Paul Walker

Dr Paul Walker is an economist at University of Canterbury. He has expertise in microeconomics, institutional economics and industrial Organization. He blogs for The Dismal Science.

Cause and effect: ancient trade and development - The Dismal Science

Sep 26, 2013

In a previous post on the history of globalisation I quoted from Elhanan Helpman's book Understanding Global Trade. With regard to long-distance trade Helpman noted just how ancient trade is,

While long-distance trade plays an essential role in modern economies, it was also a salient feature of economic development after the Neolithic Revolution, as hunter-gatherers evolved into sedentary societies that specialized in food crops. The importance of trade further increased with the emergence of cities and early civilizations. Caravans traveled along the Fertile Crescent, trading between Mesopotamia and the Levant, and trading routes expanded over time to distant parts of Asia and Europe.
With regard to a later period Silver (1995: 67) notes that
“Large commercial houses flourished in Babylonia from the seventh to the fourth century. The House of Egibi, for example, bought and sold houses, fields, and slaves, took part in domestic and international trade, and participated in a wide variety of banking activities."
Thus trade is an old human activity. But given that it is, what is the relationship between trade and economic development even in the earliest times. Did hunter-gathers become farmers because of trade or was trade the result of a more sedentary society? Did cites and civilisations cause an increase in trade or did increasing trade cause cites and civilisations? What is the cause and what is the effect?

As to the development of farming we know that farming is an ancient human activity:
“The first clear evidence for activities that can be recognized as farming is commonly identified by scholars as at about 12,000 years ago [ ...]” (Barker 2006: 1).
Tudge (1998: 3) writes
“I want to argue that from at least 40,000 years ago − the late Palaeolithic − people were managing their environments to such an extent that they can properly be called ‘proto-farmers’.”
But what was the relationship between farming and trade in these times. Ofek (2001: chapter 13) argues that agriculture developed with a symbiotic relationship with exchange/trade. There is a conflict between the fact that we specialise in production but diversify in consumption. This conflict is reconciled by redistribution, i.e. via exchange/trade. Ridley (2010: 127-30) goes further and argues there would be no farming or cities and civilisation without trade, that trade was a precursor to both:
“One of the intriguing things about the first farming settlement is that they also seem to be trading towns. [ ...] it is a reasonable guess that one of the pressures to invent agriculture was to feed and profit from wealthy traders − to generate surplus that could be exchanged for obsidian, shells or other more perishable goods. Trade came first” (Ridley 2010: 127).
"To argue, therefore, that emperors or agricultural surpluses made the urban revolution is to get it backwards. Intensification of trade come first. Agricultural surpluses were summoned forth by trade, which offered farmers a way of turning their produce into valuable good from elsewhere. Emperors, with their ziggurats and pyramids, were often made possible by trade. Throughout history, empires start as trade areas before they become the playthings of military plunderers from within or without. The urban revolution was an extension of the division of labour." (Ridley 2010: 163-4)
So in this line of reasoning, trade is not a result of economic development it is one of the causes of farming and civilisation. Trade extended the size of the market, a larger market makes greater specialisation and an increased division of labour possible and this, as Adam Smith would argue, leads to greater production and wealth. Smith wrote in The Wealth of Nations,
This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no extensive utility; the propensity to truck, barter, and exchange one thing for another.
And the rest is, as they say, history.

  • Barker,Graeme (2006). The Agricultural Revolution in Prehistory: Why did Forages Become Farmers?, Oxford: Oxford University Press.
  • Ofek, Haim (2001). Second Nature: Economic Origins of Human Evolution, Cambridge: Cambridge University Press.
  • Ridley, Matt (2010). The Rational Optimist: How Prosperity Evolves, New York: HarperCollins Publishers.
  • Silver, Morris (1995). Economic Structures of Antiquity, Westport Connecticut: Greenwood Press.
  • Tudge, Colin (1998). Neanderthals, Bandits and Farmers: How Agriculture Really Began, New Haven: Yale University Press.

When did globalisation start? - The Dismal Science

Sep 24, 2013

A good question. But is there a good answer? The Free Exchange blog at the Economist website has asked this question and as part of their answer they write,

However, economic historians reckon the question of whether the benefits of globalisation outweigh the downsides is more complicated than this. For them, the answer depends on when you say the process of globalisation started. But why does it matter whether globalisation started 20, 200, or even 2,000 years ago? Their answer is that it is impossible to say how much of a “good thing” a process is in history without first defining for how long it has been going on.

Early economists would certainly have been familiar with the general concept that markets and people around the world were becoming more integrated over time. Although Adam Smith himself never used the word, globalisation is a key theme in the Wealth of Nations. His description of economic development has as its underlying principle the integration of markets over time. As the division of labour enables output to expand, the search for specialisation expands trade, and gradually, brings communities from disparate parts of the world together. The trend is nearly as old as civilisation. Primitive divisions of labour, between “hunters” and “shepherds”, grew as villages and trading networks expanded to include wider specialisations. Eventually armourers to craft bows and arrows, carpenters to build houses, and seamstress to make clothing all appeared as specialist artisans, trading their wares for food produced by the hunters and shepherds. As villages, towns, countries and continents started trading goods that they were efficient at making for ones they were not, markets became more integrated, as specialisation and trade increased. This process that Smith describes starts to sound rather like “globalisation”, even if it was more limited in geographical area than what most people think of the term today.
The German historical economist, Andre Gunder Frank, has argued that the start of globalisation can be traced back to the growth of trade and market integration between the Sumer and Indus civilisations of the third millennium BC. Trade links between China and Europe first grew during the Hellenistic Age, with further increases in global market convergence occuring when transport costs dropped in the sixteenth century and more rapidly in the modern era of globalisation, which Mssrs O’Rourke and Williamson describe as after 1750. Global historians such as Anthony Hopkins and Christopher Bayly have also stressed the importance of the exchange of not only trade but also ideas and knowledge during periods of pre-modern globalisation.
That long-distance trade, one aspect of globalisation, is ancient is noted by Elhanan Helpman in this book Understanding Global Trade:
While long-distance trade plays an essential role in modern economies, it was also a salient feature of economic development after the Neolithic Revolution, as hunter-gatherers evolved into sedentary societies that specialized in food crops. The importance of trade further increased with the emergence of cities and early civilizations. Caravans traveled along the Fertile Crescent, trading between Mesopotamia and the Levant, and trading routes expanded over time to distant parts of Asia and Europe.
The Economist concludes by saying,
But it is clear that globalisation is not simply a process that started in the last two decades or even the last two centuries. It has a history that stretches thousands of years, starting with Smith’s primitive hunter-gatherers trading with the next village, and eventually developing into the globally interconnected societies of today. Whether you think globalisation is a “good thing” or not, it appears to be an essential element of the economic history of mankind.
In other words, globalisation (or at least some aspects of globalisation) is a lot older than most people would have thought.

Offshoring and its effects on innovation in emerging economies - The Dismal Science

Sep 24, 2013

Outsourcing is still a controversial practice in most countries around the world. This is just as true for emerging markets as it is for the industrialised economies. The effects of outscouring are increasingly understood for industrialised countries but what of emerging markets? A new column at looks at the effects of outsourcing on firm-level innovation in emerging markets. The authors find robust evidence that outsourcing is positively related to various innovation measures. However, outsourcing only leads to increased R&D spending in countries where intellectual-property rights are well-protected.

Most of the empirical work that has been done on the effects of outsourcing on firms has looked at firms in the industrialised countries. However outsourcing is not just an industrialised country phenomena, it is also common in emerging economies. Firms in middle-income countries split up their production processes similarly to firms in developed countries. Recent research analyses the benefits to emerging market firms from outsourcing, focusing mainly on productivity and innovation effects. The latter are particularly important, since innovation is a key determinant of productivity improvements and – ultimately – growth.

The VoxEU column, Offshoring and its effects on innovation in emerging economies, summaries the research contained in a recent paper Fritsch and Gorg (2013). This paper finds robust evidence that outsourcing is associated at the firm level with:

  • Spending on research and development.
  • The introduction of new products.
  • Upgrading existing products.
But, significantly, Fritsch and Gorg show that firms only increase their R&D effort after outscouring if intellectual property right are well protected.The interpretation given to this is that a lack of protection of intellectual property prevents firms from restructuring towards innovation activities.
Intellectual property rights protection does not matter for the introduction of new products or for upgrading. Since we control for R&D spending at the firm level, offshoring activity reflects access to better technology from foreign firms. Of course, protection of this external knowledge does not matter for the sourcing firm. Thus, intellectual property protection matters whenever firms engage in innovation effort through their own R&D.
Fritsch and Gorg distinguish in their analysis between domestic outsourcing - getting another local firm to supply a component of production - and offshoring – getting a foreign company involved in the supply chain. Fritsch and Gorg write,
In terms of innovation effects, we have two mechanisms in mind:
  • First, outsourcing allows firms to reduce factor costs and restructure their operations towards higher value-added activities such as R&D and innovation [...] – a channel highlighted in the context of developed countries.
  • Secondly, if offshoring takes place to technologically advanced countries, it may provide access to higher quality inputs [...]). This allows the firm to learn new technologies and expand its technological frontier.
While the restructuring effect is present for both outsourcing and offshoring, the technology effect is likely to be particularly important for offshoring. The use of imported inputs – in particular from industrialised countries – can provide strong learning effects for emerging-market firms, thus enhancing their technology level and innovation activities [...]. Studies for a multitude of developing economies have shown that imports enhance the productivity of firms in these countries. Thus, we would also expect to see that firms in emerging economies increase innovation as a result of engaging in offshoring, which is an alternative method of international sourcing.
Fritsch and Gorg's conclusions,
Our study shows that outsourcing and offshoring induce positive effects on innovation for firms in emerging economies. This corroborates the view that outsourcing is beneficial for firms. It also implies that outsourcing might help emerging economies to enhance their productivity and hence increase their competitiveness. Although we cannot explicitly test the complementarity of firms sourcing superior technology and upgrading their own technology, we suspect that this mechanism is at work. If this is indeed the case, then outsourcing would allow firms in these countries to offer more sophisticated products and services.
  • Fritsch, Ursula and Holger Görg (2013), “Outsourcing, Offshoring and Innovation: Evidence from Firm-level Data for Emerging Economies”, Kiel Working Paper No. 1861, Kiel Institute for the World Economy.

Do men and women react differently to advertising? - The Dismal Science

Sep 23, 2013

The short answer, at least for political advertisements, seems to be yes.

A recent article at looks at Heterogeneous response across genders to tonal variation in messaging: Experimental evidence. The column by Vincenzo Galasso and Tommaso Nanni looks at how the perceived tone of a product or political advertisement affects public response – even holding constant the content of the message. The column provides evidence that men and women react differently to positive and negative tones in electoral advertisements. Negative advertising increases voter turnout among men but not women; positive advertising tends to win women’s sympathy but alienates men. This should inform gender-specific tailoring of targeted advertisements.

Given that Galasso and Nanni run experiments the first question has to do with their experiment design.

We implemented our experiment by providing four surveys to an online sample of about 1,500 eligible voters. Respondents to the initial profiling survey – conducted at the end of March 2011 – were randomly assigned
to two treatment groups and a control group exposed to neither campaign. There was one treatment group each for the positive and negative campaigns.

Individuals in the positive group were exposed to an electoral campaign with a positive tone by the main opponent, and those in the negative group to a campaign with a negative tone. Both treatment groups, as well as the
control group, were exposed to the actual (non-randomised) campaign by the incumbent. The incumbent’s campaign was mainly perceived to be negative in tone by subjects in the control group.

Since actual political campaigns consist of various communication tools which potentially reinforce each other, we expose individuals in our sample to four devices of political persuasion:
  • A video interview with the candidate.
  • An electoral slogan.
  • An open letter to the voters; and
  • A video ad endorsed by the candidate.
  • Each of these items was presented to the two treatment groups in a positive or in a negative tone. Both positive and negative ads addressed the same issue, with the same format, and in the same setting (i.e. video images,
    length of the letter).
The initial two treatment tools (the video interview and campaign slogan) were provided with our second survey, run at the end of April 2011. The last two tools (the open letter and video ad) were provided with our third survey, run in the week before the election. After administering each of the four tools, we used the corresponding survey to measure their instantaneous effect on the perceived credibility and approval rate of the candidates, as in a standard survey experiment. All campaign ads and videos can be watched on the experiment website. The ’in the field‘ component of our experimental design comes from collecting (self-declared) turnout and voting choices through a fourth survey, run in the days immediately after the 15-16 May election. These responses enable us to evaluate the overall effect of our randomised campaigns on electoral behaviour.
What then were the results?
Our empirical results show large differences in the gender response to political persuasion strategies. In fact, male and female voters respond in opposite ways to the degree of aggressiveness of the opponent’s campaign.
  • Negative advertising increases men’s turnout by about eight percentage points, but has no effect on women.
Gender differences are even stronger for electoral choices.
  • Women vote more for the opponent (by eight points) and less for the incumbent (by eight points) if exposed to the opponent’s positive campaign.
Exactly the opposite happens for men.
  • Men vote less for the opponent (by 11 points) and more for the incumbent (by 12.7 points) if exposed to the opponent’s positive campaign.
Overall, these effects amount to persuasion rates ranging from 21% to 24%.
Galasso and Nanni's concluding comments,
The diffusion of social networks and the ability to process the huge amount of information collected in large datasets have allowed sellers and politicians to precisely identify their preferred targets: undecided, potential buyers, and swing voters. Our results suggest that since the ads can now be targeted to the right receiver, the message should be tailored to persuade her or him.

Economists versus the cup - The Dismal Science

Sep 17, 2013

As Team New Zealand moves ever closer to winning the America's Cup we are beginning to hear the mindless, uninformed, self serving bs about the wonders having the cup in Auckland will do for the economy. Over a half a billion dollars in financial gain ...

I wish I had said this - The Dismal Science

Sep 13, 2013

This is Chris Dillow at the Stumbling and Mumbling blog,

To whom should economists offer advice? Traditionally, the answer has been: politicians.But I'm not sure this should be so.

This isn't just because economists can't foresee the future and so a lot of advice on monetary and fiscal policy is pointless.It's because policy is shaped not by what is the right thing to do, but by what politicians can sell to inattentive and sub-rational voters. Whatever else informs immigration policy, for example, it is not economic research.

Of course, economists do sometimes influence policy for the better - auction theory being a good example - but this happens only when economic ideas don't rub too harshly against prejudice and vested interest. Otherwise giving policy advice is, to paraphrase Robert Heinlein, like teaching a pig to sing: it wastes your time and it annoys the pig.
Well said that man. I feel the problem is that politicians care about .... well .... politics, not economics. In some cases politicians don't seem to understand the economic effects of their politics but in other cases I think they do understand but just don't care. They put forward ideas that they can, as Chris puts it, "sell to inattentive and sub-rational voters." That is they want votes and don't much care how they get them.

This does raise the normative issue of whether economists should advise politicians at all. For a start any advice offered will most likely have little effect and when economists have an effect it is not via advice given on a particular topic at a particular time but via a longer term effect via changing the general changing the intellectual climate. Hayek's advice to Antony Fisher, founder of the IEA, still seems relevant. Fisher went to see Hayek who was then at the LSE,
“My central question was what, if anything, could he advise me to do to help get discussion and policy on the right lines… Hayek first warned me against wasting time-as I was then tempted-by taking up a political career. He explained his view that the decisive influence in the battle of ideas and policy was wielded by intellectuals whom he characterised as the secondhand dealers in ideas’. It was the dominant intellectuals from the Fabians onwards who had tilted the political debate in favour of growing government intervention with all that followed. If I shared the view that better ideas were not getting a fair hearing, his counsel was that I should join with others in forming a scholarly research organisation to supply intellectuals in universities, schools, journalism and broadcasting with authoritative studies of the economic theory of markets and its application to practical affairs.”
Thus in an effort to change the intellectual climate economists may well want to give up talking to politicians and start talking to everybody else.

The minimum wage and employment dynamics - The Dismal Science

Sep 11, 2013

In the U.S. the recent proposal by President Obama to raise the federal minimum wage has brought the minimum wage debate back to life. Not that it really left the limelight in the U.S., or anywhere else around the world. A new column at presents new research suggesting minimum-wage policies may not cause an immediate shock to employment, as is often feared, but do cause a reduction in the rate of net job growth. The long-run prospects for individuals are damaged, as they are delayed the opportunity to develop skills and work experience – that crucial first rung on the career ladder. Thus who suffer most from the effects of the minimum wage are those who can afford to suffer least.

Most papers in the long literature on the minimum wage have focused on the number of people employed but there are several reasons, grounded both in theory and data, to expect the effects to be reflected in the rate of net job growth. The transition from one employment level to the next may be slow due to adjustment costs or even an aversion to firing existing employees, so it is more likely that minimum wage increases result in a change in the rate at which employment grows.

This phenomenon becomes more clear when one considers the composition of the minimum-wage work force. Using the Current Population Survey’s Merged Outgoing Rotation Groups from 1979 to 2011, we found that, although only about 3.3% of all employees are paid the minimum wage, nearly 12% of those who enter the workforce are paid that amount. Indeed, nearly a third of minimum-wage workers are recent workforce entrants. Minimum-wage workers are also likely to transition to higher pay quickly: of those who remain employed after one year, about 60% are paid in excess of the minimum wage the following year. As such, it seems likely that any effects of the minimum wage are more likely to be reflected among new workers and in new job openings than on the existing stock of employment.
So dynamics of the labour market are important for the effects of changes to the minimum wage. Despite this importance little of the previous literature has focused on dynamics. In their column Jonathan Meer and Jeremy West set out to correct this lack of interest.

In Meer and West's view this lack of focus on dynamics is particularly worrisome because, unlike many of the other policies that economists study, the minimum wage is characterised by frequent, relatively small increases.
This means that slow adjustments in response to these increases are difficult to detect. Moreover, in Meer and West (2013), we use a simulation to show that a common practice in regression analysis in this literature – including state-specific time trends – leads to incorrect estimation of the effect of the minimum wage on the level of employment when the true effect is on the rate of employment growth. Essentially, the deck is often stacked against finding any effect.

The data for our study are drawn from the Business Dynamics Statistics, which covers the population of non-agricultural private employer businesses between 1977 and 2011. The underlying data are sourced from mandatory employer tax filings and aggregated by state in each year. The Business Dynamics Statistics includes not only the number of jobs in each state for every year, but the number of jobs created by expanding establishments and the number of jobs destroyed by contracting establishments. These numbers are used to calculate the rate of net job growth.

We combine the Business Dynamics Statistics with data on state minimum wages and other state attributes, like the state economic environment, to estimate how the minimum wage affects the rate of net job growth. We also account for annual shocks to the outcome variables occurring at the regional level, to account for any conditions that lead a state to see both a change in the minimum wage and job growth. This would be a concern if, for instance, a state legislature responded to lower job growth with a minimum-wage increase. We also conduct a number of robustness checks to ensure that our results are not driven by spurious correlation. For instance, we show that future increases in the minimum wage do not predict current job growth outcomes. If they did, we would be concerned that other factors are driving the correlation.
What of the results of the Meer and West study.
[Their] findings are unequivocal: higher minimum wages lead to lower rates of job growth. Indeed, a ten percent increase in the minimum wage causes roughly half a percentage point reduction in the rate of job growth, a very large effect. The effect of this hypothetical increase is not permanent, though, since it is eroded by inflation and increases in the state’s comparison group. Our calculations show that this ten percent increase in a state’s real minimum wage, relative to its regional neighbours, causes a 1.2% reduction in total employment relative to what it would have been. We further find that this appears to be driven primarily by reductions in job creation by expanding establishments, not by increases in job destruction by contracting establishments. Essentially, then, the intuition is that employers respond to the minimum wage by growing more slowly.

Judging whether the effect we find is large or small is not necessarily simple. Some might point to a 1.2% reduction in the level of employment after five years and argue that is relatively small – it represents about 23,000 fewer jobs for the average state – and that those who earn the minimum wage and remain in the labour force would earn more. But that argument seems coldly indifferent to those who remain outside of the labour market, unable to take advantage of the relatively rapid transitions out of minimum-wage jobs. At a broader level, it is important to note that, in contrast to much of the previous literature and the dismissiveness of some advocates, we document that the minimum wage does, in fact, affect employment.
The conclusion of the column is that the type of effect we should see, and the type found in their study, is a reduction of job creation, not a loss of existing jobs. Minimum-wage policies may not cause an immediate loss in the number of jobs, but rather a reduction in the rate of net job growth. This effect is all the more insidious for being difficult to detect. Employment growth is slowed, but more importantly, the long-run prospects for individuals are damaged, as they are delayed in the opportunity to develop skills and work experience – to grasp that crucial first rung on the career ladder.

  • Meer, J and West, J (2013), “Effects of the minimum wage on employment dynamics”, Working Paper.

Is technological progress history? - The Dismal Science

Sep 10, 2013

When it comes to technological progress and thus economic growth some of the most important questions being asked include, Has technological progress slowed down? Have we really picked all the low-hanging fruit?

A new column by Joel Mokyr at argues that technological progress is in fact not a thing of the past. Far from it. There are myriad reasons why the future should bring more technological progress than ever before – perhaps the most important being that technological innovation itself creates questions and problems that need to be fixed through further technological progress. If we rethink how innovation happens, we have every reason to suspect that we ain’t seen nothing yet. Not an answer the likes of Robert J. Gordon will take too well.

Technological progress has been the driver of economic growth for the last two centuries. Some authors, such as Robert Gordon and Tyler Cowen, however, are being to suggest that product and process innovation are running out of steam.

  • Robert J Gordon and Tyler Cowen, inter alia, have expressed the view that technological progress is slowing down.
  • Jan Vijg has suggested that the industrialised West of the 21st century will resemble the declining Empires of late Rome and Qing China .
Their basic point is that technological dynamism is fizzling out. The low-hanging fruits that have improved our lives so much in the 20th century have all been picked. We should be ready for a more stagnant world in which living standards rise little if at all. Joel Mokyr is having none of this. For him "we ain’t seen nothin’ yet, the best is still to come".
My argument concerns both the supply and the demand sides of innovation. Starting with supply, what is it that accounts for sustained technological progress? The relation between scientific progress and technology is a complex two-way street. For example, 19th-century energy-physics learned more from the steam engine than the other way around.

The historical record makes clear that science depends on technology in that it depends on the instruments and tools that are needed for science to advance. New instruments opened new horizons in what Derek Price called "artificial revelation”, observations through instruments that allow us to see things that would otherwise be invisible.

  • The Scientific Revolution of the 17th century depended critically on the development of the telescope, the microscope, the barometer, the vacuum pump, and similar contraptions.
  • The achromatic-lens microscope developed by Joseph J Lister (father of the famous surgeon) in the 1820s paved the way for the germ theory, the greatest breakthrough in medicine before 1900.
The same was true in physics, for instance:
  • The equipment designed by Heinrich Hertz allowed him to detect electromagnetic radiation in the 1880s and Robert Millikan’s ingenious oil-drop apparatus allowed him to measure the electric charge of an electron (1911).
In the twentieth century, the impact of instruments on progress is even more apparent. For example:
  • X-ray crystallography, developed in 1912, was crucial forty years later in the discovery of the structure of DNA.
If tools and instruments are a key to further scientific progress, it is hard not to be impressed by the possibilities of the 21st century:
  • DNA sequencing machines and cell analysis through flow cytometry (to mention but two) have revolutionised molecular microbiology.
  • High-powered computers are helping research in every domain conceivable, from content analysis in novels to the (very hard) problems of turbulence.
  • Astronomy, nanochemistry, and genetic engineering are all areas in which progress has been mind-boggling in the past few decades thanks to better tools.
To be sure, there is no automatic mechanism that turns better science into improved technology. But there is one reason to believe that in the near future it will do so better and more efficiently than ever before. The reason is access.

Inventors, engineers, applied chemists, and physicians all need access to best-practice science to answer an infinite list of questions about what can and cannot be done. Search engines were invented in the 18th century through encyclopaedias and compendia that arranged all available knowledge in alphabetical order, making it easy to find. Textbooks had indexes that did the same. Libraries developed cataloguing systems and other techniques that made scientific information findable.

But these search systems have their limitations. One might have feared that the explosion of scientific knowledge in the 20th century could outrun our ability to find what we are looking for. Yet the reverse has happened. The development of searchable databanks of massive sizes has even outrun our ability to generate scientific knowledge. Copying, storing, transmitting, and searching vast amounts of information today is fast, easy, and practically free. We no longer deal with megabytes or gigabytes. Instead terms like petabytes (a million gigabytes) and zettabytes (a million petabytes) are being bandied about. Scientists can now find the tiniest needles in data haystacks as large as Montana in a fraction of a second.
And if science sometimes still proceeds by ‘trying every bottle on the shelf’ – as in some areas it still does – it can search with blinding speed over many more bottles, perhaps even peta-bottles.
This brings us to the Cowen question, Have all the low-hanging fruits been picked?
One answer is that the analogy is flawed. Science builds taller and taller ladders, so we can reach the upper branches, and then the branches above them.
  • A less obvious answer is that technological progress is fundamentally a dis-equilibrating process.
Whenever a technological solution is found for some human need, it creates a new problem. As Edward Tenner put it, technology ‘bites back’. The new technique then needs a further ‘technological fix’, but that one in turn creates another problem, and so on. The notion that invention definitely ‘solves’ a human need, allowing us to move to pick the next piece of fruit on the tree is simply misleading.
  • Each solution perturbs some other component in the system and sows the seed of more needs; the ‘demand’ for new technology is thus self-sustaining.
The most obvious example for such a dynamic is in our never-ending struggles with insects and harmful bacteria. In those wars, evolutionary mechanisms decree that after most battles we win, the enemy regroups by becoming resistant to whatever poison we throw at them. Drug-resistant bacteria are increasingly common and require novel approaches to new antibiotics. The search for novel antibiotics will resume with tools that Chain and Florey would never have dreamed of – but even such new antibiotics will eventually lead to adaptation.

In agriculture, the advance in fertiliser use has helped avert the Malthusian disasters that various doom-and-gloom authors predicted. But the vast increase in nitrate use following Fritz Haber’s epochal invention of the nitrogen-fixing process before World War I has now led to serious environmental problems in aquifer pollution and algae blooms. Again, technology will provide us with a fix, possibly through genetic engineering in which more plants can fix their own nitrates rather than needing fertiliser or bacteria that convert nitrates into nitrogen at more efficient rates.

Another example is energy: For better or for worse, modern technology has relied heavily on fossil fuels: first coal, then oil, and now increasingly on natural gas. The bite-back here has been planetary in scope: climate change is no longer a prospect, it is a reality. Can new technology stop it? There is no doubt that it can, even if nobody can predict right now what shape that will take, and if collective action difficulties will actually make it realistic.
Yes, but what about the workers?!

The big question here is, If technology replaces workers, what will the role of people become? Many commentators have written about having an idle and vapid humanity in a robotised economy. This is a concern for many. There will be disruption and pain, as there always is with progress, but the new technology will also create new demand for workers, to perform tasks that a new technology creates. It is most plausible that in our future new technology will create new occupations we cannot imagine, let alone envisage, as it has in the past.
Furthermore, the task that 20th-century technology seems to have carried out the easiest is to create activities that fill the ever-growing leisure time that early retirement and shorter work-weeks have created. Technological creativity has responded to the growth of free time: a bewildering choice of programmes on TV, the rise of mass tourism, access at will to virtually every film made and opera written, and a vast pet industry are just some examples. The cockfights and eye-gouging contests with which working classes in the past entertained themselves have been replaced by a gigantic high-tech spectator-sports industrial complex, both local and global.
Mokyr closes with a comment on Keynes and his view of the Economic Possibilities for our Grandchildren
In his brief Economic Possibilities for our Grandchildren (1931) Keynes foresaw much of the future impact of technology. His insights may surprise those who regard him as the prophet of unemployment: “all this [technological change] means in the long run [is] that mankind is solving its economic problem” (italics in original). Contemplating a world in which work itself would become redundant thanks to science and capital (Keynes did not envisage robots, but they would have strengthened his case), he felt that this age of leisure and abundance was frightening people because “we have been trained too long to strive and not to enjoy”.

Does offshoring hurt domestic innovation activities? - The Dismal Science

Sep 09, 2013

Concerns about the effects of offshoring around the world, including Europe, focus mainly on the loss of factory jobs, but some also worry that innovation will also be affected in a bad way. A new column at shows that offshoring firms employ more people in R&D and design, introduce more frequently new products, and invest more frequently in advanced process technologies compared to non-offshoring firms. Concerns that offshoring may hurt innovation because of the lost links between production and product development are not supported by the evidence.

The article, by Bernhard Dachs, Bernd Ebersberger, Steffen Kinkeland and Oliver Som, opens by saying,

Offshoring of production activities has been a topic of economic policy debates for at least the last decade. A central issue in these debates are the economic effects of offshoring on firms in the home country. Most contributions investigated the effects of offshoring on output, employment or skills [...] and find a complementary relationship between foreign and domestic economic activity, at least in the long run.

The effects of offshoring on innovation and technology investment came into focus only recently. Conventional economic wisdom suggests that offshoring changes the internal division of labour between various parts of the firm and strengthens capital-, technology-, and skills-intensive types of economic activity in the home country, including headquarter services such as innovation and research and development. Studies on the changing skills composition of offshoring firms [...] provide empirical support for this assumption.

This view has been challenged by various authors who point to possible negative effects of offshoring on national innovation capabilities. Gary P Pisano and Willy C Shih (2012), for example, state that “mass migration [of manufacturing] has seriously eroded the domestic capabilities needed to turn inventions into high-quality, cost-competitive products”. Pisano and Shith argue that close linkages between production product development are main source for product innovation. This idea goes back to the notion of the ‘factory as a laboratory’ [...] and to interactive models of the innovation process [...], and has also been brought forward recently [...] for Finland. Offshoring cuts these ties.
The big question asked in the article is "Are offshoring firms more innovative"? Dachs, Ebersberger, Kinkeland and Som answer by noting,
We first test for effects of offshoring on innovation input.
  • Results suggest that offshoring firms employ a significantly higher share of employees in research and development and design.
Research and development and design personnel accounts for 13.7% of total employment in offshoring firms, compared to 11.9% in non-offshoring firms.

This result supports the view that offshoring firms specialise on skill-intensive, non-routine tasks and rejects fears of a lower innovation performance due to offshoring.
  • Offshoring firms are also more likely to introduce new products to the market, including market novelties.
58.7% of the firms which have offshored production between 1999 and 2006 have introduced products new to the market between 2007 and mid-2009. The corresponding share for non-offshoring firms is 51.7%. The difference is significant at 10% error level. Internationalisation via offshoring may increase sales expectations of firms, which in turn spur product development. However, offshoring firms do not yield larger benefits from product innovation than non-offshoring firms. Sales from new products as a share of total turnover reveal no significant difference. This may rather reflect the uncertainties of the innovation process than to adverse effects from offshoring.

To study process innovation, we construct an involvement index that resembles the index used in Bozeman and Gaughan (2007, 2011). This procedure weights up (relatively) rare utilisation of technologies, and weights down (relatively) common ones. We calculate an overall involvement index, and sub-indices for production technologies, value chain integration technologies, and product development technologies.

Results reveal a positive effect of offshoring on process innovation [...]. Offshoring firms invest significantly more frequent in production technologies and in technologies that facilitate the management and integration of global value chains. These technologies are a means to facilitate the integration of production processes between suppliers and clients across firm boundaries and therefore promote the trade in tasks. Investment in technologies for product development show no significant difference.

This result clearly contradicts the assumption that offshoring is associated with a loss of domestic production activity. However, it supports the international economics literature which predicts that offshoring firms in the home country will focus on skill-intensive and capital-intensive activities. An explanation is that offshoring firms concentrate on the most advanced, most productive equipment – which can compete with low wages at locations abroad – in the home country to avoid involuntary knowledge spillovers to foreign competitors and increase flexibility.
Overall, we see no negative effect of production offshoring on innovation and technological capabilities of firms in the home country. Most indicators reveal that offshoring is associated with a higher innovation performance at the firm level. We explain this result by the changing specialisation patterns of offshoring firms towards research and development, design and innovation in their home country. Moreover, innovation activities in the home countries may also benefit from additional demand generated abroad. Fears that offshoring hurts innovation because it cuts links between production and product development are not supported by our results. An important limitation of the results, however, is the fact that we cannot observe firms that offshored all their production activities.
What then are implications for future research and policy?
Our findings provide fresh evidence on the relationship between offshoring and innovation, a field where empirical results were scarce so far. They support a view on internationalisation of firms that regards offshoring as a strategy of international expansion, and not a passive reaction of firms to a loss of their competitiveness.

With respect to policy, the analysis does not confirm fears of a weakening of national competitiveness due to offshoring:
  • Activities that add to the technological capabilities of firms and their ability to create competitive advantage – such as research and development, design or process innovation – are positively associated with a firm’s decision to offshore production activities.
  • Concerns that offshoring may hurt innovation because of lost links between production and product development are not supported by the evidence.
On contrary, offshoring firms have higher propensity to invest in advanced production technologies in the home country than the control group of non-offshoring firms.

Our findings also point to complementarities between domestic education and innovation policies and internationalisation:
  • Domestic firms are likely to specialise in knowledge-intensive activities when they internationalise their production activities.
  • Policy can help to take full advantage of the benefits from internationalisation by promoting education and qualifying personnel early enough, particularly in countries or regions where talent is short.
So offshoring is good for innovation, something worth keeping in mind when you see people complaining about the offshoring activities of firms.

  • Bozeman, B, and M Gaughan (2007), "Impacts of grants and contracts on academic researchers’ interactions with industry", Research Policy, 36(5), 694-707.
  • Bozeman, B, and M Gaughan (2011), "How do men and women differ in research collabourations? An analysis of the collabourative motives and strategies of academic researchers", Research Policy 40(10), 1393-1402.
  • Pisano, G, and W C Shih (2012), "Does America Really Need Manufacturing?", Harvard Business Review, 90(3), 94-102.

An intellectual giant has fallen (updated) - The Dismal Science

Sep 04, 2013

A world of economics has lost the greatest economist of the 20th century. The death of Ronald Harry Coase has deprived the economists profession of one of its creative and innovative thinkers. His introduction of transaction costs into economics gave rise to the modern theory of the firm, law and economics and the new institutional economics.

For me the most important thing in Coase’s work is that we see most of the main issues of the modern theory of the firm being raised together for the first time. He sets out to “discover why a firm emerges at all in a specialized exchange” − a question about the existence of the firm; he also sets out to “study the forces which determine the size of the firm” − an issue to do with the boundaries of the firm; and he inquires into the reasons for “diminishing returns to management” − issues to do with the internal organisation of the firm. It was the efforts to answer these questions that initiated the charge from seeing the theory of the firm as just part of price theory to seeing it as an important topic in its own right. Coase also provides one of the main building block for answers to these issues, the “costs of using the price mechanism” or transaction costs.


Update: Matt Nolan comments at the TVHE blog here.