One of the main goals of economic policy is to maintain a high level of economic growth, one that is sustainable over the long term, helping society to develop. The trigger for this process is productivity growth generated by technological change and improvements in human capital.
This connection has often been the object of study in economic theory. Although the focus of these studies may vary, most arrive at the same conclusion: innovation and rising educational levels have a positive impact on the economy and are the basic factors behind sustained economic growth.
In this article we seek to highlight the way in which technology is integrated into productive processes, given that - as the American economist Paul Romer has noted - research results are public property, and may be freely used simultaneously by two or more individuals. Moreover, increased knowledge can help to generate economies of scale that can lead to increasingly improved performance. The intensity of these improvements, however, is not always the same. The effects of innovation evolve in step with technological cycles.
For example, during the First Industrial Revolution (1750-1830), the railroad was a great invention that definitively altered business relations. The first regions to enjoy rail service attained a significant comparative advantage, allowing them to grow at a much faster rate than their competitors. However, to the extent that the rail network expanded, this innovation became less important in terms of competitive advantage, eventually becoming a mature technology, i.e., it ceased to generate growing performance. This example can help us see how research is a continuous process, and how innovations move the frontiers of knowledge.
At the beginning of an industrial revolution, new ideas are rapidly generated, given the general lack of scientific knowledge. As science continues to develop, researchers must spend more time educating themselves before being able to produce new knowledge.
This is due to the fact that innovation is based on pre-existing technology. For example, internet would not have existed if scientists had not been able to support their work on electricity - a 19th century innovation.
It becomes more and more difficult to innovate. As technology improves, identifying the needs that have yet to be met calls for a level of expertise and sensitivity that were not necessary in the early stages of science. Nevertheless, this growing difficulty does not mean the end of possible innovation. Moreover, it is possible to produce knowledge beyond the current limits by widening the field of investigation.
These successive displacements of knowledge frontiers represent one of the basic aspects of economic growth: improved productivity.
Accordingly, we might confidently say that the continuation of scientific research assures productivity and future economic growth.
However, North American economist Robert J. Gordon offers an idea that dampens this optimism, claiming that we have arrived at a situation of long-term economic stagnation.
Gordon believes that the greatest advances occurred as the result of the Second Industrial Revolution (1870-1900). During that time, animal-drawn transport was replaced by motor vehicles, coal gave way to oil and electricity, and sewage systems were developed along with water pipelines. All of these innovations boosted productivity, economic growth and social welfare. These changes, together with those resulting from the First Industrial Revolution, made it possible for per capita production in the United States to grow at a rate of 2% from 1981 until 2007. According to Gordon, the future at this point is not so promising, and we will not see a repeat of this growth rate. He states that from 2007 until 2032 - and even until 2047 - per capita production in the United States will grow by only 0.9% annually. Nor does he expect productivity to keep growing; he predicts a reduced annual rate of 1.3%.
[This research paper has been reproduced with permission of the authors, professors of IE Business School, Spain http://www.ie.edu/]