Technology/Knowledge – Development – Technology/Knowledge Virtuous Circles – Vicious Circles

1. Technology/Knowledge – Development – Technology/KnowledgeVirtuous Circles – Vicious Circles INCENTIVES MATTER INSTITUTIONS MATTER “…good government doesn’t steal the fruits of workers’ labor” Wm. Easterly, The Elusive Quest for Growth Technology/Knowledge: A Public Good Knowledge leaks:Nonrival & Nonexcludable Complementary knowledge/Interactions between technologies (PCs and Windows)  INCREASING RETURNS  Virtuous Circle Start with little knowledge  Low return  Low incentive  Vicious Circle Coordination problem: Private return = f(What others know/do) Government role – direct intervention Coordinate expectations: French indicative planning

2. Technology/Knowledge – Development – Technology/Knowledge Virtuous Circles – Vicious Circles • Skill matches • Individuals are more productive the better the qualities of those they work with…Think YANKEES…Think MIT • Increasing Returns to Skills  Agglomeration Thems that’s gotsgits • Immigrant flows/capital flows from poor to rich (not from more endowed to less endowed) • Incentive to invest in skills = f(Skills of neighbors/fellow workers) Virtuous circles – Vicious circles • Traps • “Primary goods trap”…don’t move to next stage if you’ll break it • Wealth trap…Think YANKEES…Think MIT • Ethnic matching: • Jewish Entrepreneurs/Professionals • LDCs – if those you deal w/have few skills  little incentive to acquire skills  Persistence of income differences between countries

3. Technology/Knowledge – Development – Technology/KnowledgeVirtuous Circles – Vicious Circles • Escaping Traps • Wider networks  greater opportunity for better match • Expectation of breakout  breakout • Publicly subsidized education/higher education • Open access: support move to Production Possibilities Frontier • Y1/Y2 = (A1/A2)(Factor Endowments1)/(Factor Endowments2) • Most of cross-country income differences are owing to A1/A2 • Creative Destruction…growth thru new, ground-breaking products Horsepower – steam – network electricity – solar/wind Campfire – candle – whale oil – kerosene – light bulb – LED Retardants to innovation • Knowledge leaks: Social return > Private return  Government role • Anticipations: Competitive entry/obsolescence • Network economies: • retard and accelerate…Think internet/electric cars and charging stations • “Luddites”… old folks rationally set in old ways • Vested interests: Preserve rents…Limit Access…Maintain Status Quo • Leapfrogging: Backward can skip step … but need complementary knowledge

4. Technology/Knowledge – Development – Technology/KnowledgeA Virtuous Circle – A Vicious Circle • Path dependence and development • A leading industry’s needs attract complements to serve it • Complements interact create new industries • Seattle: Boeing – High Tech – Microsoft – Amazon • New York: Railroad – Fashion – Garment Industry – Finance – The Next Next Thing • Las Vegas: Gaming – Resort – Convention –??? • Prospects Complements  increasing returns to each industry  Increasing rate of technological progress • But beware Baumol Disease: Increasing importance of low productivity services Advances in transport and communications • Decentralization/Dispersion? and/or • Concentration/Agglomeration? “What can people be paying Manhattan or downtown Chicago rents for except for being near other people?” R. Lucas, Mechanics of Economic Development, 1988 B. Malamud, Economics of Office Location, 1970.