Following up on Chapter VII of Capitalism, Socialism, & Democracy from last time, we move on to some rather more modern treatments of the economics of innovation. We start with Professor Galambos’ and a slightly modified version of the primer he gives to his students in his excellent course, In Pursuit of Innovation (coming this winter).
Galambos wades through some basics of innovation policy and the industrial enlightenment before arriving at the question of allocative efficiency on pages 4 and 5. Again, the conventional treatment is that there is a tradeoff between the promise of monopoly profits and the efficiency properties of competitive industries. And, recall, this is a tradeoff that Schumpeter explicitly rejects.
Of course, in the next section Professor Galambos introduces us to William Baumol’s “free-market innovation machine,” (the title of his 2004 book), whereby firms compete more on the basis of innovation than on price. This leads to a general discussion of intellectual property — the core of much work in the economics of innovation — and leads us to this question:
What is the value of spreading an innovation to the many compared with the value of letting the few enjoy the fruits and thus be more motivated to innovate further? (Galambos, 7).
I think it is worth dwelling on this question for a couple of reasons, one being whether this is any different than the question posed above that Schumpeter rejects?
Baumol goes on to flesh out a conception of the entrepreneur and entrepreneurship, and his now famous characterization of productive and destructive entrepreneurship. Specifically, Baumol argues that it is reasonable to believe that all societies have roughly the same (per capita) quantity and quality of entrepreneurial talent. The principal benefit of a free-market economy is that the institutions — that is, the rules of the game — channel this behavior toward productive, innovative ends. In other societies, entrepreneurial expertise often ends up in redistribution or outright theft, which impedes rather than enhances well being.
David J. Teece, “Firm organization, industrial structure, and technological innovation,” Journal of Economic Behavior and Organization 31(193-224). (read pp. 193-200; pp. 201- optional)
Although Galambos touches on several main themes of the innovation literature, he does get into the question of firm structure. In our next article, “Firm organization, industrial structure, and technological innovation,” David Teece points out that, despite attention given to the Schumpeter hypothesis, the omission is par for the course: “[M]uch of the literature in economics proceeds as if the identity of the firm in which innovation is taking place is of little moment” (193-194).
I first chose this particular article as an overview is because of the very succinct characterization of the characteristics of technological development in section 2. I especially like the brief discussion of uncertainty in 2.1, and will discuss this rather more fully this weekend. Be sure to familiarize yourselves with these various terms (path dependency, appropriability, irreversibility).
Teece also rejects the idea of searching for allocative efficiency, and instead incorporates comparative institutional analysis (194). What this means is that the analysis does not try to figure out what the “most efficient” world looks like; instead, the analysis looks at alternative arrangements and evaluates the relative performance of each. For our purposes, we might simply ask, for example, which type of organization has greater access to capital — a question Teece points out is potentially important for financing innovation.
This gets us to a very meaty discussion in Section 3 (198-199), which is where you should focus close attention. Teece calls out Schumpeter here, saying “the Schumpeterian notion that small entrepreneurial firms lack financial resources seems archaic, at least in countries with a vigorous venture capital market” (198). At the same time, however, he concedes that despite all the venture capital money, internal cash is a major source of financing innovation in the US (199). Why would that be?
I will touch on a couple of other points on page 199, including Williamson’s treatment of debt and equity financing.
Teece concludes our assigned reading by point out that “[t]he point … is that there are many factors besides firm size, and the presence or absence of market power, that affect an innovator’s capacity to access capital” (200).
Mark Blaug (2000) “Entrepreneurship before and after Schumpeter,” in Entrepreneurship: The Social Science View. Oxford University Press.
With Galambos and Teece under your belts, you should have enough firepower to get into the Journal of Economic History article by Tom Nicholas. Before we go there, however, read through Mark Blaug’s discussion of entrepreneurship. Do you have a good idea on what an entrepreneur is? Pay attention to the ascension of the entrepreneur in economic thought, starting with Knight and continuing with Schumpeter. How does Knight revive the importance of entrepreneurship in a capitalist economy? Does Schumpeter’s view differ from Knight’s? What is entrepreneurship for Schumpeter? Is there a distinction between entrepreneurship and innovation? And how does this all relate to the Schumpeterian hypothesis?
Take note here that at the end, Blaug links us back to the Austrians, who we read about in the McNulty piece. You might consider whether Blaug’s treatment of Schumpeter v. Kirzner is consistent with what McNulty said. We can take this up, along with the rest of these questions, on Saturday morning.
Once you are through these middle pieces and get into Nicholas, think about whether the characterization Nicholas is giving you is the same as the one that Teece and Blaug — or even Schumpeter — provide. In the next post, I will give you some technical help in reading Nicholas, but I will leave it to you to give that article a careful read.