Key Messages from Prof Richard Lipsey's Guest Lecture presented at the Treasury on 29 October 2002.
Prof Richard Lipsey
Simon Fraser University, Canada
Based on historical evidence, the maximum sustainable growth in per capita is perhaps 2% per annum. But because of compounding, even this amount can transform people's lives. Moreover, growth in per capita income understates the effect of economic change because it leaves out the effect of technology. For instance, technologies which we have access to, such as international travel, household appliances, and safe food, would have astounded the Victorians.
Technological change can take the form of millions of incremental changes, or huge technological shocks, referred to as 'General Purpose Technologies' (GPTs). There have been perhaps 20-25 GPTs in the last 10,000 years. Examples include the domestication of plants, the invention of writing, the invention of the electric dynamo, and the invention of the computer. The appearance of a GPT has three stages: the introduction of the technology itself; the evolution of infrastructure, policies, education, complementary technologies to support the GPT; and a period where the benefits from the new technology are reaped. This process can take a long time: for instance the electric dynamo was invented in the 1880, but the development of supporting structures such as the assembly line took several decades, so that the electricity-derived boom did not begin until after World War II. Often it is not the technology itself but the flow of benefits that are really important. The main benefit of replacing electricity by steam, for instance, was the opportunity to reorganize factories around unit electric power sources.
How the West Grew Rich
Six necessary conditions:
- Freedom to innovate.
- Adoption of technologies via market rather than political decisions.
- Rewards to innovators through property rights and patents.
- Pluralism, so that change could not be prevented. When the authorities in southern Italy clamped down on science after Galileo, science moved to northern Europe.
- Rule of law - and an evolving system like that of the English common law tradition rather than a fixed, codified system.
- Free scientific inquiry.
Could the West grow poor?
Yes it could, if conditions 1-6 above were reversed. These conditions could indeed be reversed if, for instance, increased reliance on funding by the private sector restricts free inquiry.
Does the world need more growth?
Yes, if developing countries are to attain living standards comparable to those of developed countries.
Yes, to reduce the environmental impact of economic activity: growth-inducing technical change typically permits production of the same output for fewer inputs (though public policy is still important).
Need to pay attention to both the creation and the redistribution of wealth.
Need to understand and accept change: the success of the West rests not on any one technology, but in a capacity to innovate.
Keep rules and regulations flexible.
Accept foreign direct investment.
Government action. Such efforts do not always fail. The US government has had particular success: for instance, early infusions of public money were instrumental to the development of the software industry and the green revolution.