Mainstream economists argue that in a well-functioning capitalist economy, it is market coordination that determines the allocation of productive resources in response to scarcity , with business enterprises adapting to changes in market prices, subject to given technological constraints. At the same time, an increasing number of situations exist in which the market is not a very satisfactory way of governing and coordinating behaviour or allocating resources. Regulations and other non-market elements may be necessary to make market governance work, while for many activities it is, or would be, socially more desirable or economically more eYcient to use other modes of organization and governance.
This obsession with markets obscures important issues associated with the dynamics of capitalism. In particular, Wrms do not always simply adapt to a given economic environment. For example, Wrms, such as Ford in the early twentieth century and Intel in the s, adopted organizational and technological innovations that enabled them to change their economic environments and create markets by producing completely new products, processes, or services that enabled people to do things that had never before been possible, or which changed the methods of production of a very large number of Wrms and industries in most national economies.
The market is an important institution in capitalism, but it is the interplay between market processes and innovating Wrms which characterizes capitalism. Technology is given. Mainstream economics regards technology and science as exogenous, that is, a phenomenon coming from outside the economic system, possibly with an impact on the economic system, but essentially a matter for scientists and engineers rather than a business problem or something generated by or inXuenced by social and economic forces.
Innovation and technological change are key to boosting competitiveness in the region
Technology is thus at the heart of economic development and competitiveness of Wrms and countries, while mainstream economic analysis places it on the periphery important in its impact, certainly, but not the subject of economic understanding and analysis. For many decades, thinking about science and technology was dominated by a linear research-to-marketing or discovery-push model. In this model, the development, production, and marketing of new technologies followed a well-deWned and causal time sequence that originated in research activities, involved a product development phase, then led to production and eventual commercialization.
The focus in these three countries was very much on building up a strong research capability in nuclear technology and weapons systems, corresponding to the demands of the Cold War, and support for fundamental research. British policy particularly emphasized government support for basic research rather than civil industrial technology.
Parallel to this change in hypotheses about the determinants of innovation, the emphasis of science policy in the late s and s became increasingly based on a focus on the general economic environment rather than expanding the research and development system Freeman Debate in the innovation literature about the relative importance of demand-pull and discovery-push forces in stimulating innovation resolved itself around a consensus that innovation is in fact a coupling process between technical possibilities and market demands or opportunities, though at diVerent times in the life cycle of a technology or industry one or other might be the prime mover Walsh Today, the innovation process has Wnally come to be recognized as characterized by continuing interaction and feedback—emphasizing the role of design—the feedback between upstream and downstream phases and between Wrms and the wider science and technology systems e.
These models mean that innovation requires attention to be paid to linkages, especially relations between Wrms and their suppliers and users of their products and services Lundvall , ; von Hippel and collaborative research relations between Wrms and universities Nelson Ignores the organization of production. They have of course recognized that these events have signiWcant economic consequences.
Nevertheless the economics profession has adhered rather strictly to a self-imposed ordinance not to inquire too closely into what transpires inside that box. Rosenberg vii. Our purpose, instead, and that of the evolutionary or neo-Schumpeterian tradition in which we write, is to break open the black box and examine the processes by which technological change is generated and study the business, organizational, and technological capabilities of the Wrm, the processes that cause diVerential growth between Wrms and the interactions with sectoral and national institutions that support the development of these capabilities in the Wrm.
Focus on price competition. Conventional economic theory of trade is based on the idea that countries have comparative advantages in certain resources or factor endowments, such as cheap sources of energy, cheap or abundant labour and skills, cheap or abundant raw materials, or readily available capital, and therefore a comparative advantage in the production of certain goods.
Countries might thus be expected to specialize in the production and export of these goods, and import those they have less of an advantage in producing. This is based in turn on the idea that competition is essentially about the price of goods. Since the Second World War, however, an accumulation of evidence about patterns of trade does not Wt the comparative advantage theory. For example, the USA with the most expensive labour and the most capital-intensive economy was expected to export capital-intensive goods and import labour-intensive goods.
The LeontieV paradox LeontieV was the observation that, in fact, the USA was exporting goods that were more labour intensive than its imports. Furthermore, the work of various authors collected by Pavitt suggests that the UK often imported goods that were more expensive than home-produced ones because they were better in some other way e. The idea that it is technological change rather than price competition that matters most in the success and growth of Wrms and economies in capitalist economies was argued by Schumpeter see Box 1.
- Real-Time Systems in Mechatronic Applications;
- International Competitiveness and Technological Change - Oxford Scholarship.
- Organizations and Global Competitiveness.
We need not accept all the conclusions reached by Marx or Schumpeter to recognize the importance of their major insights into the process of capitalist development. An alternative to that presented in mainstream economics, on the relation between innovation and economic development, and which draws on the legacy of Schumpeter and Marx has the following characteristics:.
Capitalism as an evolutionary process. Capitalism can never be stationary, but is constantly undergoing a process of change and its dynamics are rooted within the system. Capitalism has its own logic and is self-transforming Rosenberg If we are willing to take historical analysis seriously, it makes no sense to see economic development simply in terms of Wrms adapting in response to market forces.
Instead they both evolve and change in interaction with each other, and shaping each other. The analysis needs to focus on capitalism as an evolutionary process—the variations in performance of Wrms in relation to their international competitors, the selection processes that transform Wrm diversity into structural changes in domestic and international economies and the processes that generate variation in behaviour and performance among Wrms.
Innovation as central to economic change and development.
Introduction of new or cheaper ways of making things or the introduction of wholly new things is central to economic development. Essentially these were all variants on price factors and the argument that UK goods cost more than competing products due to ineYcient production, low productivity, and high manufacturing costs. International trade theory underwent a profound change in the s Freeman This book launched him on an academic career including teaching at Harvard interrupted by a brief foray into government and business. In this book he argues that the introduction of technological and organizational innovations—new or cheaper ways of making things, or ways of making wholly new things—generates a flow of income that cannot be traced either to the contribution of labour or to the resource owners.
This rent derives from the innovating activity of the entrepreneur and disappears as soon as other capitalists learn the trick of the pioneer. On the heels of the innovators comes a swarm of imitators. The innovation is generalized through the industry, and a rash of bank borrowing and investment gives rise to a boom.
But the very generalization of the innovation removes its differential advantage. Competition forces prices down to the new cost of production; profits disappear as routine takes over. As profits decline, so does investment, leading to busts, until the next wave of innovations appears and the whole process starts again.
However, the depression of the s cried out for reasons why new innovations were failing to arrive on time. In his Business Cycles he argues that there are three kinds of business cycles—one of quite short duration, a second with a rhythm of seven to eleven years, and a third with a fifty-year duration with epoch-making innovations like the steam locomotive and automobile and he argued that all three cycles were touching their respective low-points at the same time during the depression of the s. Capitalism is seen as an economic system caught up in a process of continuous self-renewal and growth.
However, when forced to answer whether capitalism would survive, Schumpeter conceded that Marx was right in saying that it would not. For Schumpeter, the main fact about the modern corporation is that managers cannot fill the strong role played by the entrepreneurs.
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Socialism will succeed, because without the entrepreneurs to guard capitalism, a new class of socialist intellectuals and government officials eventually take over. Source : Heilbroner , Schumpeter , originally published in , Schumpeter , Philips His aim was to understand the logic of capitalist development, including the role of scientific knowledge and new machinery, but from the point of view not of the manufacturers but of the workers. He developed a critique of the economic theories of classical economists such as Adam Smith.
His book Capital examined the intrinsic tendencies of capitalism and concluded with a pessimistic outlook for the survival of the capitalist economy pessimistic, that is, from the point of view of the manufactures and owners of capital.
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Social relations are closely bound up with productive forces. In acquiring new productive forces men change their mode of production; and in changing their mode of production, in changing the way of earning their living, they change all their social relations. He argued that as organizational and technological forces of production change as factories destroy handicraft industries, for example the social relations of production and social classes change too, and conflict develops e.
Gradually, however, the classes in society and wealth distribution are rearranged.
In Capital he erects a model of pure and abstract capitalism a capitalism with no monopolies or unions which he uses to argue that even the best of all possible capitalisms is heading for disaster. This is because one particular commodity, labour power, is different from all others. While all capitalists have profits, they are also all in competition and as they try to expand their scale of production, wages tend to rise and surplus value tends to fall. Capitalists meet the threat of rising wages by introducing labour-saving machinery, throwing workers into the street. As profits shrink, more labour-saving devices are introduced, reducing profits and leading to bankruptcies and crisis.
After a crisis, there is a renewal but each renewal leads to the same ending, with more labour-saving technology and large firms absorbing the smaller ones. Source : Heilbroner , Marx  He argued that to deWne capitalism simply as an economy with private property, market exchange, and competition did not capture its essential ingredients. But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization the largest-scale unit of control for instance —competition which commands a decisive cost or quality advantage and which strikes not at the margins of proWts and the outputs of existing Wrms but at their foundations and their very lives Schumpeter Inevitability of crises in capitalism.
Capitalist accumulation is irregular and cyclical, with big structural transformations that tend to lead to crises. Marx regarded crises as a necessary expression of the main contradictions of the capitalist mode of production: the contradiction between the social character of production factory production and so on and the capitalist form of appropriation the owner of the means of production appropriates products which have been exclusively made with the labour of others. Marx argued that, in the search for proWts, capitalists reduce the applied volume of live labour by replacing it with labour-saving innovations and reduce wages to a minimum facilitated by the pressure of the industrial reserve army on the labour market leading to cycles of phases-crisis, depression, trade revival, boom, and so on.
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We will develop this theory in the next section, but before we turn to that it may be worth mentioning that it is Keynes who is best known for addressing the problem of business cycles. While Schumpeter started out as a neoclassical economist who broke with the tradition in two important ways—in developing a theory of economic development and in giving a key role to technological change in his theory—Keynes see Box 1.
He attacked in particular the view of mainstream economics that the proper role of state intervention is laissez-faire, arguing that state intervention could be used to ensure the full utilization of productive resources so that capitalism could work.