Lecture 1-4/ references (book and articles) and discussions in classes
Lecture 1: Divergence/ Convergence
Innovation = commercial renewal
Imitation = learning from each other
Sustainable:
- innovate
- respond to shocks
- socially inclusive (inequality)
- environment sustainability
Convergence/divergence:
- Regional income inequality
- Inequality within a region: Silicon Valley: the global hub of tech giants. But also
having the highest income inequality. Silicon Valley is good in innovation but not in
social inclusiveness. Innovation is good but not for all.
- Inequality between regions: example differences in GDP per head in EU: in growth
per head in EU you can discuss whether there is convergence or divergence
between regions.
Theories:
1. Conventional neo-classical theory (predict convergence)
- homo economicus: Robert Slow, nobel prize
- unbounded rationality
- complete focus on market prices: sow the the market is powerful
- constant returns to scale
- technology is public good (non-rival and non-excludable; everybody is well
informed. Everybody has the information to make a good decision. Technology is
higher in poor countries because they can copy due to the accessibility.
Due to immigrants and people moving all the time: technological development spread.
Knowledge is spreading. Also due to the internet. So the theory that knowledge is a public
good is a good theory.
Income of a region depends on three factors:
- capital (investments and net capital flows: form outside or growth)
- labour (population growth and net migration)
- technology not specified (exogenous)
,Why convergence?
- 1. declining marginal productivity of capital: (in poor countries it’s more efficient
to increase capital. In rich regions increasing the capital leads to small change in
output).
- 2. labour and capital flows in opposite directions (Borts & Stein 1964):
- labour from poor to rich regions, due to relatively higher labour returns (wages):
capital will leave the rich country’s (output)
, - capital from rich to poor regions, due to relatively higher capital returns (output)
- due to mobility of people and capital, returns on capital and labour equalize: regional
convergence.
- 3. Technology is fully available and accessible: public good
- difussion of technology from rich to poor regions
- technology contributes to regional convergence
- technology exogenous factor: not explained (in the figure above ‘Growth T’ is not
explained. They don’t make it part of their theory) The question why technology
grows is not answered.
(convergence due to technology diffuse).
Policy implications:
- the free market will lower regional income inequality
- remove all obstacles of full mobility of capital and labour (nobody can dominate the
market because you have no innovation: buyers will buy it anyhow; Apple).
- Technology is a public good: market failure: policy intervention needed to secure
incentives for new knowledge creation through the patent system (through the
granting of intellectual monopoly rights for some time), or providing R&D subsidies
(because everybody can copy and imitate). When Corona started the state paid
xtreme much money: because due to uncertainties businesses didn’t do it by
themselves.
2. Evolutionary growth theory
- Homo psychologicus; Herbert Simon Nobel Prize
- no ‘optimizing’ but ‘satisficing’ behavior: actors try to optimize as much as they can,
but they are limited (for example: prices). You can never make an optimized decision,
because you are not fully informed (knowledge is no public good) and have limited
absorptive capacity.
- actors fall back on tried and trusted ‘heuristics’: rules of thumbs
- boudend rationality
- access to limited information (despite internet: it looks to your search history)
- limited absorptive capacity to understand and process information (physics books
for me is difficult to understand)
Role of knowledge:
- knowledge is not public good: it accumulates over time within individuals and firms,
through learning-by-doing
- absorptive capacity: provides opportunities but also set limits to learning and
innovation
- creation and diffusion of knowledge is imperfect: search for new knowledge is
bounded: localized learning (they rely on history: steel companies know everything
about steel but not on mobile phones: it’s too risky to something different without
knowledge)
- especially diffusion of tacit knowledge (‘you have to do it’) (Polyani 1958, 1966): ‘we
can know more than we can tell’: hard to communicate and difficult to transfer, like
how to bike:
‘You can’t be a specialist in everything but only in a few things’
Increasing returns
, - knowledge does not travel well between regions: geographical distance is a barrier to
its diffusion
- history matters: path dependence, due to self-
reinforcing forces: increasing returns (Arthur 1994)
-technologies: example of QWERTY keyboard: high switching costs (David
1985): lock-in
-regions: example of Silicon Valley: increasing returns, due to agglomeration
forces (Arthur 1989)
Everything goes to the same place. Labour and capital will leave poor regions (opposite to
neo-classic theory). History matters: things in the past it’s not lost but you can expand it
further.
Extra: Kuznets curve: development countries will diverge and after that there will be
convergence because technology spreads. Criticized: no convergence in rich countries due
to neoliberal policies.
Why divergence?
- regions accumulate knowledge over time: persistent technology gaps between rich
and poor (Fagerberg and Verspagen 1996): rich become richer, poor cannot catch
up: regional divergence
- labour and capital flows in the same direction:
Lecture 1: Divergence/ Convergence
Innovation = commercial renewal
Imitation = learning from each other
Sustainable:
- innovate
- respond to shocks
- socially inclusive (inequality)
- environment sustainability
Convergence/divergence:
- Regional income inequality
- Inequality within a region: Silicon Valley: the global hub of tech giants. But also
having the highest income inequality. Silicon Valley is good in innovation but not in
social inclusiveness. Innovation is good but not for all.
- Inequality between regions: example differences in GDP per head in EU: in growth
per head in EU you can discuss whether there is convergence or divergence
between regions.
Theories:
1. Conventional neo-classical theory (predict convergence)
- homo economicus: Robert Slow, nobel prize
- unbounded rationality
- complete focus on market prices: sow the the market is powerful
- constant returns to scale
- technology is public good (non-rival and non-excludable; everybody is well
informed. Everybody has the information to make a good decision. Technology is
higher in poor countries because they can copy due to the accessibility.
Due to immigrants and people moving all the time: technological development spread.
Knowledge is spreading. Also due to the internet. So the theory that knowledge is a public
good is a good theory.
Income of a region depends on three factors:
- capital (investments and net capital flows: form outside or growth)
- labour (population growth and net migration)
- technology not specified (exogenous)
,Why convergence?
- 1. declining marginal productivity of capital: (in poor countries it’s more efficient
to increase capital. In rich regions increasing the capital leads to small change in
output).
- 2. labour and capital flows in opposite directions (Borts & Stein 1964):
- labour from poor to rich regions, due to relatively higher labour returns (wages):
capital will leave the rich country’s (output)
, - capital from rich to poor regions, due to relatively higher capital returns (output)
- due to mobility of people and capital, returns on capital and labour equalize: regional
convergence.
- 3. Technology is fully available and accessible: public good
- difussion of technology from rich to poor regions
- technology contributes to regional convergence
- technology exogenous factor: not explained (in the figure above ‘Growth T’ is not
explained. They don’t make it part of their theory) The question why technology
grows is not answered.
(convergence due to technology diffuse).
Policy implications:
- the free market will lower regional income inequality
- remove all obstacles of full mobility of capital and labour (nobody can dominate the
market because you have no innovation: buyers will buy it anyhow; Apple).
- Technology is a public good: market failure: policy intervention needed to secure
incentives for new knowledge creation through the patent system (through the
granting of intellectual monopoly rights for some time), or providing R&D subsidies
(because everybody can copy and imitate). When Corona started the state paid
xtreme much money: because due to uncertainties businesses didn’t do it by
themselves.
2. Evolutionary growth theory
- Homo psychologicus; Herbert Simon Nobel Prize
- no ‘optimizing’ but ‘satisficing’ behavior: actors try to optimize as much as they can,
but they are limited (for example: prices). You can never make an optimized decision,
because you are not fully informed (knowledge is no public good) and have limited
absorptive capacity.
- actors fall back on tried and trusted ‘heuristics’: rules of thumbs
- boudend rationality
- access to limited information (despite internet: it looks to your search history)
- limited absorptive capacity to understand and process information (physics books
for me is difficult to understand)
Role of knowledge:
- knowledge is not public good: it accumulates over time within individuals and firms,
through learning-by-doing
- absorptive capacity: provides opportunities but also set limits to learning and
innovation
- creation and diffusion of knowledge is imperfect: search for new knowledge is
bounded: localized learning (they rely on history: steel companies know everything
about steel but not on mobile phones: it’s too risky to something different without
knowledge)
- especially diffusion of tacit knowledge (‘you have to do it’) (Polyani 1958, 1966): ‘we
can know more than we can tell’: hard to communicate and difficult to transfer, like
how to bike:
‘You can’t be a specialist in everything but only in a few things’
Increasing returns
, - knowledge does not travel well between regions: geographical distance is a barrier to
its diffusion
- history matters: path dependence, due to self-
reinforcing forces: increasing returns (Arthur 1994)
-technologies: example of QWERTY keyboard: high switching costs (David
1985): lock-in
-regions: example of Silicon Valley: increasing returns, due to agglomeration
forces (Arthur 1989)
Everything goes to the same place. Labour and capital will leave poor regions (opposite to
neo-classic theory). History matters: things in the past it’s not lost but you can expand it
further.
Extra: Kuznets curve: development countries will diverge and after that there will be
convergence because technology spreads. Criticized: no convergence in rich countries due
to neoliberal policies.
Why divergence?
- regions accumulate knowledge over time: persistent technology gaps between rich
and poor (Fagerberg and Verspagen 1996): rich become richer, poor cannot catch
up: regional divergence
- labour and capital flows in the same direction:
