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The
Positive Sum
Tracy
Harnessing Technologyfor
Economic Growth
Ralph Mu and Nathan Rosenberg, editors
NATIONAL ACADEMY PRESS
Washington, D.C. 1986
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National Academy Press ~ 2101 Constitution Avenue, NVV ~ Washington, DC 20418
This volume is the result of work sponsored by the National Academy of Engineering, the Center
for Economic Policy Research at Stanford University, and the Departments of Chemistry and Chem-
ical Engineenug at Stanford University.
The National Academy of Engineering is described on the following page.
The Center for Economic Policy Research (CEPR) fosters a more rational and infonned approach
to economic policy. CEPR pursues four interrelated goals in support of this mission: (1) stimulating
research on economic policy; (2) broad dissemination of its research findings; (3) building a com-
munity of scholars conducting research on policy issues; and (4) linking the policy community at
Stanford with decision makers from business, government, and academia. In addition to a general
research seed grant program, CEPR has developed and supports research programs in tax policy,
regulation, energy and natural resources, electronics/inforTnaion industries, and the economics of
technological innovation.
The Departments of Chemistry and Chemical Engineering at Stanford, in 1969, organized an
Industrial Affiliates Program. The primary purpose of the program, which sponsors conferences and
exchanges between industry and the Chemistry and Chemical Engineering faculty, is to serge as a
forum for communication between faculty, students, and representatives of industry.
We views expressed in this volume are those of the authors and editors and are not presented as
the views of the organizations with which they are affiliated.
Library of Congress Cataloging in Publication Data
The positive sum strategy.
Bibliography: p.
Includes index.
1. Technological innovations United States-
Congresses. 2. United States Economic conditions—
Congresses. I. Landau' Ralph. II. Rosenberg,
Nathan, 1927-
T173.8.P67 1986
ISBN 0-309~3630-5
m. National Academy of Engineering.
338.9'26 85-21713
Copyright ~ 1986 by the National Academy of Sciences
No part of this book may be reproduced by any mechanical, photographic, or electronic process,
or In the form of a phonographic recording, nor may it be stored in a retrieval system, transmitted,
or otherwise copied for public or private 1lse, without written permission from the publisher, except
for the purposes of official use by tile United States Government.
Printed in the United States of America
First Pnnting, December 1985
Second Printing, February 1989
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The National Academy Press was created by the National Academy of
Sciences to publish the reports issued by the National Academy of Sciences,
the National Academy of Engineering, the Institute of Medicine, and the
National Research Council. This volume is published under the auspices of
the National Academy of Engineering (NAE).
The National Academy of Engineenng is a private organization established
in 1964. It shares in the responsibility given the National Academy of Sciences
under a congressional charter granted in 1863 to advise the federal government
on questions of science and technology. This collaboration is implemented
primarily through the National Research Council. The National Academy of
Engineering also recognizes distinguished engineers, sponsors engineering pro-
grarns aimed at meeting national needs, and encourages education and research.
The President of the National Academy of Engineering is responsible for
the decision to publish an NAE manuscript through the National Academy
Press. In reviewing publications that include papers signed by individuals, the
President considers the competence, accuracy, objectivity, and balance of the
work as a whole. In reaching his decision, the President is advised by such
reviewers as he deems necessary on any aspect of the material treated in the
papers.
Publication of signed work signifies that it is judged a competent and useful
contribution worthy of public consideration, but it does not imply endorsement
of conclusions or recommendations by the NAE. The interpretations and con-
clusions in such publications are those of the authors and do not purport to
represent the views of the council, officers, or staff of the National Academy
of Engineenng.
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hn~oduction
RALPH LANDAU and NATHAN ROSENBERG
Why this volume? We start from the premise Hat engineers and economists
share a common interest in technology and technological change. They do,
however, approach He subject from different vantage points, and the ver,
differences in these vantage points have been intensified by the inevitable
increase in specialization that has characterized industrial societies.
Specialization has been not only He source of well-known benefits in
economic activity but also He source of spectacular advances in He pro-
duction of knowledge. However, increased specialization of disciplines has
fostered compamnentalizaiion and fragmentation of knowledge about pir-
ticular subjects that can, in some instances, prove to be dysfunctional and
therefore costly. This occurs when one group of specialists no longer has
even minimal comprehension of bodies of information that are highly relevant
to He successful performance of some of its responsibilities.
We have prepared this book because we believe that we are now at such
a juncture in our understanding of He determinants of successful technolog-
ical innovation. We believe that engineers and economists can benefit from
a dialogue in which each group of specialists acquires a deeper understanding
of He concerns, prionties, insights, and methods of He over.
Thus, this volume presents chapters by engineers who are knowledgeable
about technologies and by economists who are knowledgeable about the
functioning of markets. ~ A fruitful exchange of views between these groups
*Much of the material contained in this volume was originally presented in somewhat different
folly, at the Symposium on Economics and Technology held at Stanford University on March 17-
19, 1985, which we cochaired.
To bung out the various perspectives and to make the most of the opportunity for dialogue among
notable thinkers and doers, the design of the symposium called for some authors to address, as
discussants, the presentations of other authors. And so, while shorter chapters in this volume could
have been expanded by their authors into more lengthy and formal presentations, the symposium
discussants graciously accepted their role, as reflected in their briefer comments.
v
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v!
INTRODUCTION
of specialists should lead to a better understanding of the conditions under
which technological innovation can be made to function more effectively in
the generation of economic grown.
WHY DIALOGUE IS NEEDED
Technology has been the critical factor in the long-term economic growth
of modern industrial societies. But it functions successfully only within
a larger social environment that provides an effective combination of
incentives and complementary inputs into the innovation process. Tech-
nology may be thought of as an extroverted activity: it involves a search
for workable solutions to problems (the practice of technological inno-
vation). When it finds solutions that are workable and effective, it does
not pursue the "Why?" question very hard. Moreover, the output of
technological activities is a product or a service that must eventually stand
the test of the marketplace.
Science, by contrast, is an introverted activity. It studies problems that
are usually generated internally—e.g., by logical discrepancies or internal
inconsistencies or by anomalous observations that cannot be accounted
for within the present intellectual framework. As technologies have be-
come increasingly sophisticated and complex over the past century, the
innovation process has become increasingly dependent on the findings and
methodology of science, which has been flourishing in the post-World
War II era.
Markets are the basic institutional framework within which new tech-
nologies are evaluated. Long-term economic growth must, in large mea-
sure, be understood in terms of the performance of new technologies within
this framework. The functioning of the market has been the specialized
concern of the discipline of economics.
Why Should Technologists Be Concerned About Economics?
Just as technological change is related to and operates within Be framework
of physical science, so the discipline of economics is related to politics. The
political sphere establishes the larger societal framework (including the legal
structure) within which technological change and economic grown take place.
This includes:
1. The macroenvironment flowing from monetary and fiscal policies.
2. The microenvironment resulting from the effects of specific government
tax and spending policies, for example.
3. The larger environment established by a changing legal framework; by
regulations directed at such problems as heals, pollution, and safety; and
by foreign made, anutn~st, and other policies.
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INTRODU=lON
. .
All
It is this economic environment, and the political forces that shape it, that
in turn determines the effectiveness of the incentives that society provides
to the activities of technologists.
The poor performance of the U.S. economy in the past 15 years or so
points forcefully to the limitations of economic knowledge, especially as it
pertains to the forces that encourage technological innovation and economic
growth. As a result, there are sharp differences within the economics profes-
sion over how best to provide a stable environment for continued grown
within a framework that simultaneously provides for low levels of inflation
and unemployment. It is at least arguable that government policies have, in
this period of uncertainty and confusion, exacerbated rather than improved
matters. The disagreement among economists inevitably has led to improv-
isation by politicians conscious of the election cycle, with inadequate regard
for the economic consequences of political decisions.
It is therefore time for the intellectual stocktaking that this book represents,
by which technologists can be offered guidance on what economists know
and on the limits of knowledge on how economic forces shape the environ-
ment for technological innovation.
Itis important, at the same time, to recognize that the intellectual disarray
in economics is only partial. There are broad areas of consensus among
economists on matters of vital importance to the ongoing activities of tech-
nologists. These need to be identified and emphasized. For example, suc-
cessful technological innovation always involves more Man purely technological
considerations. Successful innovation involves the fulfillment of needs as
they are expressed in the marketplace, where considerations of cost and
adaptation to specific needs and determination of appropriate trade-offs be-
tween price and performance are likely to be critical. Thus, from a purely
technological point of view, the Concorde was a more spectacular innovation
than the Boeing 747. From a commercial point of view, however, the Con-
corde was a failure, whereas the 747 looks quite different. It is itself an
interesting commentary on the commercial uncertainties associated with in-
novation in some industries that, although the 747 has been in service for
more than a decade, it is still hard to judge whether it will be a commercial
success.
Thus, successful new product design and manufacture are tightly linked
to economic variables. Indeed, good engineering design is close, concep-
n~ally, to microeconomics. In both cases a central activity consists of opti-
m~zin~,, subject to certain constraints.
Technologists need to participate more in setting, the stage for their own
specialized efforts, but in order to do so they must understand better the
advice that economists are giving, to policymakers and the probable economic
consequences of political actions.
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Vlll
1~7P
INTRODUCTION
LX
diffusion of new technologies that will otherwise remain poorly understood
by economists. A carefully structured, selective, and discriminating inter-
change of infonnation between economists and engineers such as takes place
in this volume should, we believe, prove beneficial to both groups and
therefore also, ultimately, to policymakers.
THEMES OF THIS VOLUME
The overarching themes that the authors were invited to consider in pre-
paring their contributions to this volume were:
I. How technological innovation in the United States actually works in
different industries and different forms of organizations and what future trends
might be recognized.
2. How the United States' innovative process compares with that of its
principal competitors, especially Japan.
3. The comparative role of the educational, financial, and over key infra-
structures in United States and competitors' economies as they affect inno-
vation.
4. The impact of government on innovation, particularly from the stand-
point of macroeconomic and microeconomic policies of the past and with
regard to options for the future.
5. The competitive position of the United States in the light of the pre-
ceding analyses, and how economics and technology might work more con-
s~uctively together to further this position and encourage healthy economic
growth.
The first chapter, the "Editors' Overview," presents a selective discussion
as we see it of some of the points made in much greater detail by the authors
of He individual chapters, who are responsible for their own views. The
authors themselves did not participate in He writing of the Overview, so that
it represents solely- our perceptions of some of He significant themes that
were touched on at various times by the different authors and is not to be
considered as any kind of consensus reached by the authors. Nor does it
reflect any positions or views of the sponsoring organizations; we alone are
responsible for this Introduction and for He Overview, which are intended
as a preliminary guide to the reader in examining the individual chapters.
While the papers can be read individually, we encourage He reader to look
at the book as a complex whole, and hope the Overview may be of assistance
in this regard.
Although many individuals deserve our sincerest thanks for their assistance
throughout the preparations for the symposium and this volume, we wish
p~cul~y 10 express ok ~~ci~on beg ~ He hems of me sensing
o~=iz~ons:
Dr. Robed H. Lie, ~~m of me Onions Academy of Eng~eedug;
Dr. James L. Sweeney, Di~c~r of He Center far Economic Policy Re-
se~h ~ S~ Unive~i~;
Dr. Sahel Boud=, Pm~ssor of Chemical Eng~oedng ~ Sacs, who
Has ~ ~~ alias -~ ~ Saga Off ad Of
EngiDeedng Deponents.
Contents
EDITORS OVERVIEW ............
Ralph Landau and Nathan Rosenberg
TECHNOLOGY AND THE DYNAMICS
OF ECONOMIC GROWTH
THE IMPACT OF TECHNOLOGICAL INNOVATION:
A HISTORICAL VIEW .......................
Nathan Rosenberg
MACROECONOMICS, TECHNOLOGY, AND ECONOMIC GROWTH:
AN INTr(oDucrIoN TO SOME IMPORTANT ISSUES .....
Michael ]. Boskin
MICROECONOMICS AND PRODucrivrry .............
Date W. Jorgenson
DYNAMIC COMPETITION AND PRODUCTIVE ADVANCES
Burton H. Klein
THE EFFECT OF RECENT MACROECONOMIC POLICE:S ON
INNOVATION AND pRoDuc-~Ivrn ............
Charles B. Reeder
MACROREAEPrES OF THE INFORMATION ECONOMY
Stephen S. Roach
x'
17
. . .
33
·.. 57
77
.. 89
·.. 93
. .
xI!
HARNESSING TECHNOLOGY FOR GROW rH
Robert Malpas
POLICY, LAW, SCIENCE:, AND EDUCATION:
THE FRAMEWORK OF TECHNOLOGICAL CHANGE
TECHNOLOGY AND ITS ROLE IN MODERN SOCIETY
Stephen D. Bechtet, Jr.
NATIONAL SCIENCE POLICY AND TECHNOLOGICAL INNOVATION
Harvey Brooks
THE ROLE OF THE LEGAL SYSTEM IN TECHNOLOGICAL
INNOVATION AND ECONOMIC GROWTH
Milton Katz
THE BHOPAEIZATION OF AMERICAN TORT LAW
Peter W. Huber
FROM UNDERSTANDING TO MANIPULATING DNA
James D. Watson
THE PHYSICAL SCIENCES AS THE BASIS FOR MODERN
TECHNOLOGY
William 0. Baker
TECHNO! OGICAE EDUCATION
Joseph M. Pettit
.
BASIC RESEARCH IN THE UNIVERSI1-~HS: HOW MUCH UTILrrY?
Donald Kennedy
IIIE ECONOMICS OF INNOVATION
AN OVERVIEW OF INNOVATION ...........
Stephen J. Kline and Nathan Rosenberg
MICROECONOMICS OF TECHNOLOGICAL INNOVATION
Edwin Mansfield
MACROECONOMICS AND MICROECONOMICS OF INNOVATION:
THE ROLE OF THE TECHNOLOGICAL ENVIRONMENT . . .
Ann F. Friedlaender
CONTENTS
105
115
119
169
191
213
227
255
. .
. 263
275
.. 307
327
CONTENTS
TECHNICAL CHANGE AND INNOVATION IN AGRICULTURE
Vernon W. Ruttan
TECHNOLOGY ADOPTION: THE SERVICES INDUSTRIES
James Brian Quinn
TECHNOLOGY DIFFUSION, PUBLIC POLICY, AND INDUSTRIAL
COMPETrrIVENESS
Paul A. David
DETERMINANTS OF INNOVATIVE ACTIVITY
Keith L. R. Paviu
THE ORGANIZATION OF TECHNOLOGICAL ADVANCE:
ENTREPRENEURSHIP AND THE MANAGEMENT OF
INNOVATION
PROGRAMMED INNOVATION STRATEGY FOR SUCCESS
H. W. Coover
THE CHEMICAL INDUSTRY: CHALLENGES, RISKS, AND
REWARDS
Edwin C. Holmer
ENTREPRENEURSHIP AND INNOVATION: THE EEEC1KONICS
INDUSTRY
Gordon E. Moore
ENTREPRENEURSHIP AND INNOVATION: BIOTECHNOLOGY
Robert A. Swanson
IMPACT OF ENTREPRENEURSHIP AND INNOVATION ON THE
DISTRIBErrION OF PERSONAE COMPU rERs
David A. Norman
MAKING THE TRANSITION FROM ENTREPRENEUR TO LARGE
COMPANY
William R. Hewlett
FINANCING INNOVATION
CULTIVATING TECHNOLOGICAL INNOVATION
William J. Perry
. . .
bitt
333
357
373
393
399
417
423
429
437
441
443
All
CONTENTS
THE Rot E OF LARGE BANKS N FINANCING INNOVATION ... ... 453
John S. Reed and Glen R. Moreno
A VIEW FROM WALL STREET
Robert H. B. Baldwin
. . . . . . . .
TRENDS IN FINANCING INNOVATION
James D. Marver
........ 467
TECHNOLOGY AND INTERNATIONAL ECONOMIC
COMPETITION
TECHNOLOGY AND TRADE: A STUDY OF U.S. COMPETITIVENESS
IN SEVEN INDUSTRIES 479
N. Bruce Hannay
GLOBAL COMPEI-rTION THE NEW REALITY: RESULTS OF THE
PRESIDENT S COMMISSION ON INDUSTRIAL COMP~IVENESS . . 501
John A. Young
THE NEED FOR NATIONAL CONSENSUS TO IMPROVE
COMP~TmVENESS
Albert Bowers
. . . . . . . . .
INNOVATION, JOB CREATION, AND COMPk-~-~-IVENESS .
Ruben F. Mettler
DANGERS ~ U.S. EFFORTS TO PROMOTE INTERNATIONAL
COMPETITIVENESS
George C. Eads
GOVERNMENT POLICIES FOR INNOVATION AND GROWTH
Ed Zschau
THE JAPANESE CHAT LENGE IN HIGH TECHNOLOGY
Daniel I. Okimoto
THE MACROECONOMIC BACKGROUND FOR HIGH-TECH
INDUSTMAL=ATION ~ JAPAN
Masahiko Aoki
. . . . . . . . .
CAPITAL FORMATION IN THE UNDED STATES AND JAPAN . . .
Ralph landau and! George N. Hatsopoutos
CON~3UTORS
LNDEX . . . . . . . . . . .
.. 511
... 517
. . . 527
535
. 541
. 569
. 583
623
Positive Sum
Squatly
