Sunday, 31 May 2015

Localised and Biased Technologies: Atkinson and Stiglitz's New View, Induced Innovations, and Directed Technological Change


This study revisits the important ideas proposed by Atkinson and Stiglitz's seminal 1969 paper on technological change. After linking these ideas to the induced innovation literature of the 1960s and the more recent directed technological change literature, it explains how these three complementary but different approaches are useful in the study of a range of current research areas – though they may also yield different answers to important questions. It concludes by highlighting several important areas where these ideas can be fruitfully applied in future work.
Atkinson and Stiglitz's seminal paper in the Economic Journal 1969, ‘A New View of Technological Change’, took an important departure from the orthodoxy of its time, which assumed that technological improvements could be viewed as increasing productivity at all factor proportions (in particular, at all combinations of capital and labour). In the language of modern growth theory, technological progress was neutral – in the simplest form, Hicks neutral, creating the same proportional gain in output regardless of factor proportions, though the Harrod neutral version that became more central to growth theory is also broadly similar (Acemoglu, 2009). Atkinson and Stiglitz, instead, noted that it would be much more plausible to assume that technological progress is localised and improves the productivity of the techniques (or ‘activities’) currently being used and perhaps some similar techniques with neighbouring capital–labour ratios, rather than all techniques regardless of whether or not they are being used and how far they are from the current practice. This situation is illustrated in Figures 1 and 2, adapted from Atkinson and Stiglitz (1969). Figure 1 represents a stylised version of the orthodoxy, while Figure 2 shows the improvement at the technique currently in use – corresponding to the current capital–labour ratio, inline image – together with an improvement in ‘neighbouring’ techniques (as well as a further improvement at inline image which we will discuss later).
Figure 1. A Technological Improvement Increases Productivity by Similar Amounts at Capital–Labour Ratios
Figure 2. A Technological Improvement Increases Productivity at the Current and Neighbouring Capital–Labour Ratios, with No Effect on Productivity at Farther Capital–Labour Ratios
Atkinson and Stiglitz (1969, p. 575) emphasised how their new view would be natural in the context of ‘learning-by-doing’ but did not neglect the case where technological progress results from research and development activity, writing:
But where technical progress is localised to one technique, there is a second important question [in addition to the optimal amount of research and development] that we must answer – which technique should we improve? Research activity can be directed towards the improvement of any process but once it has been carried out, the resulting knowledge is specific to one particular process.
Though they did not emphasise it, another important implication of this new view – again using a term that has since become more widely used – is that technological change is biased. This can readily be observed from Figure 2, where the slope of the production function, corresponding to the marginal product of capital in this case, changes very differently at different ratios of capital to labour. Moreover, as the above quotation indicates, Atkinson and Stiglitz did anticipate that technological change has to be modelled as directed – towards specific capital–labour ratios or the specific techniques.
Atkinson and Stiglitz were not the first to make these observations. As they note in passing, an earlier literature on ‘induced innovations’, which can be more directly viewed as the harbinger of the endogenous growth literature of the 1980s and 1990s, also concerned itself with the same questions. Just like Atkinson and Stiglitz's new view, the induced innovation literature was ahead of endogenous growth in one sense. It went beyond studying the process of growth at the aggregate and also strove to understand what type of innovations the economy would generate and what the implications of these innovations were for factor prices and the factor distribution of income (but differently from Atkinson and Stiglitz's approach, it did not attempt to unpack the production function by working with technological progress at the level of techniques or ‘activities’ ). It seems to have been Hicks (1932, p. 124) who first discussed these issues in The Theory of Wages, in particular when he wrote:
A change in the relative prices of the factors of production is itself a spur to invention, and to invention of a particular kind – directed to economizing the use of a factor which has become relatively expensive
This was followed up with the significant progress by, inter alia, Kennedy (1964), Drandakis and Phelps (1965), Samuelson (1965) and Ahmad (1966) – interestingly, all except Samuelson's article were also published in the Economic Journal in the 1960s.
Despite these important contributions, the orthodoxy that Atkinson and Stiglitz were criticising is still fairly influential. But important advances that are closer in spirit to Atkinson and Stiglitz's vision have also been made, in large part because several central questions, including the role of appropriate and inappropriate technology in economic development, skill-biased technological change and wage inequality, the relationship between new technologies and tasks and the impact of trade on technological change, necessitate a clear departure from the conception of neutral technological change towards localised, biased and directed technological change.
In the rest of this short article, I first explain the logic of both the induced innovation literature and Atkinson and Stiglitz's seminal paper. In Section 'Directed Technological Change', I contrast them to the more recent directed technological change literature. In Section 'Applications', I discuss how Atkinson and Stiglitz's insights have been part of certain modern analyses – even though in many cases these analyses themselves did not directly build on their work.