Magazine article The Wilson Quarterly

What Makes Technology Grow?

Magazine article The Wilson Quarterly

What Makes Technology Grow?

Article excerpt

An excerpt from an essay by Paul M. Romer in Outlook (No. 1, 1998), Andersen Consulting's "journal on changing to be more successful." Romer is a Senior Research Fellow at the Hoover Institution and a professor of economics in the Graduate School of Business at Stanford University.

The traffic was awful. The cabbie was rode. His radio blared music and static in equal measure. I faced at least an hour, maybe more, of jarring starts and stops. The long ride from the airport looked to be only a little less painful than spending the same amount of time under the dentist's drill.

Then I remembered that I had my portable compact disc player with me. (I bring it with me when I travel because I sometimes want to block out the noise of conversation on an airplane.) I slumped down, put on the headphones, closed my eyes, and concentrated on the achingly clear soprano of Loreena McKennitt. Everything changed. The ride was going to be less pleasant than a good meal with friends, but not by much.

As I appreciated the music, I realized that it was 50 years to the month since the invention of the transistor. This made me think once again about the kinds of changes I have seen in my lifetime.

When I was a child, audio equipment was big, heavy, and expensive. It took 40 pounds of black transformers and glowing orange vacuum tubes to amplify a high-fidelity audio signal. Now, the transistor-based amplifier in my portable compact disc player weighs less than the two AA batteries that power it and costs less than one night in my hotel room in Manhattan.

As an economist, I frequently contemplate changes like these. Smaller and less expensive amplifiers are just one example of the countless improvements, large and small, in the standards of living that we have come to expect over time. One of the great intellectual challenges of our age is to understand the forces that generate these improvements.

I study an area of economics that tries to meet this challenge. This area, commonly referred to as New Growth Theory, has grown up in the last 15 years. It offers a perspective on economic growth that differs in important ways from the traditional view, which suggested that we cannot alter the rate of technological change. If we are even partly right, business leaders and government policymakers will need to rethink some of their basic assumptions about how they do their jobs.

In the past, social scientists and policymakers saw economic progress as the inevitable product of a small number of serendipitous discoveries. These discoveries, they believed, followed naturally from progress in science, and science itself developed according to its own logic and at its own pace. We know now that this explanation is wrong. Inventions such as the transistor radio or compact disc player do not flow naturally from basic discoveries like the transistor. Nor is the overall rate of technological progress in an economy limited or directed by the unvarying internal dynamic of the scientific disciplines.

In basic discoveries and applications alike, it is the incentives created by the market that profoundly affect the pace and direction of economic progress. When the incentives are stronger, growth is faster. When the incentives point in a new direction, both basic research and development efforts change course. AS economic historian Nathan Rosenberg has shown, there are many cases in which basic science follows practical opportunities, not the other way around. The transistor caused the development of the field of solid-state physics. The steam engine led to the development of thermodynamics.

In the traditional economic view, technological progress comes in two steps: the heroic discovery and the ensuing transformation of the economy. According to this theory, once John Bardeen, Walter Brattain, and William Shockley gave us a shove with their discovery of the transistor, we just followed Gordon Moore's famous law down the cost curve, like a skier going down a jump ramp. …

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