Title: Economic Transformations: General Purpose Technologies and Long Term Economic Growth
Author: Richard Lipsey, Kenneth Carlaw and Clifford Bekar
Scope: 3 stars
Readability: 3 stars
My personal rating: 3.5 stars
See more on my book rating system.

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Topic of Book

The authors create a theory and model for economic change. In particular, they focus on General Purpose Technologies.

If you would like to learn more about long-term economic growth, read my book From Poverty to Progress: How Humans Invented Progress, and How We Can Keep It Going.

My Comments

Though I find the concept of General Purpose Technologies to be useful, I would not recommend reading this book.

Rather than one book, it is actually many books combined together. Much of the book is an attempt to convince economists that their models and assumptions do not capture economic transformations very well. They then construct their own theory and model. For most non-economists, this is not very interesting.

The authors do, however, make so interesting observations on GPTs and the reasons for the Industrial Revolution.

Key Take-aways

• A General Purpose Technology (GPT) is a single generic technology, recognizable as such over its whole lifetime, that initially has much scope for improvement and eventually comes to be widely used, to have many uses, and to have many spillover effects.
• GPTs are a tiny proportion of all technologies, but they play a vastly disproportionate impact on long-term economic growth.
• The initial impact of a GPT is typically minor, as it takes decades to perfect the technology and realize all their potential uses.
• The authors believe that the most important cause of the Industrial Revolution was the wide-spread usage of Newton mechanical science in Britain. Nowhere else was this type of thinking widespread.

Important Quotes from Book

Stated in a nutshell, our theses were: (a) early modern science and technology coevolved without one being the clear leader of the other; (b) Newtonian mechanics, the first fully modern, overarching, scientific ‘laws’ were critical to the First Industrial Revolution, which helped to explain why it occurred where and when it did (in eighteenth-century Britain); (c) the absence of Newtonian science solved the puzzle of why China, which was the equal of Europe in so many other ways, failed to generate its own indigenous industrial revolution.

This book is about two interrelated phenomena: long-term economic growth and the pervasive technologies that occasionally transform a society’s entire set of economic, social, and political structures and that have come to be called ‘general purpose technologies’ (GPTs). In most of the existing literature, these have been treated separately, and indeed much of our discussion of GPTs can be taken on its own, independent of long-term growth. Importantly, however, we seek to relate these phenomena by treating GPTs as one of the main forces that sustain economic growth in the long term.

Largely working through the mechanism of general purpose technologies, economic growth has transformed our economic, social, and political structures over past millennia, and is still doing so. Over the last ten or so millennia since the neolithic agricultural revolution, economic growth has helped to turn us ever so slowly but quite decisively from hunter-gatherers, consuming only what nature provides directly, into people who consciously produce what we consume, often using materials that we ourselves have created. Growth has occurred not by producing more of the same, using static techniques, but by creating new products, new processes, and new forms of organization.

Over the last two and a half centuries, the pace of economic growth has quickened, raising the material living standards of average citizens in industrialized countries to levels previously undreamed of by any of their earlier counterparts and reducing the typical working hours for urban dwellers in industrialized countries from 60–72 hours a week at the beginning of the nineteenth century to 35–40 hours a week at the beginning of the twenty-first century. But this more rapid growth has not benefited everyone, at least in the first instance, since growth is an uneven process that initially yields gains for some and losses for others.

We argue that all long-term growth is best understood as a historical process driven by innovative activity. Indeed, the evolution of technology causes much of the economic, social, and political change that we experience.

In summary, technological advance not only increases our incomes but it also transforms our lives through the invention of new, hitherto undreamed of products that are made in new, hitherto undreamed of ways. For all these reasons and more, it is clear that changes in per capita GDP radically understate the impact of economic growth on the average person. Nonetheless, changes in real GDP do convey significant information.

For more than a century most economists paid little attention to the importance of technological change.

We use a simple thought experiment that illustrates a conclusion on which economic historians and students of technological change agree: technological change is the most important determinant of long-term economic growth. Consider investment first. Imagine freezing technological knowledge at the levels existing in, say, 1900, while continuing to accumulate more 1900-vintage machines and factories and using them to produce more 1900-vintage goods and services, and training more people longer and more thoroughly in the technological knowledge that was available in 1900. It is obvious that today we would have vastly lower living standards than we now enjoy (and pollution would be a massive problem). The contrast is even more striking if the same thought experiment is used to compare today’s knowledge of product and process technologies with those that existed at even earlier times. Similarly, holding technology constant and expanding market size would have some effect, but could not be the source of exponential growth over the centuries. Now hold constant the sizes of the market and of the capital stock (which means positive gross investment but zero net investment), then introduce all the new products, processes, and forms of organization that characterized the twentieth century.

Definition: A GPT is a single generic technology, recognizable as such over its whole lifetime, that initially has much scope for improvement and eventually comes to be widely used, to have many uses, and to have many spillover effects.

One of the most important aspects of GPTs is that they rejuvenate the growth process by creating spillovers that go far beyond the concept of measurable externalities.

One of the most common erroneous beliefs is that new GPTs lead sooner or later to a ‘productivity bonus’—an acceleration in the rate of productivity growth.

If no further GPTs were invented to provide new research programmes, the number of derivative technological developments would eventually diminish. There would be further innovations using existing GPTs, but their number and their productivity would be much less than if further GPTs were to become available. Consider, for example, what the range of possibilities for new innovations would now be if the last GPTs to be invented had been the steam engine for power, the iron steamship for transport, steel for materials (no man-made materials), the telegraph for communication (the voltaic cell but no dynamo) and the mid-nineteenthcentury factory system for organization. So what new GPTs, such as computers, electricity, and mass production do is to prevent the number of efficiency-increasing innovations from petering out.

Transforming GPTs:

1 Domestication of plants 9000–8000 bc

2 Domestication of animals 8500–7500 bc

3 Smelting of ore 8000–7000 bc

4 Wheel 4000–3000 bc

5 Writing 3400–3200 bc

6 Bronze 2800 bc

7 Iron 1200 bc

8 Waterwheel Early medieval period

9 Three-masted sailing ship 15th century

10 Printing 16th century

11 Steam engine Late 18th to early 19th century

12 Factory system Late 18th to early 19th century

13 Railway Mid 19th century

14 Iron steamship Mid 19th century

15 Internal combustion engine Late 19th century

16 Electricity Late 19th century

17 Motor vehicle 20th century

18 Airplane 20th century

19 Mass production, continuous process, factory5 20th century

20 Computer 20th century

21 Lean production 20th century

22 Internet 20th century

23 Biotechnology 20th century

24 Nanotechnology Sometime in the 21st century

Although others might expand or contract our list by a few items, it illustrates several important points. First, the current ICT revolution is not unique; there have been (GPT-driven) ‘new economies’ in the past. Second, GPTs have not been common in human experience, averaging between two and three per millennium over the last 10,000 years. Third, the rate of innovation of GPTs had been accelerating over the whole period. We start with millennia between GPTs, then centuries.

These technologies fall into six main classes, with some overlap.

1. Materials technologies : domesticated plants; domesticated animals; bronze; iron; biotechnology.

2. Power: domesticated animals; waterwheel; steam engine; internal combustion engine; dynamo.

3. Information and communications technologies: writing; printing; computer; Internet.

4. Tools: wheel.

5. Transportation: domesticated animals; wheel; three-masted sailing ship; railway; iron steamship.

6. Organization: factory system; mass production; lean production.

We move to our second level of abstraction by stylizing the evolution of GPTs into five distinct phases:

Phase 1. A new GPT is introduced into the facilitating and policy structures that were designed for a pre-existing set of GPTs. In this phase, the amount of investment and output attributable to the new GPT is small.

Phase 2. The facilitating structure, public policies, and the policy structure are redesigned to fit the new GPT—this stage is often long-drawn-out, full of uncertainty, and prone to conflict since the adjustments create many winners and losers. There is often a burst of investment in such things as R&D and new capital (both physical and human), without a correspondingly large increase in output.

Phase 3. The principles of the new GPTare applied to produce many new products, processes, and organizational forms within a newly evolved facilitating and policy structure, which is by now fairly well adapted to it. This phase is the time when the new technology tends to yield the largest pay-offs in terms of productivity, real wage increases, and investment booms.

Phase 4. The opportunities for application of the GPT’s principles to new product, process and organizational technologies diminish and, if new GPTs are not introduced, the growth process will slow—at least in so far as it is related to the GPT in question.

Phase 5. The GPT is challenged by a new competing technology. The established GPT may either be displaced fairly quickly or may undergo a burst of productivity gains because intense competition develops with the challenging GPT. Sooner or later, however, the new GPT displaces the old one. The replacement may be total or partial.

Three questions need to be addressed about Britain’s Industrial Revolution that initiated sustained extensive growth in the West: Why was there an Industrial Revolution? Why did it occur where it did? Why did it occur when it did? In short: Why? When? Where?

To consider the conditions that led to the Industrial Revolution, we argue that the focus must be on the generation of technological knowledge. Specifically, we argue that the answer to the ‘why’ of the Industrial Revolution is that it stemmed from a view of the universe as an ordered machine governed by natural laws that goes back at least to the medieval scholastic philosophers and to research programmes that were initiated in the early modern period to mechanize all aspects of textile production, to discover alternative sources of power, and to understand magnetism. Fulfilling these programmes required what we regard today as both technology and science—areas of study united under the single rubric of natural philosophy in the medieval and early modern periods. We argue that early modern science provided a necessary condition for the Industrial Revolution, a critical condition that was absent in other civilizations, which might otherwise have developed their own such revolutions.

To the question of ‘where’ we answer that it could only have happened in northwestern Europe, because only there were people developing a scientific approach to understanding and controlling the physical world. More specifically, we argue that within north-western Europe, it could only have happened when it did, in Britain. Britain was the only country in which the new Newtonian mechanics was widely taught, understood, and practised throughout the eighteenth century. This lead in mechanics ensured that, if the Industrial Revolution was to start in the eighteenth century, it could only start in Britain. If Britain had been prevented from developing the revolution, say for political reasons, it might well have happened elsewhere in Europe. Even so, it would have been much delayed, as is illustrated by the actual difficulties in diffusing the early nineteenth-century British technologies to the Continent.

We argue that the Islamic countries missed out on several of the key developments that contributed to the European Industrial Revolution. In contrast, China had at the beginning of the eighteenth century many characteristics that matched those found in Europe. But what it lacked was the necessary condition for such a revolution: early modern science.

After centuries of debate, Christian thinkers rejected occasionalism and accepted naturalism. They argued that, although God could have created any world, he chose to create this world with its causes, effects, and natural laws. Thus, immutable natural laws explain what we see in the world of our experience, except in the case of rare divine interventions in the form of miracles. To discover the laws of nature is, therefore, to discover the work of God. Science is reverent, not blasphemous.

The new science, which became a uniquely Western science, developed in the fifteenth, sixteenth, and seventeenth centuries. It slowly replaced the Aristotelian–Christian world view with a new mechanical view of the universe. In it there was no clear distinction between pure and applied science or science and engineering.

Indeed, it does not seem an overstatement to say that Newtonian mechanics provided the intellectual basis for the First Industrial Revolution, which in its two stages, was almost wholly mechanical.

The degree to which Newton’s new mechanical science permeated British society and was used by innovators and entrepreneurs, such as the Watts and the Boultons, separated England from all other European countries—only the Netherlands came close.

More specifically, we argue that early modern science, mechanistic science, was a necessary condition for the Industrial Revolution. Science as it existed in nineteenth-century Britain was necessary for the full development of the key GPTs of the Industrial Revolution, and that science could never have developed in the absence of the scientific revolution of the early modern period.

The Industrial Revolution was not a sudden event that came more or less from out of the blue. Instead, it was the contingent culmination of evolutionary paths that had been in place for centuries.

In the early modern period, three research programmes were begun: to mechanize textile production; to harness atmospheric pressure (and eventually steam power); and to understand magnetism. These evolved slowly through incremental changes as knowledge accumulated in a path-dependent way. They reached fruition in the eighteenth and nineteenth centuries when they became key drivers of the Industrial Revolutions. These research programmes relied on what we now regard both as technology and science.  

The decline of Islamic science can be traced to a number of developments that were different from those in theWest, many of them due to historical accidents: a theocracy with no concept of degrees of jurisdiction or of a developing code of laws; religious hostility to established science and free enquiry; no major institutional innovations such as the corporation—in the form of guilds, universities, independent cities, and business organizations. In short, while the West was developing a pluralistic society, Islam was solidifying a monolithic, relatively rigid, theocratic society.

China did not have even the beginnings of systematic cumulative modern science. There were many great scientific thinkers in China, but too often their ideas flourished briefly, only to be lost.

What was lacking? First and foremost were institutions of scientific learning with a corporate structure similar to the universities that emerged in Europe in the Middle Ages. In their absence, there was nothing to provide a collective memory for scientific discoveries that would preserve them and allow them to be built on cumulatively. Although the Chinese developed institutions that preserved knowledge and art in many spheres including history, scientific libraries that gathered together and preserved important works about the natural world were largely absent.

A second consequence of the lack of independent universities was the absence of institutions to protect individual scholars who might be advancing knowledge in ways that threatened established authorities.

The emergence of sustained extensive growth required the development of the science that became unique to the West. Newtonian mechanical science assisted many of the developments in eighteenth-century England, greatly helped the development of automated textile machinery, and, even more so, the high-pressure steam engine. It was without any doubt essential for the key technologies of the Second Industrial Revolution that were based on electricity, metallurgy, and chemistry.

The development of the necessary mechanistic science can be traced back at least to the revival of learning and the rise of scholastic philosophy in eleventh- and twelfth-century Western Europe. The unanswered questions with which those philosophers struggled sowed the seeds of early modern science, which allowed investigators to use new empirical tools to settle old questions. Out of this piecemeal empirical testing of many Aristotelian hypotheses came much new scientific knowledge. This knowledge was finally synthesized by Newton into a new mechanical world view that replaced the Aristotelian teleological world view.

 There were some key conditions that encouraged the growth of modern science in the West and discouraged it elsewhere. These include: the Christian Church’s acceptance of Aristotelian science and the need to reconcile it with Christian theology, which gave a measure of protection to scholars that was lacking in both Islam and China; the provision of an institutionalized memory for scientific advances in the form of the autonomous universities and their libraries—developments that were not found in Islam and China; pluralism, in the form of the corporation, distinct areas of different legal authority and bodies of law, and levels of political jurisdiction. The latter gave rise to protected spheres of action where individuals could get on with investigations that often threatened the established secular and religious authorities. All of these were to a significant extent lacking in the theocracy of the Islamic empire and its successors as well as in imperial China.  

The technologies that created the First Industrial Revolution can be traced back to a European concern with mechanization, already manifest in medieval times by such things as the application of the waterwheel to myriad tasks and the development of the mechanical clock. They were given a great boost by the mechanical world view that grew up around early modern science, particularly through the development of an understanding of the heliocentric solar system, which was not discovered elsewhere. Leonardo da Vinci was the great prophet of mechanization who laid down a research programme of mechanization of textile production that took over 200 years to fulfil completely. At the same time as textile production was being partially mechanized, early scientists were beginning investigations along two other key lines: (a) air pressure, vacuum, and steam, which led to the initial development of a working atmospheric engine and then of Watt’s steam engine; and (b) magnetism and electricity, which led, after 250 years of scientific discoveries, to the invention of the dynamo.

If you would like to learn more about long-term economic growth, read my book From Poverty to Progress: How Humans Invented Progress, and How We Can Keep It Going.