The Competitiveness of Nations
in a Global Knowledge-Based Economy
May 2003
Nathan Rosenberg
On Technological Expectations [1]
Economic Journal
Volume 86, Issue 343
Sept. 1976, 523-535.
Index
II
– Innovation: “… a series of footnotes upon Schumpeter.”
One of the most important unresolved issues in the
theory of the firm and in the understanding of productivity growth is the rate
at which new and improved technologies are adopted. [2] I will argue that
expectations concerning the future course of technological innovation are a
significant and neglected component of these issues, inasmuch as they are an
important determinant of entrepreneurial decisions with respect to the adoption
of innovations.
Recent work in various aspects of economic theory and
measurement has pointed, once again, to the important role played by
expectations of future change in influencing the behaviour
of economic agents. In a number of
instances the expectation of future changes has led to quite different patterns
of behaviour than might have been expected to have
taken place if it had been anticipated that no changes in level and/or trend
would occur. What would appear to be
aberrational or irrational behaviour on the basis of
such expectations of no changes is often fully explained once allowance is made
for a different set of expectations about the future.
In this paper I should like to draw a similar analogy
for the study of the diffusion of technological innovations. The timing and nature of the adoption decision
on the part of individual business firms is a key question with major
implications for both the micro and macro levels of analysis. I will suggest that there are expectational elements in the adoption decision which have
not been given the attention and explored as systematically as could be done to
illuminate the diffusion process. Often
the explanation of specific rates and patterns of technique adoption seems
difficult to comprehend under the implicit conditions assumed, i.e. of no
future changes in the technological and economic spheres. Yet, as in other parts of economic analysis,
the introduction of attention paid to various types of expectations, not only
of prices but, more interestingly, of expectations concerning the future rate
of technological change itself, will provide some important insights. Since the technological future is,
inevitably, shrouded in uncertainty, it is not surprising both that different
entrepreneurs will hold different expectations, and also that entrepreneurial behaviour will further differ due to varying degrees of
risk aversion on the part of decision-makers.
1. I am heavily indebted to Stanley Engerman
for his encouragement and frequent counsel in developing the central argument
of this paper and in exploring some of its implications. The paper has also benefited greatly from Paul
David’s searching criticism of an earlier draft, and from valuable comments and
suggestions by David Mowery, W. B. Reddaway, Ed Steinmuller, George Stigler and an anonymous referee. I am also grateful to the National Science
Foundation for financial support during the time this paper was being written.
2. Ed Mansfield’s work has forcefully called attention both to the
general overall slowness as well as to the wide differentials in adoption rates
among different innovations . See, for example, Ed
Mansfield, Industrial Research and Technological Innovation (W. W.
Norton and Co., New York, 1968), chapter 7.
523
In terms of historical issues there are two patterns
of expectations with quite different implications which need to be examined. One, which has been implicit in the
comparisons of nineteenth century technological change in the United States and
the United Kingdom, is the impact of steady but differing rates of
technological change in the two economies. As pointed out by Habakkuk, and more formally
by Williamson, the effect of the expectation of higher rates of technological
change in the United States should have led to a shorter optimal life for
American machinery - i.e. in some sense a more rapid introduction of new
techniques. [1] More
interesting, perhaps, are other patterns of expectations which may be more important
in studying the diffusion process. Specifically,
at certain times it may be more plausible to anticipate an acceleration of the
rate of technological change. Similarly,
there may be situations where large-scale improvements are confidently expected
after the introduction of some major innovation. [2] In such cases these expectations
may lead to a surprising result of making rational a delay in the widespread
diffusion of the innovation. Therefore,
in analysing any historical decision with respect to
diffusion, one must be sensitive to the specific nature of the expectations
held by entrepreneurs with respect to the future course of technology.
II –
Innovation: “… a series of footnotes upon Schumpeter.”
If, as Alfred North Whitehead once asserted, the
history of western philosophy may be adequately described as a series of
footnotes upon Plato, it may equally be said of the study of technological
innovation that it still consists of a series of footnotes upon Schumpeter. Although the footnotes may be getting longer,
more critical and, happily, richer in the recognition of empirical
complexities, we still occupy the conceptual edifice which Schumpeter built for
the subject. Inevitably, therefore,
Schumpeter’s concepts constitute our point of departure.
Schumpeter’s theory of capitalist development, it will
be recalled, starts out from the circular flow of economic life where producers
and consumers are all in equilibrium, and where all adjustments and adaptations
have been made. Schumpeter then
introduces an innovation - a shift in the production function - into this
circular flow. The entrepreneurial
response to this new profit prospect in turn generates a sequence of
alterations in the behaviour of economic actors, beginning
with an expansion of bank credit and including, eventually, a secondary wave of
investment activity imposed on top of the primary wave as the expectations of
the larger business community are affected by the evidence and by the
consequences of business expansion. [3]
1. H. J. Habakkuk, American and British Technology in the Nineteenth
Century (Cambridge University Press, 1962), and Jeffrey Williamson,
“Optimal Replacement of Capital Goods: The Early New England and British
Textile Firm”, Journal of Political Economy, Nov./Dec.
1971.
2. For earlier empirical studies dealing with the life-cycle of specific
technological innovations, see Simon Kuznets, Secular
Movements in Production and Prices (Houghton Muffin, 1930), chapter I, and
Arthur F. Burns, Production Trends in the United States Since 1870 (National
Bureau of Economic Research, 1934), especially chapter 4.
3. J. A. Schumpeter, The Theory of Economic Development (Harvard
University Press, 1934), chapters and 2.
524
Schumpeter himself was so much persuaded of the large
elements of risk and uncertainty inherent in the innovation decision that he
down-played the role of rational calculation itself in the decision-making
process. The Schumpeterian entrepreneur
is a distinctly heroic figure, prepared (unlike most mortals) to venture forth
boldly into the unknown. His decisions
are not the outcome of precise and careful calculation and, Schumpeter emphasised, cannot be reduced to such terms.
The point to be made here is that there is a further
dimension of uncertainty in the innovation decision of a sort not emphasised by Schumpeter in his stress on the discontinuous
nature of technological innovation. This is, quite simply, the uncertainty generated
not only by technological innovations elsewhere in the economy, but by
further improvement in the technology whose introduction is now being
considered. Schumpeter’s argument
creates a presumption that the first innovator reaps the large rewards. Nevertheless, the decision to undertake
innovation X today may be decisively affected by the expectation that
significant improvements will be introduced into X tomorrow (or by the firmly
held expectation that a new substitute technology, Y, will be introduced
the day after). The possible wisdom of
waiting is reinforced by observations, abundantly available to all would-be
entrepreneurs, concerning the sad financial fate of innumerable earlier
entrepreneurs who ended up in the bankruptcy courts because of their premature
entrepreneurial activities. [1] As
soon as we accept the perspective of the ongoing nature of much technological
change, the optimal timing of an innovation becomes heavily influenced by
expectations concerning the timing and the significance of future improvements.
Even when a new process innovation
passes the stringent test of reducing new average total costs below old average
variable costs, it may not be adopted. The
reason for this is that the entrepreneur’s views about the pace of technological
improvements may reflect expectations of a higher rate of technological
obsolescence than that allowed for by conventional accounting procedures in
valuing the investment. Moreover,
accounting formulae may not give adequate recognition to the “disruption costs”
involved in introducing new methods, especially when such disruptions are
frequent. Thus, a firm may be unwilling
to introduce the new technology if it seems highly probable that further
technological improvements will shortly be forthcoming. [2] This problem
1. Marx long ago called attention to “the far greater cost of operating
an establishment based on a new invention as compared to later establishments
arising ex suis ossibus. This is
so very true that the trail-blazers generally go bankrupt, and only those who
later buy the buildings, machinery, etc., at a cheaper price, make money out of
it” (Karl Marx, Capital (Foreign Languages Publishing House, Moscow,
1959), vol. III, p. 103). He also called
attention to the rapid improvements in the productivity of machinery in its
early stages as well as the sharp reduction in the cost of its production. “When machinery is first introduced into an
industry, new methods of reproducing it more cheaply follow blow by blow, and
so do improvements, that not only affect individual parts and details on the
machine, but its entire build” (Karl Marx, Capital (Modern Library
Edition, New York, no date), vol. I, p. 442). In a footnote on that page, Marx cites
approvingly Babbage’s statement: “It has been estimated, roughly, that the
first individual of a newly invented machine will cost about five times as much
as the construction of the second.” For
a discussion of related problems with respect to the growth of nations, see Ed
Ames and Nathan Rosenberg, “Changing Technological Leadership and Economic
Growth”, Economic Journal, March 1963.
2. Fellner’s discussion of what he calls
“anticipatory retardation” is relevant here. See William Fellner,
“The Influence of Market Structure on Technological Progress”, Quarterly
Journal of Economics [(1951), pp.
556-77, as reprinted in R. Heflebower and G. Stocking
(eds.), Readings in Indust Organization and Public
Policy (Richard D. Irwin, 2958). The
discussion of “anticipatory retardation” appears on pages 287-8 of that volume.]
HHC: [bracketed] displayed on page 526 of original.
525
of how the optimal timing of innovation is
affected by expectations of discontinuous technological change is an extremely
significant one which has received relatively little attention in the
theoretical literature.’ Nor have there been systematic empirical studies of
the phenomenon.
In their earliest stages, innovations are often highly
imperfect and are known to be so. Innumerable “bugs” may need to be worked out.
[2] If one
anticipates significant improvements, it may be foolish to undertake the
innovation now - the more so the greater the size of the financial commitment
and the greater the durability of the equipment involved. Whereas the Schumpeterian innovator
experiences abnormally high profits until the “imitators” catch up with him,
the impetuous innovator may go broke as a result of investing in a premature
model of an invention. This apparent
distinction follows from the earlier-stated difficulties of Schumpeter’s
concept of innovation with its emphasis on discontinuity and its implication
that all problems in the introduction of a new product or process have already
been completely solved. Moreover, as
Mansfield points out: “In cases where the invention is a new piece of
equipment, both the firm that is first to sell the equipment and the firm that
is first to use it may be regarded as innovators. The first user is important because he, as
well as the supplier, often takes considerable risk.” [3]
1. Of course attention has been paid to the optimal timing of the
introduction (and scrapping) machinery, but these models generally do not deal
with problems of expected future changes technology. Rather, they are more often concerned with
issues relating to relative factor prices, future product demands, or the
relation between machine use and deterioration. While the expectation relating to technology
can no doubt be easily incorporated into such models, the specific problem
virtually unexplored. For a brief
discussion, see Vernon L. Smith, Investment and Production (Harvard
University Press, 2962), pp. 143-5. The
relationship between expectations concerning the rate technological progress
and the rate of return on investment in the context of a model of embodied
technological change is discussed by Robert Solow in Capital
Theory and the Rate of Return (No Holland Publishing Co., 1963, pp. 62-4). For an interesting treatment of a somewhat
related problem, how the introduction of a new technology will be affected by
expected future growth in demand under different forms of market structure,
externalities and property rights, see Yoram Ban “Optimal Timing of Innovations”, Review of
Economics and Statistics, August 1968.
2. This term should be taken to include a great many production problems
involving the use new equipment which it is almost impossible to anticipate and
which become apparent only a result of extensive use - e.g. metal fatigue in aeroplanes. William
Hughes has made this point well with respect to exploration of the scale
frontier in electric power generation: “Even under the most favorable
conditions for advancing the scale frontier the cost side of the equation
imposes fairly strict upper limits on the economical pace of advance, and
trying to force the pace could mean sharply rising cost of development. The experience required for pushing out the
scale frontier is related time and cannot be acquired by increasing the number
of similar new units. Perhaps the great
uncertainties connected with units arise from problems that may not show up
until the units have been in operation a few years. For the industry as a whole, the socially
optimal number of pioneer: units during the first two or three years of any
major advance in scale, design, or steam conditions is probably rather small,
most often ranging from perhaps two or three or half a dozen” (William Hughes,
“Scale Frontiers in Electric Power,” in William Capron (ed.), Technological
Change Regulated Industries (The Brookings Institution, Washington, D.C.,
1971), p. 52). One of the other
virtues of the Hughes article is its forceful reminder of the intimate link
which often exists between technological progress and economies of scale. “The realization of latent
scale economies is especially important form of technological progress in the
utility industries” (ibid., p. 45).
3. Edwin Mansfield, Industrial Research and Technological Innovation,
op. cit., p. 83.
526
De Tocqueville long ago pointed out a distinctive
characteristic of the American scene: “...I accost an American sailor, and I
inquire why the ships of his country are built so as to last but for a short
time; he answers without hesitation that the art of navigation is every day
making such rapid progress that the finest vessel would become almost useless
if it lasted beyond a certain number of years. In these words, which fall accidentally and on
a particular subject from a man of rude attainments, I recognize the general
and systematic idea upon which a great people directs
all its concerns.” [1] Similarly,
expectations of future changes may have the effect, not of delaying innovation,
but of determining some of the specific characteristics of the innovation
chosen. An adaptation to these
expectations might be deliberately to construct cheaper and flimsier capital
equipment. Thus, for example, as between
two economies with different expected rates of future technical change, it
would be anticipated that optimal life would be shorter where expected changes
are largest. [2] And,
correspondingly, an anticipated acceleration in the course of technological
improvement could lead to the selection of equipment with expected optimal life
shorter than would otherwise be chosen.
Central to the analysis of the problem of expectations
with respect to further improvements in technology, is the question of the
specific source of subsequent improvements. It may be that these improvements can only be
brought about by the process which we have come to call “learning by doing”, in
which case the pace of improvement is itself
determined by either the producers’ accumulated experience over time or by
their cumulative output. [3] Alternatively,
improvements may be rigidly linked to the passage of time necessary to acquire
information about the results of earlier experience. [4] Consider the problems
associated with the introduction of commercial jet aeroplanes.
Britain introduced the Comet I two years
before the Americans began the development of a jet airliner. Yet the Americans eventually won out. In retrospect, it is apparent that the
American delay was salutary rather than costly to them,
and that Boeing and Douglas chose the moment to proceed better than did de
Havilland. “Their delay allowed them to
offer airplanes that could carry
1 Alexis De Tocqueville (trans. Henry Reeve), Democracy
in America, 2 vols. (D. Appleton and Company, New York, 290!), vol. I, p. 526.
2. For a discussion of optimal replacement in the ante bellum textile
industries of the United States and the United Kingdom, see Williamson, op.
cit. For a criticism of the
Williamson article which does not alter the relationship between expected rates
of technical change and optimal life, see David Denslow,
Jr., and David Schulze, “Optimal Replacement of Capital Goods in Early New
England and British Textile Firms: A Comment”, Journal of Political Economy,
May/June 2974.
3. See Paul David, “Learning by Doing and Tariff Protection: A
Reconsideration of the Case of the Ante-Bellum United States Cotton Textile
Industry”, Journal of Economic History, September 1970, and
Tsuneo Ishikawa, “Conceptualization of Learning by Doing: A Note on Paul David’s
‘Learning by Doing and... The Ante-Bellum United States Cotton Textile
Industry’ “, ibid., December 2973. Note the importance of this distinction as
well as that between learning which can be freely captured by others and that
which accrues solely to the learner. This
latter distinction will have important implications for the number of firms in
an industry as well as the optimal entry date for any one firm. See Barzel, op. cit.
4. This is not really “learning by doing” in the usual sense, which is
restricted to learning by participation in the production process, even though
it does involve the passage of time and the accumulation of experience. However, the distinctions above concerning the
“appropriability” of the information generated by the
experience remain important for examining entry decisions.
527
up to 180 passengers when the Comet IV carries up to 100, and a
cruising speed of 550 m.p.h. instead of 480 m.p.h. - hard commercial advantages
that they could offer because they were designing for later and more powerful
engines. But they were also aided by the
delay of four years in making the Comet safe after its accidents from metal fatigue.”
[1] More
generally, information concerning the useful life of metal components could
only be derived from prolonged periods of use and experience. Which forms of improvements may be expected to
dominate, and the conditions under which they may become available to other
firms, will have important implications not only for entrepreneurs making entry
or adoption decisions, but also for public policy concerning efficient growth.
There are many possible reasons why waiting may be the
most sensible decision. Indeed, often
there may be no real choice. On the
purely technological level, innovations in their early stages are usually
exceedingly ill-adapted to the wide range of more specialised
uses to which they are eventually put. Potential
buyers may postpone purchase to await the elimination of “bugs” or the
inevitable flow of improvements in product performance or characteristics. On the other hand, they may have to wait
through the lengthy process of product redesign and modification before a product
has been created which is suitable to specific sets of final users. Thus, widely used products such as machine
tools, electric motors and steam engines have experienced a proliferation of
time-consuming changes as they were adapted to the varying range of needs of
ultimate users. In the case of machine
tools, for example, there was a successful search for the application of
specific machine tool innovations across a wide variety of industrial uses. [2] In the case of final
consumer goods, the redesigning is likely to be primarily concerned with the
development of product varieties suitable to the financial resources of
different income groups. What is
observed over their life cycles is a gradual expansion of their quality range
to accommodate these final users. [3] Today’s academics are
keenly aware of this problem when deciding whether to purchase today or to
defer the purchase of pocket calculators, given their expectations of ongoing
improvement in their capacities and characteristics. Similar problems have characterised
the selection decision with respect to the last few
1. Ronald Miller and David Sawers, The Technical Development of Modern Aviation (Praeger Publishers, New York, 1970), p. 27. For an American failure in the attempted
development of the “Demon” fighter plane under the pressures of the Korean War,
see Eighth Report of the Preparedness Investigating Sub-committee of the
Committee on Armed Services, United States Senate (84th Congress, 2d Session), Navy
Aircraft Procurement Program: Final Report on F3H Development and Procurement (United
States Government Printing Office, Washington, 1956). The specific failure here was that numerous
airframes became available years before it was possible to develop a jet engine
with the required performance characteristics. In the lugubrious tone of
the congressional investigating committee which was appointed to account for
the resulting loss of several hundred million dollars: “What has somehow been
overlooked is that the essential procurement practice employed with respect to
the Demon fighter would inevitably result in some wastage of airframes if the
engine were not forthcoming” (ibid., pp. 9-10).
2. Nathan Rosenberg, “Technological Change in the Machine Tool Industry,
1840-1910”, Journal of Economic History, December 1963.
3. For historical evidence in support of these assertions, see Dorothy
Brady, “Relative Prices in the Nineteenth Century”, Journal of Economic
History, June 1964, pp. 145-203.
528
generations of computers, and may also have
influenced the choice between purchase and rental on the part of users. [1]
There are some areas, of course, where the pressures
militate very heavily against delay - as in weapons acquisition. Nevertheless, even when the costs of being
late may be regarded as uniquely high, considerations of technological
expectations cannot be ignored. Peck and
Scherer, in their very careful study of weapons procurement, rephrase two of
the key questions. First, “Should we
begin developing this newly feasible weapon system immediately to ensure early
availability, or should we wait a year or so until the state of the art is
better defined so that fewer costly mistakes will be made during the development?” Secondly, “... should funds be committed to
long lead time production items early in the development program so that
full-scale production can start as soon as the development is completed?” [2]
A recent important instance in which the combination
of long lead time and rapid technological change led to an apparent large
misallocation of resources is the case of automobile emission controls. Under pressure from the federal government,
American automakers, with production lead times of four or five years, were
required to specify which anti-pollution technology would be incorporated into
the 1975 automobiles. The catalytic
converter seemed at that time to be a proven and more certain solution to the
problem than did alternative technologies, such as the still-unproven stratified-charge
engine. However, the subsequent
development of this latter technology produced a solution to automobile
emissions which was superior to the catalytic converter. Foreign automakers, such as Honda, with
shorter production lead times than the Americans, were able to adopt the
stratified-charge technology, thus avoiding what now appears to be the costly
and premature commitment of American auto firms. (It is important to note, however, that some
of the difficulty in this particular case is due to uncertainty concerning the
future of the emission standards themselves as well as technological
uncertainty.)
Problems such as these have, of course, a long history.
In his book on the early history of
electrical equipment manufacturing, Harold Passer extensively documents the
marketing difficulties which confronted makers before 1900. During this period, expectations of rapid
technical improvement were firmly entrenched in the minds of potential buyers,
and such expectations served to reduce present demand. “The manufacturer has to
convince the prospective buyer that no major improvements are in the offing. At the same time, the manufacturer must
continue to improve his product to maintain his com-
1. See William F. Sharpe, The Economics of Computers (Columbia
University Press, New York, 1969), particularly chapter 7.
2. Merton J. Peck and Frederic M. Scherer, The Weapons Acquisition
Process: An Economic Analysis (Division of Research, Graduate School of
Business Administration, Harvard University, Cambridge, 1962), pp. 283, 318. The authors also observe: “The risks of early
investment in production are impressive - in some programs enormous quantities
of special tools and manufactured material became worthless due to unexpected
technical changes. On the other hand,
the gamble has been successful and valuable time savings have been achieved in
other programs (such as in the prewar British radar effort and in the first
U.S. ballistic missile programs) by preparing for production concurrently with
development” (ibid., pp. 318-19).
529
petitive
position and to force existing products into obsolescence.” [1] Passer’s statement
neatly identifies the horns of the dilemma which threaten to impale the
entrepreneur in the early stages of product innovation. One must attempt to persuade potential buyers
of product stability at the same time as one commits resources to the search
for product improvement so as not to fall behind the pace of such improvement
which is set by one’s competitors.
The implications of such
considerations may be very great for the innovation process. When these intertemporal
considerations loom very large, a rapid rate of technological progress need by
no means result in as rapid a rate of introduction of new technological
innovation. As Sayers has pointed out
for Great Britain:
There were times,
between the wars, when marine engineering was changing in such a rapid yet
uncertain way that firms in the highly competitive shipping industry delayed
investment in the replacement of old high-cost engines by the new low-cost
engines. In the middle ‘twenties
progress was rapid in all three propulsion methods - the reciprocating
steam-engine, the geared steam-turbine and the diesel motor. Minor variations are said to have brought the
number of possible combination types up to nearly a hundred. For some classes of ships there was
momentarily very little to choose between several of these combinations, and shipowners were inclined to postpone placing orders until a
little more experience and perhaps further invention had shown which types
would be holding the field over the next ten years. Put in economic terms, the shipowners’
position was that, though total costs of new engines might already be less than
running costs of old engines, the profit on engines of 1923 build might be
wiped out by the appearance in 1924 of even lower-cost engines, the purchase of
which would allow a competitor (who had postponed the decision) to cut freights
further. Also there was uncertainty as
to which of two types of 1923 engine would prove to work at lower cost. If shipowner A installed
engine X, and shipowner B installed engine Y,
whose costs in 1923 appeared to equal those of X, a year’s experience might
show that in fact Y costs were much lower than X costs, in which event shipowner A would have done better to wait until
1924 before installing new engines. [2]
1. Harold Passer, The Electrical Manufacturers, 1875-1900 (Cambridge,
Harvard University Press, 1953), p. 45. The
1880s and the 1890s were, in fact, a period of continuous product improvement
in incandescent lighting, and it was only with the advent of metallic filaments
in the early years of the twentieth century that the incandescent lamp
established its decisive superiority over gas lighting and arc lighting. Even so, the record from 1880 to 1896 is one
of startling improvements in product efficiency and reductions in cost. Bright has stated: “The following figures show
the approximate course of list prices per lamp for standard 16-candlepower
lamps from 1880 to 1896: 1880-6, $1.00; 1888, 80 cents; 1891, 50 cents; 1892,
44 cents; 1893, 50 cents; 1894, 25 cents; 1895, 18-25 cents; 1896, 12-18 cents...
In 1896 a dollar could buy approximately six standard carbon-filament lamps
which would give more than twelve times as many lumen-hours of light as a
single lamp of the same candlepower costing a dollar in 1880” (Arthur A.
Bright, Jr., The Electric-Lamp Industry (New York, Macmillan, 1949, pp.
93 and 134).
2. R. S. Sayers, “The Springs
of Technical Progress in Britain, 1919-39”, Economic Journal, June 1950,
pp. 289-90. These circumstances might
also be described as a case of “technological uncertainty” as to which specific
methods would yield the greatest long-run effect, but the impact [upon diffusion is the same. Habakkuk has called attention to a similar
experience in shipbuilding immediately after the opening of the Suez Canal: “It
accelerated the technical perfection of the steamer; the rate of technical
progress was so rapid that the steamers built in the early ‘seventies were
unable to compete with those completed in the middle of the decade...” (H. J. Habakkuk, “Free Trade and Commercial Expansion, 1853-1870”,
in The Cambridge History of the British Empire, vol. 2, p. 762).]
HHC: [bracketed] displayed on page 531 of original.
530
For a much more recent period, Walter Adams and Joel Dirlam call attention to the U.S. Steel Corporation’s
concern over the imminence of future improvements as an explanation for their
delay in introducing the oxygen steel-making process.
U.S. Steel conceded that “some form of
oxygen steel-making will undoubtedly become an important feature in steelmaking
in this country”, but it declined to say when or to commit itself to
introducing this innovation. Indeed,
three years later, Fortune still pictured the Corporation as confronted
by “painfully difficult choices between competing alternatives - for example,
whether to spend large sums for cost reduction now [1960], in effect
committing the company to present technology, or to stall for time in
order to capitalise on a new and perhaps far superior
technology that may be available in a few years”. [1]
Expectations of continued improvement in a new
technology may therefore lead to postponement of an innovation, to a slowing
down in the rate of its diffusion, or to an adoption in a modified form to
permit greater future flexibility. Moreover,
one must consider expectations relating not only to possible improvements in
the technology being considered, but also the possibility of improvement in both
substitute and complementary technologies. Further improvements in an existing product
may be held up because of the expectation that a superior new product
will soon be developed. [2] At
the same time expectations of continued improvement in the old technology,
which the new technology is designed to displace, will exercise a similar
effect. There is much evidence to
suggest that historically, the actual improvement in old technologies
after the introduction of the new were often substantial and played a
significant role in slowing the pace of the diffusion process, so that this
provides a quite reasonable basis for such a set of expectations. The water wheel continued to experience major
improvements for at least a century after the introduction of Watt’s steam
engine; and the wooden sailing ship was subjected to many major and imaginative
improvements long after the introduction of the iron-hull steamship. [3] During the 1920S the
competition of the internal combustion engine is said to have been responsible
for much technological improvement in steam engines, while in the same period
the competition from the radio stimulated experiments which led to the new
1. Walter Adams and Joel Dirlam, “Big Steel,
Invention, and Innovation “, Quarterly Journal of Economics, May 1966,
pp. 18 1-2. Emphasis
by Adams and Dirlam.
2. Jewkes et al. have pointed out that
“... improvements in the more traditional methods of producing insulin were
held up by the widespread belief that a synthesized product would soon be
found”. See John Jewkes,
David Sawers and Richard Stillerman,
The Sources of Invention (Macmillan and
Co., London, 1958), p. 232.
3. See Nathan Rosenberg, “Factors Affecting the Diffusion of Technology”,
Explorations in Economic History, Fall 1972,
for a more extended discussion.
531
and improved type of cable which was
introduced in 1924. [1] The
Welsbach mantle, perhaps the single most important
improvement in gas lighting, was introduced after the electric utilities had
begun to challenge the gas utilities over the respective merits of their
lighting systems. The Welsbach gas mantle brought about a dramatic increase in
the amount of illumination produced by a standard gas jet. [2] Not only the diffusion of
technologies but also the effort devoted to the development of new technologies
may be decisively shaped by expectations as to future improvements and the
continued superiority of existing technologies. One explanation for the limited attention
devoted to the development of the electric motor for many years was the belief that the economic superiority of the steam
engine was overwhelming and beyond serious challenge. [3] The decision to neglect
research on the electrically powered car in the early history of the automobile
industry reflected the belief, justified at the time, in the total superiority
of the internal combustion engine (this neglect may soon be repaired!). Similarly, the limited shift to nuclear
sources of power over the past quarter century has been influenced by continued
improvements in thermal efficiency based upon the “old-fashioned” but still
apparently superior fossil fuel technologies. It seems equally clear that the recent growing
pessimism about future fossil fuel supplies is likely to accelerate the concern
with nuclear technologies, and lead to a more rapid rate of technical
improvements there as experience accumulates. This will first require, however, a careful
sorting out and distinction between short-term and long-term phenomena. Large-scale commitment of private resources to
nuclear energy (or shale processing) is unlikely so long as investors in
energy-supplying industries anticipate that the price of oil is likely to fall
sharply from its post-October 1973 levels. [4]
1. Sayers, op. cit., pp. 284-5.
2. “The Weisbach mantle was a lacy asbestos
hood which became incandescent when attached over a burning gas jet. It increased the candlepower six-fold with a
white light far superior to the yellowish flame of the bare jet... The Welsbach mantle, improved by many changes in the original
design, extended the life of gas lighting nearly half a century. It sustained the gas utilities while they were
discovering other productive uses for gas which would permit them to give up
the struggle against electric lighting” (Charles M. Coleman, P.G. and E. of California,
the Centennial Story of Pacific Gas and Electric Company, 1852-1952), p. 81.
Even the old arc-lamp technology experienced substantial improvements in
response to the competition of new forms of lighting. See Bright, op. cit., pp.
213-18.
It is interesting to note that, even though the gas industry could not
indefinitely meet the competition of electricity in lighting, the gas industry
as a whole continued to find new uses for its product and experienced no
long-term decline. “Despite the
declining importance of gas in lighting, the manufactured-gas industry as a whole
has grown continually. The competition
of the carbon lamp and the old open arc during the 1880s had encouraged the gas
industry to spread its field to heating, and it was that use which permitted
the industry to continue expanding when its lighting market was destroyed. Cooking, space heating, water heating, and
later refrigeration resulted in a steady growth in the value of products of the
industry from $56,987,290 in 1889 to $512,652,595 in 1929” (Bright, op.
cit., p. 213).
3. Kendall Birr, “Science in American Industry”, in David Van Tassel and
Michael Hall (eds.), Science and Society in the United States (The
Dorsey Press, Homewood, Illinois, 1966), p. 50.
4. Dependence upon price expectations has, of course, been extensively
discussed elsewhere. The purpose of the
present article is confined to calling attention to the significance of
expectations with respect to technological change itself. Expectations about future changes in
technology might themselves be produced by projecting the anticipated influence
of relative price changes on the innovation process. The willingness to explore for new techniques
which involve factor combinations drastically [different
from those which currently prevail, will in turn depend upon the magnitude of
expected price shifts.]
HHC: [bracketed] displayed on page 533 of original.
532
The recent efforts by oil firms to gain control of
competing technologies - coal and uranium - may be seen as attempts to assure
long-term market control by minimising the potential
threats arising from technological breakthroughs in the provision of substitute
products. [1] The
earlier experience of gas companies in meeting the competition of electricity
is also highly instructive in this regard. The ubiquitousness
of “Gas and Electric” utility companies in the United States today suggests
something of their past success in making the transition from the old to the
new technology.
Expected profitability will not only be affected
negatively by expected improvements in substitute technologies; it will also be
affected positively by expected technological improvements in complementary
technologies. Since innovation in
steel-making will be affected not only by innovations in aluminum or
pre-stressed concrete which provide potential substitutes for steel, but also
by technological changes in petroleum refining which increase the size of the
automobile-producing sector, the entrepreneur must consider expected
developments in these other sectors. The
profitability of technological changes in electric power generation will be favourably affected by metallurgical improvements which
provide power plant components with increased capacity to tolerate higher pressures
and temperatures in the form of high-strength, heat-resistant alloys. On the other hand, improvements in power
generation would have a limited impact upon the delivered cost of electricity
without improvements in the transmission network which reduce the cost of
transporting electricity over long distances. The point is that the need for and
expected availability of complementary innovations will often affect the
profitability and therefore the diffusion of an innovation. [2] Therefore single technological
breakthroughs hardly ever constitute a complete innovation. [3] It is for this reason -
the expected as well as realised changes in other
sectors - that decisions to adopt an innovation are often postponed in
situations which might otherwise appear to constitute irrationality, excessive
caution, or over-attachment to traditional practices in the eyes of uninformed
observers.
1. Such attempts, by providing a limited diversification for these
firms, reduce the risks they face, and this may conceivably have some role in
encouraging research activity.
2. See Fishlow’s discussion of the importance
of expectations with respect to transport improvements and their impact upon
American land settlement patterns. Albert Fishlow, American Railroads and
the Transformation of the Ante-Bellum Economy (Harvard University Press,
1965). Fishlow
explains why mid-western railroads were profitable immediately after their
construction as a result of the process of anticipatory settlement. More broadly, it would be of interest to
examine the impact of the expectations generated by transport improvements upon
agricultural practices in the older areas of the northeast.
Parker and Klein have argued that the mechanisation
of American agriculture which so increased its productivity would not have
occurred in the absence of those transport improvements which made it possible
to introduce its products into world markets. See William Parker and Judith Klein,
“Productivity Growth in Grain Production in the United States, 1840-60 and 1900-10”,
in Studies in Income and Wealth No. 30, Output, Employment and Productivity
in the United States after 1800 (Columbia University Press, 1966).
3. Rosenberg, “Factors Affecting the Diffusion of Technology”, op. cit.
533
Some significant (and superficially paradoxical)
implications can be drawn from this discussion. Specifically, the relationship between the
rate of technological change and the rate of technological innovation and
diffusion is by no means a simple one, and may well be the opposite of
intuitive expectations. A rapid rate of
technological change may lead to a seemingly slow rate of adoption and
diffusion, or to the introduction of machinery which fails to incorporate the
most “advanced” technology, so long as it leads potential buyers to anticipate,
by extrapolation, a continued or accelerating rate of future improvements. A decision to buy now may be, in effect, a
decision to saddle oneself with a soon-to-be-obsolete technology. [1] Conversely,
when the rate of technological change slows down and the product stabilises, the pace of adoptions may increase owing to the
much greater confidence on the part of potential buyers that the product will not
be superseded by a better one in a relatively short period of time. Thus the lag behind the “best available”
methods might appear less when technological change is at a slower rate or is
decelerating than when it is more rapid. In this sense, our argument may explain the
failure of firms to function at the “best practice” frontier - such failure may
owe a great deal to differences in entrepreneurial expectations about the
future pace of technological improvement. [2]
There are two distinct issues involved here. One is the rate of improvement of best
practice technology. The second is the
rate of adoption of those best practice methods. If the two were independent, any lag in
adoption would seem to impose social costs. However, as seems clear from historical experience,
an important explanation of lagged adoption is the environment created by the
high rate of improvement of best practice technology. Thus, a lagged rate of adoption is the “price”
paid by technologically dynamic economies for their technological dynamism.
Clearly, a further examination of the adoption of
technological innovations must be conducted within an enlarged framework which
includes expectations not only of own-improvements but of improvements in the
range of closely-linked substitutes and complements as well. Further research along such lines may
considerably improve our understanding of the diffusion process. For the present, I would suggest that
decisions to postpone the adoption of an innovation are often based upon
well-founded and insufficiently-appreciated expectations concerning the future
time-flow of further improvements. Even
the most widely accepted justification for postponement, the elimination of
conspicuous but not overwhelmingly serious technical difficulties, or “bugs”,
1. As discussed, the effect might also be to lead to the initial
adoption of a more flexible set of techniques which more readily permits the
adoption of future improvements. For an
analogous argument with respect to the benefits of flexibility in the design of
plant and equipment, see George Stigler, “Production and Distribution in the
Short Run “, Journal of Political Economy, June
1939. Reprinted in
American Economic Association, Readings in the Theory of Income Distribution
(Philadelphia, 1946).
2. For a discussion of other reasons for the failure to operate at the
“best practice” frontier, see W. E. G. Salter, Productivity and Technical
Change (Cambridge University Press, 1960), chapter 4.
534
can reasonably be interpreted as merely a
special case of expectations of future technological improvement. In this case, the expectations approach
complete certainty that the technical difficulties can shortly be eliminated by
recourse to the application of ordinary engineering skills. I suggest, finally, that entrepreneurs may be
making appraisals of the future payoff to innovations of greater objective
validity than are made by social scientists who invoke all sorts of
extra-rational factors to account for the delay or “lag” in the adoption and
diffusion of innovation. Practical
businessmen tend to remember what social scientists often forget: that the very
rapidity of the overall pace of technological improvement may make a postponed
adoption decision privately (and perhaps even socially) optimal.
Nathan Rosenberg
Stanford University
535
The Competitiveness of Nations
in a Global Knowledge-Based Economy
May 2003