Creative Destruction, Vested Interests and Incentives to Innovate and Adopt New Ideas

1. Creative Destruction, Vested Interests and Incentives to Innovate and Adopt New Ideas Xavier Sala-i-Martin Economic Growth and Development, Harvard University Fall 2003

2. Creative Destruction • When new inventions “destroy” previous ideas, the owners of the previous technology suffer losses (economic losses or utility losses) • They may want to use “political power” to prevent the implementation of new technologies OR the financing of new research

3. The Luddites • At the beginning of the 1800's England was still largely an agricultural country • Most industry (textiles, hosiery, lace, iron mining and manufacture, ship building, and coal mining) was located in the country, with the majority of work taking place in the home work-shops of craftsmen. • Any manufacturing plants that did exist at that time were water powered.

4. The Luddites • In 1811, mass production was being introduced by the use of wide knitting frames, which made the work less labor intensive and the stockings were cheaper to manufacture. • The knitters felt that these methods of manufacturing were displacing skilled labor

5. The Luddites • The weavers and croppers were facing similar problems: the manufactures had been employing gig-mills and shearing frames, which like their wide-frame counterparts were labor saving, thus reducing cost.

6. The Luddites • In 1811, in the town of Arnold (outside Nottingham), knitters stole the jack wires out of the knitting frames during the months of February and March. • The Jack wires were deposited in the churches as "hostages" for the good behavior of their owners.

7. The Luddites • On March 11th a crowd of framework knitters gathered in the market place at Nottingham. During the evening some 60 knitting frames were broken in Arnold. • For weeks after this knitting frames continued to be broken and the attacks became more widespread. • By April,200 frames had been broken

8. The Luddites • Later that same year, in November, the disturbances began once again • A mob, led by someone calling himself Ned Lud, broke into the knitting shop of Edward Hollingsworth--a notorious and hated hosier--and broke several of his frames. • The name Ned Lud would surface throughout the period of the rebellions in various forms. There were references to a General Lud and there were letters sent to hated manufacturers by someone identifying himself as Edward Lud. • There were even groups of workers who pledged their allegiance to King Ludd.

9. The Luddites • Nobody knows exactly who Lud was. • It became evident sometime after the Luddite Revolts began that there were several individuals calling themselves Ned Lud. • It may even have been that the name functioned as a title for the leaders of the various groups.

10. The Luddites • By December 15, 1811 Parliament sent the military. They looked at France and feared a new “French Revolution”. Some 900 cavalry and 1,000 infantry being led by General Dyott. General Dyott's army along with the local militias began to chase the Luddites, but this did not deter the Luds. • By 1812 Parliament placed Lieutenant General Thomas Maitland in charge of a force of some 35,000 men to stop the Luddite attacks. • Those Luddites who were caught were tried and hanged. The remaining members were sent to Australian prisons.

11. Other Examples • The “quebrakilos”, followers of the Apostol Ibiapina in the Brazillian Regions of Bahia and Sergipe. • They were against the introduction of the metric system so they destroyed weighing machines.

12. Other Examples • Government bureaucrats may be part of the vested interests. Some argue that this is why China closed borders in the Ming Dynasty (which precipitated the technological decline) • British government protected industry after the industrial revolution (and that is why Britain lost out to the US a hundred years later) (Joel Mokyr)

13. Current Example: Steel • U.S. Steel Industry (big fight between the U.S. and Europe-Japan-Korea at the WTO TODAY).

14. Steel • WWII destroyed Japanese and European Steel industries • A young engineer, Nishiyama Yataro became president of Kawasaki Steel • 1952, two Austrian companies invented the ”basic oxigen furnace” that replaced the old “open hearth furnace”. • The new technology refines iron in 45 minutes and the old one took 6 hours

15. Steel • The Austrians offered the technology to the Japanese and the Americans. • Americans had vested interest in the old technology so they refused it • Yataro adopted it in the late 1950s

16. Steel • Between 1952 and 1996, efficiency of Japanese Steel industry doubled. • American stayed constant. • Japanese production quadrupled • American increased by 13% • Japanese share of world steel production doubled • American share halved (and losing markets to newcomers like Korea and Taiwan)

17. Implications of Vested Interests in Technology • Leapfrogging (laggard has an advantage) • Long Cycles of World Leaders • Spain • The Netherlands • France • Britain • The United States… • Note: Prediction is not that last will be first (not true in the data)

18. Implications of Vested Interests in Technology • Quick recovery from Wars (Mancur Olson) • Japan and Germany grew faster than Britain or the United States after WWII because the destruction of their territories destroyed their vested interests… so they could adopt the new technologies. • Lesser extent, same with Italy and France. • Same for Korea and Taiwan (Taiwan started from scratch)

19. Implications of Vested Interests in Technology • In democracies, younger countries will innovate more than older countries (because the young are in the majority and, therefore, they vote to adopt new technologies). • Today: USA is young and Europe is old.