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The Evolution of Technology and its Implications for Investment Policy

The Evolution of Technology and its Implications for Investment Policy NREL June 24, 2009 W. Brian Arthur External Professor, Santa Fe Institute and Intelligent Systems Lab, PARC There is no “-ology” of technology We know about:

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The Evolution of Technology and its Implications for Investment Policy

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  1. The Evolution of Technologyand its Implications for Investment Policy NREL June 24, 2009 W. Brian Arthur External Professor, Santa Fe Institute and Intelligent Systems Lab, PARC

  2. There is no “-ology” of technology • We know about: • individual technologies, design process, adoption & diffusion, society & tech, etc. • We do not know about: • base principles • how technologies are invented • process of innovation • how to get competitive at technology © 2009 W. Brian Arthur

  3. © 2009 W. Brian Arthur

  4. A theory of evolution for technology? • Most attempts use Darwinian variation and selection • But that doesn’t work • Problem: “novel species” in technology don’t emerge that way © 2009 W. Brian Arthur

  5. © 2009 W. Brian Arthur

  6. An observation Technologies are constructed from existing technologies © 2009 W. Brian Arthur

  7. © 2009 W. Brian Arthur

  8. How technology evolves  Novel technologies are constructed from existing technologies and from capturing phenomena … These offer themselves as components—building blocks for the construction of further technologies © 2009 W. Brian Arthur

  9. Technology Builds Itself from Itself Technology is autopoietic or self-creating: • New elements build from existing ones • Complication builds from simplicity © 2009 W. Brian Arthur

  10. Aspects of this • Technology forms a network of things-giving-rise to things • The technologies active in the economy form an ecology • mutually supporting, always changing • New technologies set up niches for further technologies • These come from technologies themselves—and the obstacles they face • Problems as the answer to solution © 2009 W. Brian Arthur

  11. Implications of this outlook • Every technology adds potentially to the substrate of elements to construct from • New building blocks may affect many technologies • History is important © 2009 W. Brian Arthur

  12. Therefore difficult to evaluate a technology … • Because a technology may rise to further elements and further needs • Value of a technology not just its immediate payoff. Also what possibilities it gives rise to • De Forest’s triode vacuum tube • Andy Grove’s comment © 2009 W. Brian Arthur

  13. Further considerations: technologies evolve in a second sense … slide animation • They developas they are invested in • via better materials, better parts, complex workarounds • So their efficiency improves • (they show increasing returns) © 2009 W. Brian Arthur

  14. Choice of technology investment • Payoffs after 2years of investment: • Tech A: 10, 15, …  • Tech B: 42, 45, … • Choose Tech B © 2009 W. Brian Arthur

  15. Choice of technology investment • Payoffs after 4 years of investment: • Tech A: 10, 15, …  • Tech B: 42, 45, 48, 51, … • Continue with Tech B © 2009 W. Brian Arthur

  16. Choice of technology investment • Payoffs after 6 years of investment: • Tech A: 10, 15, …  • Tech B: 42, 45, 48, 51, 54, 55, … • Continue with Tech B © 2009 W. Brian Arthur

  17. Choice of technology investment • Payoffs after 8 years of investment: • Tech A: 10, 15, …  • Tech B: 42, 45, 48, 51, 54, 55, 55, 55, … © 2009 W. Brian Arthur

  18. Choice of technology investment • Payoffs after 10 years of investment: • Tech A: 10, 15, …  • Tech B: 42, 45, 48, 51, 54, 55, 55, 55, 55, 55, … © 2009 W. Brian Arthur

  19. But if the true payoffs had been known … • Payoffs after 10 years of investment: • Tech A: 10, 15, 25, 40, 50, 60, 70, 80, 85, 85, … • Tech B: 42, 45, 48, 51, 54, 55, 55, 55, 55, 55, … © 2009 W. Brian Arthur

  20. Discounting is also important • Payoffs after n years of investment: • Tech A: 10, 15, 25, 40, 50, 60, 70, 80, 85, 85, …  • Tech B: 42, 45, 48, 51, 54, 55, 55, 55, 55, 55, … • A high enough discount rate favors Tech B from the start © 2009 W. Brian Arthur

  21. More generally, with deliberate government choice … • You get a multi-armed bandit problem • with improving payoffs to investment in each arm • And may easily lock in to an inferior outcome © 2009 W. Brian Arthur

  22. Conclude from this … • Need to consider the whole set of consequences far as can be seen • Don’t narrow the search too soon © 2009 W. Brian Arthur

  23. 3. Technologies proceed from families of phenomena • E.g. electrical, nuclear, electronic, quantum, genetic, … • Form toolboxes or domains that change and morph • From each of these trains of technologies follow © 2009 W. Brian Arthur

  24. These domains • Are practiced as deep craft • Countries and regions that command these domains and their craft lead in technology • The larger economic changes are due to re-domainings © 2009 W. Brian Arthur

  25. Summary • Technologies build out as a network They are constructed from building blocks that themselves are technologies • Novel technologies create new needs • Active technologies form a mutually supporting, changing ecology of needs and solutions © 2009 W. Brian Arthur

  26. Valuation and investment policy not well-defined • Changes in building-block technologies may affect many technologies • Development investment brings increasing returns to use - Premature lock in to inferior solutions possible 6. But we can …  - Think of technologies as an ecology that fills out, provides building blocks, has missing pieces, sets up further problems - Explore options widely © 2009 W. Brian Arthur

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  28. Laser printer © 2009 W. Brian Arthur

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