 40/50 year cycle of innovation based on radical, breakthrough, disruptive invention, then applications radical, breakthrough, disruptive invention, then applications piled on this, productivity rises, then long period of piled on this, productivity rises, then long period of incremental invention incremental invention

• ““Valley of Death”Valley of Death” – where invention and innovation usually dies – where invention and innovation usually dies - gap between research and development – institutions often not - gap between research and development – institutions often not in place to bridge this gap, and move idea into development in place to bridge this gap, and move idea into development prototyping and production, then invention into innovation prototyping and production, then invention into innovation

[source for some of these – Prof. Charles Weiss, G’town][source for some of these – Prof. Charles Weiss, G’town]

Relationship Between Relationship Between Science and Technology: Science and Technology:

* Before mid-19th century – technology * Before mid-19th century – technology based on “tinkering” not science – based on “tinkering” not science – telegraph, RR - early technology gives telegraph, RR - early technology gives rise to early technologyrise to early technology

*Now: basic science gives rise to *Now: basic science gives rise to technology – laserstechnology – lasers

•but Dr. Lee Buchannan, ex-DARPA but Dr. Lee Buchannan, ex-DARPA Deputy Director– “I get nothing Deputy Director– “I get nothing from basic science – could drop from basic science – could drop that science funding and never that science funding and never miss it”miss it”

* Now: technology gives rise to * Now: technology gives rise to science – IBM scanning tunneling science – IBM scanning tunneling microscope, nanotechnologymicroscope, nanotechnology

Professor Robert Solow, Professor Robert Solow, MITMIT

Robert M. Solow – Growth Robert M. Solow – Growth TheoryTheory (NY, Oxford Univ. Press 2000) (NY, Oxford Univ. Press 2000) - Prof. of Eco., MIT, Nobel Prize 1987, - Prof. of Eco., MIT, Nobel Prize 1987, Nat’l Medal Tech.Nat’l Medal Tech.• Solow Attacks Classical Economic Theory – Solow Attacks Classical Economic Theory – of of

Roy Harrod, Evsey Domar:Roy Harrod, Evsey Domar:– Q: When is an economy capable of steady growth?Q: When is an economy capable of steady growth?– Classical Answer: When national savings rate Classical Answer: When national savings rate (income saved)= capital/output ratio + rate of (income saved)= capital/output ratio + rate of labor force growthlabor force growth•Have to keep capital plant and equip. in Have to keep capital plant and equip. in balance with labor supplybalance with labor supply

•Static view: 3 factors – labor supply/capital Static view: 3 factors – labor supply/capital supply/savings rate – have to fix these supply/savings rate – have to fix these rations rations

into balanceinto balance•Capitalism: just periods of alternating Capitalism: just periods of alternating worsening unemployment and labor shortages worsening unemployment and labor shortages

2. Solow’s Rethinking:2. Solow’s Rethinking:• Solow: “the story told by these Solow: “the story told by these [Classical] models felt wrong”[Classical] models felt wrong”

• Harrod had a hint – vague generalizations Harrod had a hint – vague generalizations about “entrepreneurial behavior”about “entrepreneurial behavior”

• Classical Model: recipe for doubling rate Classical Model: recipe for doubling rate of growth was simply to double the of growth was simply to double the national savings rate, perhaps through the national savings rate, perhaps through the public budget (Keynes) – throw money at itpublic budget (Keynes) – throw money at it

• Economic development: Classical: “key to Economic development: Classical: “key to transition from slow growth to fast growth transition from slow growth to fast growth was sustained growth in the savings rate”was sustained growth in the savings rate”

• But Solow: “ I thought about replacing the But Solow: “ I thought about replacing the capital and labor output “with a richer capital and labor output “with a richer and more realistic representation of and more realistic representation of technology” – a new theory of production technology” – a new theory of production not just output levels not just output levels

3. Solow’s Basic Finding:3. Solow’s Basic Finding:• The Rate of growth is independent of the The Rate of growth is independent of the savings (investment) ratesavings (investment) rate

• Old “growth theory was mechanical” – Old “growth theory was mechanical” – simply simply

“ “a description of flows and stocks of a description of flows and stocks of goods”goods”

• Solow’s finding of “technological Solow’s finding of “technological flexibility…opened up growth theory to a flexibility…opened up growth theory to a wider variety of real world facts”wider variety of real world facts”

----------• Basic Growth theory – Solow in 1957:Basic Growth theory – Solow in 1957:

– ““Gross output per hour of work in the US Gross output per hour of work in the US doubled between ’09 and ’49’ [productivity doubled between ’09 and ’49’ [productivity gain]gain]

– ““7/8’s of that increase could be attributed to 7/8’s of that increase could be attributed to ‘technical change in the largest sense’”‘technical change in the largest sense’”

– ““all the remaining 1/8 could be attributed to all the remaining 1/8 could be attributed to a conventional increase in capital intensity a conventional increase in capital intensity

4. Unpacking Solow – 4. Unpacking Solow – Dennison:Dennison:• Reviewed US growth ’29-’82 to break out Reviewed US growth ’29-’82 to break out

Solow’s broad term “technical progress”:Solow’s broad term “technical progress”:– 25% increased labor output25% increased labor output– 16% increased education qualification of average 16% increased education qualification of average

workerworker– 12% growth of capital [same as Solow]12% growth of capital [same as Solow]– 11% “improved allocation of resources” [ex.- shift of 11% “improved allocation of resources” [ex.- shift of

labor from agriculture to high productivity industry]labor from agriculture to high productivity industry]– 11% economies of scale11% economies of scale– 34% growth of knowledge or technical progress 34% growth of knowledge or technical progress

[Dennison’s narrow definition][Dennison’s narrow definition]Total: 109% [extra 9% is misc.factors that reduce growth]Total: 109% [extra 9% is misc.factors that reduce growth]Dennison basically confirms Solow’s broad “technical Dennison basically confirms Solow’s broad “technical

progress” total progress” total Solow reduces Dennison’s factors to 3 broad factorsSolow reduces Dennison’s factors to 3 broad factors

- “straight labor”, “straight capital” and “technical - “straight labor”, “straight capital” and “technical change” change” - argues that technology and related innovation is - argues that technology and related innovation is 2/3’s of growth 2/3’s of growth - “technology remains the dominant engine of growth” - “technology remains the dominant engine of growth” – human capital (talent) is part of that and in second – human capital (talent) is part of that and in second place place

5. TRANSLATION OF 5. TRANSLATION OF SOLOW:SOLOW:• Solow attacks classical economics and Solow attacks classical economics and transforms growth theory – sees capitalism and transforms growth theory – sees capitalism and growth as dynamic growth as dynamic

• We see his point – RR’s canals electricity We see his point – RR’s canals electricity telegraph, telephone, aerospace, computing, telegraph, telephone, aerospace, computing, internet, all transform growthinternet, all transform growth

• Pattern: initial technology advance – yields Pattern: initial technology advance – yields new applications, which pile on to broaden the new applications, which pile on to broaden the advance – which yields productivity gains advance – which yields productivity gains throughout economy – which yields real growth throughout economy – which yields real growth in wages, incomein wages, income

• Solow’s basic point about classical economics: Solow’s basic point about classical economics: “No amount of statistical evidence will make a “No amount of statistical evidence will make a statement invulnerable to common sense” statement invulnerable to common sense”

• The good news: you can increase your rate of The good news: you can increase your rate of economic growth through technological advance – economic growth through technological advance – you can improve real incomes/societal wellbeing you can improve real incomes/societal wellbeing

6. Under Solow, what is 6. Under Solow, what is the role of Capital? -- A the role of Capital? -- A Supporting PlayerSupporting Player• ““technological progress …could find its way into actual technological progress …could find its way into actual

production only with the use of new and different production only with the use of new and different capital equipment”capital equipment”

• Therefore the effectiveness of innovation in increasing Therefore the effectiveness of innovation in increasing output would be paced by the rate of gross investment”output would be paced by the rate of gross investment”

• So: much faster transfer of new technology into So: much faster transfer of new technology into production with investmentproduction with investment

----------• Comment: Q-what kind of investment? Angel, Venture Comment: Q-what kind of investment? Angel, Venture

Capital IPO’s, general equity, lending? Which types, Capital IPO’s, general equity, lending? Which types, which mix, most impt. to innovation?which mix, most impt. to innovation?

• And doesn’t technical advance yield investment, not just And doesn’t technical advance yield investment, not just the other way around? ie, VC sitting out the last 4 the other way around? ie, VC sitting out the last 4 yearsyears

----------• Comment: Boom & Bust: Periods of boom and stagnation can Comment: Boom & Bust: Periods of boom and stagnation can

and do appear due to Keynesian and classical and do appear due to Keynesian and classical unemployment – Q: can accelerating the rate of unemployment – Q: can accelerating the rate of technological advance/innovation reduce the “bust’ technological advance/innovation reduce the “bust’ period?period?– Implication: innovation Implication: innovation capacitycapacity is a key is a key– A healthy innovation A healthy innovation systemsystem is a key to growth is a key to growth

7. Solow - Exogenous 7. Solow - Exogenous GrowthGrowth• Solow sees the power of technological Solow sees the power of technological advance as an economic force, but he advance as an economic force, but he doesn’t see how to measure itdoesn’t see how to measure it

• He’s stuck with the traditional toolset He’s stuck with the traditional toolset of both classical and neoclassical of both classical and neoclassical economics - capital supply and labor economics - capital supply and labor supply measures and market movements supply measures and market movements

• He’s not ready to measure innovation He’s not ready to measure innovation system elementssystem elements

• He therefore treats tech innovation as He therefore treats tech innovation as “exogenous” - as outside the understood “exogenous” - as outside the understood economic system and outside of metricseconomic system and outside of metrics

8. Solow’s Warning:8. Solow’s Warning:* * Ex. – there was little economic growth Ex. – there was little economic growth in medieval Europe because so little in medieval Europe because so little technical advance – economy was a technical advance – economy was a capture economy -- piracy, war were capture economy -- piracy, war were ways to capture wealth ways to capture wealth

* Solow Quoting Frost: * Solow Quoting Frost: “ “Most of the change we think we see Most of the change we think we see in life is due to truths being in an in life is due to truths being in an out of favor” out of favor”

* p.xxvi: ‘social institutions and * p.xxvi: ‘social institutions and social norms evolve… so economic social norms evolve… so economic behavior will surely evolve with them”behavior will surely evolve with them”

* So: “the permanent substructure of * So: “the permanent substructure of applicable economics cannot be so very applicable economics cannot be so very large”large”

Paul M. Romer – Prof. of Paul M. Romer – Prof. of Economics,Economics, StanfordStanford ----“Endogenous Technological Change” “Endogenous Technological Change” (Journal of Political Economy, vol 98, pp. (Journal of Political Economy, vol 98, pp. 72-102 (1990)72-102 (1990)BASIC POINTSBASIC POINTS1.1. Growth model – growth is driven by technological changeGrowth model – growth is driven by technological change

• which is driven by researchers who are profit which is driven by researchers who are profit maximizing agents at the immediate pre-commercial maximizing agents at the immediate pre-commercial stagestage

• Technology is not a conventional good and not a Technology is not a conventional good and not a “public good” – it is a “non-rival” potentially “public good” – it is a “non-rival” potentially excludable good, so it won’t support price-taking excludable good, so it won’t support price-taking competition, it’s more like monopolistic competitioncompetition, it’s more like monopolistic competition

2.2. The stock of human capital (talent) determines the rate The stock of human capital (talent) determines the rate of growthof growth

3.3. Given that role, too little human capital is devoted to Given that role, too little human capital is devoted to research (the major input into technology, so behind research (the major input into technology, so behind growth)growth)

4.4. Growth theory is therefore ENDOGENOUS - part of the Growth theory is therefore ENDOGENOUS - part of the economic system not outside iteconomic system not outside it

5.5. Integration into world markets increases access to human Integration into world markets increases access to human capital and technology and therefore increases growthcapital and technology and therefore increases growth

6.6. A large population is not enough to generate growth, the A large population is not enough to generate growth, the key is the size of human capital (talent) key is the size of human capital (talent)