The Great Waves of Technological Change
The Industrial Revolution had occurred. The new era of modern economic growth was underway. And, markets drove this process. Technological advance drove this process. First in a highly uneven way where just a few parts of the world were party to this new form of industrial economy and eventually to nearly the entire world. This is the period that the great economic historian and great conceptualizer of economic growth Simon Kuznets called the Era of Modern Growth. It is a unique period of human history. Now, we have defined economic growth as the sustained increase of gross domestic product per person. Or if we look at the whole world, we can call it the gross world product, which is the sum of the gross domestic products of all countries, divided by the world population. And in the era of modern economic growth, the period studied by Simon Kuznets, that world output per capita has increased on a sustained basis for more than 200 years now, in a very very uneven way, however. Some places have achieved marked economic growth for nearly two centuries.
Other places, not so much. Some remained poor, almost until the current day and some very particular places in the world, the world’s poorest of course, are places that have not yet achieved that takeoff of modern economic growth. We need to understand that process, and in order to do so we need to make a quite basic distinction of two kinds of economic growth. Each one is characterized by a sustained increase of output per person. But they really have a very different underlying dynamic to them.
One kind of growth, is the growth of the technological leaders in the world. In the early 19th century that was certainly England. This is where the Industrial Revolution occurred. In the middle of the 19th century and towards the end of the 19th century, Germany and the United States became the great technological leaders, even overtaking Great Britain in that role. In the 20th century, the United States was by far the most technologically dynamic part of the entire world. Though a number of other countries, certainly inventors in different parts of the world contributed to the worldwide stock of technological knowledge. But for those leaders there’s a very particular kind of economic growth, driven by technological advance. By new discoveries, innovations, new ways to do things thatthen spread and give an impulse of sustained growth to the economy. That’s what happened after James Watt invented his improved steam engine in 1776. It was taken up in factories, it was taken up in mines, in the locomotives of steam engines, in steamships and in many other technologies. And that gave a wave of economic growth of the technological leaders, those that invented those new breakthroughs. There’s a second kind of economic growth. That’s the economic growth of a country, that for whatever reason of history and geography. Perhaps resource based, perhaps just bad luck or bad policy. Stayed back, as those leaders charged ahead.
And so, a country like China, for example, did not industrialize in the 19th century, where England and the United States and Germany and other countries partook of the Industrial Revolution, and developed industrial economies. At some point, countries like China and we could say any of the emerging economies today. Looked out and saw examples of other countries far in front of them in technological lead, and with far higher income levels and typically as we know therefore much different conditions of life. Urban, generally longer life expectancy, generally healthier lives, generally more education, more public services, more opportunities and so forth. And those laggard countries had to solve a problem: how do we catch up? And that gave rise to a different kind of growth, and that is the kind of economic growth where a country that is lagging in technology and in income per capita, makes a tremendous advance quite rapidly, in narrowing the technological gap with the leader. These two different mechanisms of growth, the first one based on continuing innovation, and the second one based on closing a gap that has opened up by taking on the technologies of those advanced countries that have already been able to use them. Form the two major ways that economic growth proceeds in the world. The failure to understand these differences leads to all sorts of confusion in the discussion of economic development, because the kinds of institutions that countries need to innovate, for example, to have that first kind of growth. Endogenous growth, meaning growth from within the system itself where technological advance gives rise to more technological advance, those institutions are quite different from the catching up institutions. Those kinds of institutions, where the goal is to close the gap as fast as possible with the countries in the lead. For those institutions a stronger role of government, for example, can often be a major spur to a rapid, rapid push of economic growth. To close the gap that is already opened up. You don’t need so much innovation, but you do need widespread investments, development of infrastructure, the ability to bring in technology from abroad to close the gap. And so understanding the two kinds of growth, and therefore the two kinds of institutions that are needed to solve the growth problem is tremendously important. I want to focus first on endogenous growth, the growth of the technological leaders. It’s the kind of growth where one good thing leads to the next. Economists sometimes call this an increasing returns to scale process, and you get an ongoing process out of that that can be very dynamic. Clearly, in the case of modern technology, going back to the onset of the Industrial Revolution, there have been waves of technological breakthroughs. There have been many theorists of those waves: Kondratieff, the Russian technology historian was one of them with great influence in thinking from his writings until now. And one can think about the era of modern economic growth from the middle of the 18th century till now, having a series of waves, some people say three waves of Industrial Revolution. Others date them as four waves. But the notion is that these waves of technological change in the leading countries are the drivers of this process of endogenous economic growth. One classification says that there have been five waves until now. I think it’s a worth while idea for us to look at. The first of these Kondratieff waves in this particular classification, puts the stream engine at the core from 1780 to 1830 roughly from the time of James Watt’s invention to its wide spread application. The second of these waves is the great burst of railway and steel. And even if the technological roots of railways and steel come before 1830 the take off of those industries could be dated roughly to that time. The third of these waves is the age of electricity. Again, the discoveries of electricity date back to Benjamin Franklin, flying the kite and understanding electricity in the atmosphere, static electricity, to Michael Faraday and the discovery of induction and the beginning of the understanding of electromagnetism. In the first half of the 19th century, but then Edison and others applying the new knowledge of electricity to give us electric lighting, incandescent bulbs, city streets with electricity. And then of course, moving electricity into the homes and into the factories towards the end of the 19th century. After the Age of Electricity which is put 1880 to 1930 is a fourth wave led in this classification by automobiles and petrochemicals. Plastics and new polymers and new materials industries and much more. One could add, of course, the age of modern aviation. Again, the underlying technologies for the automobile date to the end of the 19th century, the internal combustion engine which powers automobiles till today. But the economic, dramatic application began in the early years of the 20th century with the Model T. With Henry Ford’s inventions of modern production processes on the factory line. And with the mass production of automobiles which absolutely transformed the way we live, where we live, how we produce and of course, how we trade in the economy. The fifth wave in this classification dates to around 1970 but again with roots that go back much earlier. This is the knowledge economy, the age of computers, the great advent first of the huge mainframe computers in the 1930s and 1940s, much spurred by World War Two and the immediate aftermath of World War Two. And then the discovery of the transistor at the end of the 1940s and the invention of the integrated circuit which gave rise to the modern computing age, mobile phones and all the rest of industry that has been made possible by Moore’s Law. Moore’s Law you’ll recall is the fact that roughly every 18 to 24 months the number of transistors that can be put onto an integrated circuit has doubled. This means that the ability to process, to store, to transmit data has roughly doubled, or the cost of doing so has roughly fallen by half every 18 to 24 months. Well, you do that over a period of more than 50 years and you arrive at roughly a billion time improvement in the ability to process, store, and transmit information. And we know that is revolutionizing the world in this great fifth wave of the information and communications technology driven era. Will there be a sixth wave of technological change? The one we really need now, a wave of sustainable technologies. Ways to produce energy, ways to mobilize energy, ways to transport ourselves, and transport goods that take the massive pressures and the destructive forces off of our ecosystems. This is the great challenge. We’ve had now 250 years of modern economic growth. We’ve had waves of great technological change and we need to enter a new era. A new wave of technology, of sustainable development technologies in the way we live. The way we protect the planet. And at least we can take confidence from the past. And also grab on to some of the great scientific and technological insights that we have at hand. To give us hope and confidence, and determination to move forward to that next great wave of endogenous growth. This one based on protecting the planet and achieving sustainable development.