Economics 354

Economics of Science and Technology
Jeffrey Parker, Reed College
Spring 2017

Go to this week's reading

As with most courses, this reading list only scratches the surface of the interesting and relevant literature on each of the topics we discuss. If you are interested in additional readings, please contact the instructor or search for relevant topics on EconLit. We also read only a few chapters of many books to give you a brief introduction to the subjects covered by the books. You may wish to read more chapters to get more detailed knowledge of the subject.

Many of the readings are available on the Internet. Most of these will have links directly to the reading. Note that most of these are available through online subscriptions that can be accessed only if you are connecting through the Reed network. Some of the books are available as e-books through the library Web site. For those that are only available as physical books on reserve, be sure to plan your reading carefully so that you can gain access to the limited number of copies. Not everyone will be able to read these on the morning (or even the evening) before they are discussed in class.

Starred (*) readings are not required. They are listed for those who want further detail about aspects of the topic being covered.

In some sections there is too much reading for everyone to do, so we will assign specific readings to individuals or groups, who will report on the content of these readings for the remainder of the class.

Table of Contents

I. Introduction

Session 1 (January 23): Introduction to Econ 354

Key Questions
  • What is this class about?
  • What are the requirements?
  • None

Session 2 (January 25): Knowledge

Key Questions
  • What are the distinctive characteristics of knowledge as an economic good?
  • Why are knowledge "spillovers" important? What determines their magnitude?
  • What is the "knowledge dilemma," why is it an economic problem, and what mechanisms can be used to try to mitigate it?
  • Foray, Dominique. 2004. The Economics of Knowledge. Cambridge, Mass.: MIT Press. [E-reserves through Moodle]
    • Chapter 5: Knowledge Spillovers
    • Chapter 6: Knowledge as a Public Good

Session 3 (January 27): Innovation

Key Questions
  • What is the difference between "invention" and "innovation" and why is innovation the more important concept for economic analysis?
  • What are the roles of basic research, applied research, and development in innovation?
  • Does the inevitable interconnectedness of innovations that is discussed by Rosenberg render hopeless any attempt to measure the significance of a single innovation or to measure the overall rate of innovation?
  • With respect to the evolution of paper clips:
    • Were there predictable causes leading to the various innovations or did they seem to emerge randomly?
    • How would you, in theory and in practice, try to construct a measure of the amount of paper-clip innovation in each year?
  • Freeman, Chris, and Luc Soete. 1997. The Economics of Industrial Innovation, 3rd ed. Cambridge, Mass.: MIT Press.
    • Chapter 1: Introduction [E-book through library]
  • Rosenberg, Nathan. 1979. Technological Interdependence in the American Economy. Technology and Culture 20 (1):25-50. Reprinted as Chapter 3 in N. Rosenberg, Inside the Black Box: Technology and Economics. Cambridge and New York: Cambridge University Press.
  • Petroski, Henry. 1992. The Evolution of Useful Things, New York: Alfred Knopf. [E-reserves through Moodle]
    • Chapter 4: From Pins to Paper Clips

Session 4 (January 30): Basic microeconomics of innovation and appropriability

Key Questions
  • What do economists mean by "appropriability" of the gains from innovation? Why is it a crucial concept?
  • What are the advantages of having a high level of appropriability? What are the disadvantages?
  • In a dynamic "Red Queen" equilibrium with creative destruction:
    • Do producers have monopoly power?
    • Do producers make economic profit in the long run?
    • How is research and development funded?
  • Schumpeter, Joseph A. 1950. Capitalism, Socialism, and Democracy. New York: Harper & Row. [E-reserves through Moodle]
    • Chapter VII. The Process of Creative Destruction
  • Parker, Jeffrey. 2016. Technological Change and Dynamic Equilibrium. Unpublished manuscript.
  • *(Optional) Baumol, William J. The Microtheory of Innovative Entrepreneurship. [E-book through Reed Library] [This is the more detailed model summarized in the previous reading. Read these chapters if you want to see a more complete exposition.]
    • Chapters 1 through 7 cover the basic model I've summarized in the manuscript above.

II.  Technological Epochs

Session 5 (February 1): The Industrial Revolution

Key Questions
  • What made the Industrial Revolution a "revolution"?
  • What were the most central innovations and how did they change society?
  • What are some examples of Rosenberg's concept of "technological interdependence" during the Industrial Revolution?

Session 6 (February 3): 1850 to 1950

Key Questions
  • Briefly consider how each of the following key innovations enabled advances in the economy beyond the industry that produced it:
    • Steel
    • Railroads
    • Electricity
    • Mass production
    • Automobiles
  • Mowery and Rosenberg (p. 1) quote Alfred North Whitehead as saying, "The greatest invention of the 19th century was the invention of the method of invention." Given that the Industrial Revolution was full of great inventions that occurred before the 19th century, what does this mean?
  • Mokyr. 1990. Lever of Riches. [E-book through Reed Library]
    • Chapter 6: The Later Nineteenth Century: 1830-1914.
  • Mowery, David C., and Nathan Rosenberg. 1998. Paths of Innovation: Technological Change in 20th-Century America, Cambridge and New York: Cambridge University Press. [E-reserves through Moodle]
    • Chapter 1: Introduction
    • Chapter 2: The Institutionalization of Innovation, 1900-90.
  • Freeman and Soete. 1997. Economics of Industrial Innovation [E-book through Reed Library]
    • Chapter 3: The Age of Electricity and Steel
    • *Chapter 4: Process Innovations in Oil and Chemicals (optional)
    • *Chapter 5: Synthetic Materials (optional)
    • Chapter 6: Mass Production and the Automobile

Session 7 (February 6): Briefing on innovation simulation

This session interrupts our regular topical analysis to introduce you to the innovation simulation that will proceed over the next few weeks. There will be a "debriefing" session after the conclusion of the simulation sometime in March.


Session 8 (February 8): The Information Technology "Revolution"

Key Questions
  • Do the currently progressing innovations in IT constitute a "revolution"? Why or why not?
  • In talking about the Industrial Revolution, Mokyr asserts (p. 82 of Level of Riches) that "per-capita income is notoriously hard to measure accurately during a period in which the economy undergoes rapid changes in the may markets operate." Do you think that this applies to information technology around the turn of the millennium? Why or why not?
  • Where on the "S-curve" of technological change do you think that IT currently stands? Are we still in the accelerating phase or in the later, leveling-off phase?
  • Mokyr, Joel. 1997. Are We Living in the Middle of an Industrial Revolution? Federal Reserve Bank of Kansas City Economic Review 82 (2):31-43.
  • Jorgenson, Dale W., and Khuong Vu. 2016. "The Impact of ICT Investment on World Economic Growth."  Telecommunications Policy 40:381-382. [E-reserves through Moodle]

III. Technology and the Economy

Session 9 (February 10): Technological change and economic growth

Key Questions
  • How do we measure economic growth?
  • Are "technological progress" and "increase in productivity" the same thing?
  • How do we measure the contribution of technology/productivity to growth at the aggregate level?
  • How much of the growth in a country's living standards results from technology/productivity?
  • How does new technology interact with investment in physical capital and human capital in the process of economic growth?
  • How strong is the connection between innovation and productivity growth at the firm level?
  • Mokyr, Joel. 1990. The Lever of Riches: Technological Creativity and Economic Progress, New York: Oxford University Press.
    • Chapter 1: Introduction
  • Maddison, Angus. 1994. Explaining the Economic Performance of Nations, 1820-1989. Chapter 2 in W.J. Baumol, R.R. Nelson, and E.N. Wolff, eds., Convergence of Productivity: Cross-National Studies and Historical Evidence, pp. 20-61. [E-reserves through Moodle]
  • Hall, Bronwyn H. 2011. Innovation and Productivity. Cambridge, Mass.: National Bureau of Economic Research. NBER Working Papers, No. 17178.

Sessions 10 and 11 (February 13 and 15): Technological change and the labor market

Key Questions
  • Does innovation destroy jobs or create jobs?
  • Does innovation raise or lower wages, and for whom?
  • Is innovation always "skill-biased"?
  • What is the interaction between technological change and increases in education? How does this interaction affect wages?
  • What determines whether innovation is skill-biased or the opposite?
  • Which jobs are most likely to be lost to automation in the coming decades?
  • What kind of education would be most valuable in avoiding job loss?

Session 12 (February 17): Technological change and international trade

Key Questions
  • How do technological differences across countries affect patterns of trade?
  • Does trade tend to increase or decrease innovation? Why?
  • Does it matter whether the trade is with countries at a similar or different level of income?

Session 13 (February 20): International diffusion of technology

Key Questions
  • Diffusion of technology is difficult to measure. How do Caselli/Coleman and Comin/Hobijn measure the movement of technology among countries?
  • What factors seem to determine the rate at which new technologies diffuse to other countries?
  • Comin/Easterly/Gong find remarkable apparent persistence in technological sophistication among nations. Which possible explanations  for this result (among those they offer or others) do you find most compelling?

Sessions 14 and 15 (February 22 and 24): Institutions, politics, and innovation

Key Questions
  • What determines which countries are successful in raising living standards through innovation or imitation?
  • Must every country innovate to be wealthy?
  • In what ways are political institutions important in determining the pattern of productivity and wealth?
  • (Note: These questions apply to both books we read this week, so you will be asked for responses to the same questions twice.)
  • Acemoglu, Daron, and James A. Robinson. 2012. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. New York: Crown Business Publishing.
    • Preface
    • Chapter 1: So Close and Yet So Different
    • Chapter 2: Theories that Don't Work
    • Chapter 3: The Making of Prosperity and Poverty
  • Taylor, Mark Zachary. 2016. The Politics of Innovation: Why Some Countries Are Better than Others at Science & Technology. New York: Oxford University Press. [Note: You cannot get the essence of this book from only a couple of chapters. The key chapters for us are 3, 7, and 8, but you cannot really understand 7 and 8 without getting at least the main ideas of 4 through 6. Skim these chapters to get the basic idea, then read 7 and 8. You can go back to the earlier chapters as necessary (and as you have time) to augment your understanding of the later chapters.]
    • Chapter 1: Introduction—The Puzzle of Cardwell's Law
    • Chapter 3: Cardwell's Law in Action
    • Skim Chapter 4: Does Technology Need Government? The Five Pillars of Innovation
    • Skim Chapter 5: "Why Nations Fail"—Capitalism, Democracy, and Decentralization
    • Skim Chapter 6: How Nations Succeed—Networks, Clusters, and Standards
    • Chapter 7: Technological Losers and Political Resistance to Innovation
    • Chapter 8: Creative Insecurity—Olson's Nemesis

IV. The Process of Innovation

Session 16 (February 27): Measuring innovation

Key Questions
  • Why is it difficult to quantify innovation?
  • What are some of the principal measures that used and, for each one, what are their advantages and disadvantages?
  • If you were to define a "perfect" measure of innovation at the firm level, what would its characteristics be? Why?
  • Patel, Pari, and Keith Pavitt. 1995. Patterns of Technological Activity: Their Measurement and Interpretation. Chapter 2 in P. Stoneman, ed., Handbook of the Economics of Innovation and Technological Change, Blackwell. (An overview of some of the traditional methods of measuring innovation.) [E-reserve through Moodle]
  • Trajtenberg, Manuel. 2002. A Penny for Your Quotes: Patent Citations and the Value of Innovations. Chapter 2 in A.B. Jaffe and M. Trajtenberg, eds., Patents, Citations, and Innovations: A Window on the Knowledge Economy. Cambridge, Mass.: MIT Press. (A discussion of one particular method: patent citations.) [E-reserve through Moodle]
  • Fischer, Timo, and Jan Leidinger. 2014. Testing Patent Value Indicators on Directly Observed Patent Value—An Empirical Analysis of Ocean Tomo Patent Auctions. Research Policy 43 (3):519-529.

Session 17 (March 1): Diffusion of innovations

Key Questions
  • What are the processes/channels by which innovation by one firm diffuses to others?
  • What determines how rapidly this diffusion occurs?

Session 18 (March 3): Kinds of innovation

Key Questions
  • What is the difference between "STI" knowledge and "DUI" knowledge?
  • Why might there be synergies between them? What does the evidence say?
  • How can users rather than producers of technological goods contribute to innovation?
  • The Rosenberg article on user innovation is old. Can you think of more recent examples or user innovation?
  • Jensen, Morten Berg, Björn Johnson, Edward Lorenz, and Bengt Åke Lundvall. 2007. Forms of Knowledge and Modes of Innovation. Research Policy 36 (5):680-693.
  • Rosenberg, Nathan. 1982. Inside the Black Box:Technology and Economics. Cambridge and New York: Cambridge University Press.
    • Chapter 6: Learning by Using [E-reserve through Moodle]

Session 19 (March 6): Users, producers, and suppliers as innovators

Key Questions
  • How did von Hippel go about determining the locus of innovation?
  • What are examples of innovations performed by producers, users, and suppliers?
  • What factors does von Hippel think determine the functional locus of innovation?
  • von Hippel, Eric. 1988. The Sources of Innovation. Oxford and New York: Oxford University Press.
    • Chapter 2: Users as Innovators
    • Chapter 3: Variations in the Functional Source of Innovation
    • Chapter 4: The Functional Source of Innovation as an Economic Phenomenon
    • Chapter 5: Testing the Relationship Between the Functional Source of Innovation and Expected Innovation Rents

Session 20 (March 8): Firm culture and innovation

Key Questions
  • How does Lester and Piore's evidence compare with the findings of Jensen et al. from last week's reading?
  • What do Lester and Piore mean by the analogy of the "cocktail party"?
  • How could the information in this book be useful to inform the organization of a startup firm?
  • Lester, Richard K., and Michael J. Piore. 2004. Innovation, The Missing Dimension. Cambridge, Mass.: Harvard University Press. [E-book through Reed Library]
    • Introduction
    • Chapter 1: Integration in Cell Phones, Blue Jeans, and Medical Devices
    • Chapter 2: Where Do Problems Come From?
    • Chapter 3: Conversation, Interpretation, and Ambiguity

Session 20.5 (March 10): Debriefing and analysis of simulation

No reading or preparation required, though analysis document will be available.

V. Science and Innovation

Session 21 (March 20): Economics of science

Key Questions
  • How does the reward structure of academic science differ from that of corporate innovation?
  • How do the incentives for choosing research projects differ between academics and corporate labs?
  • Thinking of the term literally, how do incentives for "publication" differ between academic and corporate settings?
  • What are the advantages and disadvantages of using grants to fund academic science?
  • In planning a scientific career, what are the advantages and disadvantages of academic vs. corporate science jobs?

Session 22 (March 22): Academic research and corporate innovation

Key Questions
  • How did the Bayh-Dole Act change the economics of academic science?
  • How do patents, corporate support, and other profit opportunities affect the choice of research topics for academic scientists?
    • What are the advantages and disadvantages of this from a social perspective?

VI. Intellectual Property and Innovation

Session 23 (March 24): The nature of patents

Key Questions
  • What protection do patents afford in the United States?
  • How are these protections enforced?
  • Why does the effectiveness of patent protection vary across industries and inventions?
  • How did the America Invents Act change the economics of patent law in the United States?
  • Scotchmer, Suzanne. 2004. Innovation and Incentives. Cambridge, Mass.: MIT Press. 
    • Chapters 1-3 [E-reserves through Moodle]
  • Hall, Bronwyn H., and Dietmar Harhoff. 2012. Recent Research on the Economics of Patents. Annual Review of Economics 4:541-565.
  • Bird, Robert C. 2013. "The America Invents Act, Patent Priority, and Supplemental Examination." In The Changing Face of U.S. Patent Law and its Impact on Business Strategy, edited by Daniel R. Cahoy and Linda J. Oswald, 63-81. Cheltenham, U.K.: Edward Elgar.
  • *de Saint-Georges, Matthis, and Bruno van Pottelsberghe de la Potterie. 2013. A Quality Index for Patent Systems. Research Policy 42 (3):704-719. (This paper is not required. Peruse it to see the kinds of characteristics that vary across patent systems and how some of the major countries rank.)

Session 24 (March 27): Trade secrets

Key Questions
  • What legal rights do the owners of trade secrets have to protect their secrets?
  • What kinds of innovations are best protected by secrecy and what kinds are not?

Session 25 (March 29): Patents and innovation

Key Questions
  • How important is patent protection in providing incentives for innovation?
  • Do patent barriers impede cumulative innovation?

Session 26 (March 31): Problems with the U.S. patent system

Key Questions
  • What was the goal of creating the Court of Appeals for the Federal Circuit to handle patent cases? What have been the advantages and disadvantages in practice?
  • Jaffe and Lerner emphasize the "Madey Decision" as a turning point in patent policy. What are the basic facts of that case and why is it important?
  • What are the implications of the the following characteristics of patent law?
    • Challengers to patents must file infringement cases in civil court.
    • Patents are presumed to be valid unless proved invalid.
    • Most patent cases are settled out of court and the Supreme Court rarely hears them.
  • What does the evidence say about the effectiveness of the patent office in examining patent applications?

Session 27 (April 3): Patent trolls

Key Questions
  • What are patent trolls and how do they make money?
  • What social costs are imposed by trolls?
  • What potential benefits arise from the existence of trolls?

Session 28 (April 5): Should we abolish intellectual property?

Key Questions
  • What are the merits and potential problems with Boldrin and Levine's proposal to abolish patents?
  • Do you agree with their proposal?
  • If patents are not abolished altogether, what major reforms seem most beneficial?

Session 29 (April 7): The anti-commons phenomenon

Key Questions
  • What are the key elements of the anti-commons hypothesis?
  • In what ways is there a conflict between the norms of academic science and the incentives of patent law?
  • Why is "Pasteur's quadrant" the locus of potential conflicts?
  • What are the basic facts of the "oncomouse" case and why is it important for the anti-commons debate?
  • What does the evidence say about the importance of this problem?

Session 30 (April 10): Economics of open-source software

Key Questions
  • How do open-source projects "work"?
  • What are some of the problems that these projects may encounter?
  • Why might programmers contribute code to open-source projects?
  • What does the evidence say about which motivations are most important?
  • Lerner, Josh, and Jean Tirole. 2002. Some Simple Economics of Open Source. Journal of Industrial Economics 50 (2):197-234. 
  • *Fershtman, Chaim, and Neil Gandal. 2011. A Brief Survey of the Economics of Open Source Software. London: Centre for Economic Policy Research. CEPR Discussion Papers, No. 8434. (This is not required, but has useful and more recent references for anyone interested in reading more.)

VII. Issues in Techological Change

Session 31 (April 12): Path dependence

Key Questions
  • What do we mean by "path dependence"?
  • Why is it important to the economics of technological progress?
  • What do you make of the evidence presented for and against the QWERTY keyboard as an example of path dependence?
  • What other examples of path dependence do you think are important in today's economy?
  • Arthur, W. Brian. 1994. Increasing Returns and Path Dependence in the Economy, Ann Arbor, Mich.: University of Michigan Press. [E-reserves through Moodle]
    • Chapter 1: Positive Feedbacks in the Economy
    • Chapter 2: Competing Technologies, Increasing Returns, and Lock-In by Historical Small Events
  • David, Paul A. 1985. Clio and the Economics of QWERTYAmerican Economic Review 75 (2):332-337.
  • Liebowitz, S. J., and Stephen E. Margolis. 1990. The Fable of the Keys. Journal of Law and Economics 33 (1):1-25. 

Session 32 (April 14): Networks, standards, and externalities

Key Questions
  • What is a network effect?
  • Under what conditions can a network effect lead to economic inefficiency?
  • How is the idea of a network standard related to path dependence?
  • Who should set standards, or should standards be allowed to evolve through the market?

Sessions 33 and 34 (April 17 and 19): Venture capital and the financing of innovation

Key Questions
  • Why is bank lending not appropriate for risky startups?
  • What does venture capital do for startups that traditional share ownership does not? Why is this important?
  • How do venture capitalists choose their investments? What role do patents seem to play?
  • In a world of global capital markets, why is venture capital usually quite local? What advantages and disadvantages does this pose?
  • What is "staged financing" and why is it a good idea for venture capitalists?
  • What happens at the "initial public offering" stage of startup growth?

VIII. Technology Policies and National Systems of Innovation

This final section of the course will consist largely of presentations by groups who have studied the national innovation systems of various countries. The readings below provide some basic background.