Apr 20, 2011

Article of the day: What enables rapid economic progress?

Richard Nelson. “What Enables Rapid Economic Progress: What are the Needed Institutions?”, Research Policy, 2008, 00 1-11. Here

This is a short but thought provoking article. The analogy between physical and social technology is useful and ingenious.

The paper analyses the link between institutions and technological change.
A principal argument is that institutional change, and its influence on economic activity, is much more difficult to direct and control than technological change, and hence prevailing institutions often are drags on economic productivity and progressiveness.
Definition of institutions:
[s]tructures and forces that mold and hold in place prevalent social technologies [e.g. patents]. They are call "social technology" in the article. However, the difference that the author makes between institutions and social technologies is not very clear, and sometimes confusing.
Institutions clearly have a certain stability. Yet economic growth, as we have experienced it, clearly has seen old social technologies fade away, sometimes abruptly sometimes slowly, and replaced by new ones.
Important points:
Today economists studying economic growth are in accord that technological innovation is the key driving force.
[i]nnovation driven economic growth needs to be understood as involving the co-evolution of physical and social technologies, and that the dynamics of institutional change should be seen in this light.
New modes of business organization were only a start. To manage these huge companies required many more high level managers than an owner could garner by canvassing family and friends, which had been the usual practice. The notion of professional management came into being, and shortly after business schools emerged as the institutional mechanism for training professional managers. The financial needs of the giant companies were beyond what could be met through existing financial institutions, and both modern investment banks, and modern stock markets, emerged to meet the needs.
Other arguments:
[t]he principal benefit that society gets from market organization of economic activity, and competition, is innovation and economic progress [but non-market institutions also play an important role].
[p]hysical technologies are more amenable to sharp specification and control, and are easier to replicate and imitate more or less exactly, than are social technologies.
[e]ngineering disciplines often can provide very helpful illumination of prevailing practice and potential roads to improvement of physical technologies. They can point relatively sharply to what is essential to the performance of a product design, or production process, and what is likely peripheral. While Ruttan (2003, 2006) has proposed otherwise, I would argue that the behavioral and social sciences provide much less light on how present institutions work and how to improve them.
The evolution of social technologies and the institutions that support them is a difficult uncertain process, compared with the evolution of physical technologies.
[i]ntroduction and spread of social technologies can be driven by fad, or ideology.
Unfortunately the author does not answer clearly the question in the title: "what are the needed institutions?"

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