Technology and economic growth

Technology and economic growth
Economists have become accustomed to associate long-term economic growth with
technological progress; it is deeply embedded in the main message of the Solow-
inspired growth models, which treated technological change as exogenous, and even
more so in the endogenous growth models.
1
An earlier growth literature regarded tech-
nology as a deus ex machina that somehow made productivity grow miraculously a little
each year. The more modern literature views it as being produced within the system by
the rational and purposeful application of research and development and the growth of
complementary human and physical capital. The historical reality inevitably finds itself
somewhere in between those two poles, and what is interesting above all is the shift of
the economies of the West in that continuum. Whatever the case may be, technology is
central to the dynamic of the economy in the past two centuries. Many scholars believe
that people are inherently innovative and that if only the circumstances are right (the
exact nature of these conditions differs from scholar to scholar), technological progress
is almost guaranteed. This somewhat heroic assumption is shared by scholars as diverse
as Robert Lucas and Eric L. Jones, yet it seems at variance with the historical record
before the Industrial Revolution. That record is that despite many significant, even path-
breaking innovations in many societies since the start of written history, it has not really
been a major factor in economic growth, such as it was, before the Industrial Revolution.
Instead, economic historians studying earlier periods have come to realize that tech-
nology was less important than institutional change in explaining pre-modern episodes
of economic growth. It is an easy exercise to point to the many virtues of “Smithian
Growth”, the increase in economic output due to commercial progress (as opposed to
technological progress). Better markets, in which agents could specialize according to
their comparative advantage and take full advantage of economies of scale, and in which
enhanced competition would stimulate allocative efficiency and the adoption of best-
practice technology could generate growth sustainable for decades and even centuries.
Even with no changes whatsoever in technology, economies can grow in the presence
of peace, law and order, improved communications and trust, the introduction of money
and credit, enforceable and secure property rights, and similar institutional improve-
ments
[Greif (2003)]
. Similarly, better institutions can lead to improved allocation of
resources: law and order and improved security can and will encourage productive in-
vestment, reduce the waste of talent on rent-seeking and the manipulation of power for
the purposes of redistribution
[North (1990), Shleifer and Vishny (1998) and Baumol
(2002)]
. Tolerance for productive “service minorities” who lubricated the wheels of
commerce (Syrians, Jews and many others) played important roles in the emergence
of commerce and credit. Economic history before 1750 is primarily about this kind
of growth. The wealth of Imperial Rome and the flourishing of the medieval Italian
and Flemish cities, to pick just a few examples, were based above all on commercial
progress, sometimes referred to as “Smithian Growth”.
2
It is usually assumed by economists that sustained economic growth is a recent
phenomenon simply because if modern rates of growth had been sustained, a simple
backward projection suggests that income in 1500 or in 1000 would have been absurdly
low.
3
Clearly, growth at the rates we have gotten used to in the twentieth century are
unthinkable in the long run. Yet it is equally implausible to think that just because
growth was slower, there was
none
of it – after all, there is a lot of time in the long
run. One does not have to fully subscribe to Graeme Snooks’ use of Domesday book
and Gregory King’s numbers 600 years later to accept his view that by 1688 the British
economy was very different indeed from what it had been at the time of William the
Conqueror. Adam Smith had no doubt that “the annual produce of the land and labour
of England ...is certainly much greater than it was a
little more than century ago at the
restoration of Charles II (1660)
. . . and [it] was certainly much greater at the restora-
tion than we can suppose it to have been a hundred years before”
[Smith (1976 [1776],
pp. 365–366)]
.
4
On the eve of the Industrial Revolution, large parts of Europe and some
parts of Asia were enjoying a standard of living that had not been experienced ever be-
fore, in terms of the quantity, quality, and variety of consumption.
5
Pre-1750 growth
was primarily based on Smithian and Northian effects: gains from trade and more ef-

ficient allocations due to institutional changes. The Industrial Revolution, then, can be
regarded not as the beginnings of growth altogether but as the time at which technol-
ogy began to assume an ever-increasing weight in the generation of growth and when
economic growth accelerated dramatically. An average growth rate of 0.15–0.20% per
annum, with high year-to-year variation and frequent setbacks was replaced by a much
more steady growth rate of 1.5% per annum and better. Big differences in degree here
are tantamount to differences in quality. This transition should not be confused with the
demographic transition, which came later and whose relationship with technological
progress is complex and poorly understood.
6
This is not to say that before the Industrial Revolution technology was altogether
unimportant in its impact on growth. Medieval Europe was an innovative society which
invented many important things (including the mechanical clock, movable type, gun-
powder, spectacles, iron-casting) and adopted many more inventions from other soci-
eties (paper, navigational instruments, Arabic numerals, the lateen sail, wind power).
Yet, when all is said and done, it is hard to argue that the impact of these inventions on
the growth of GDP or some other measure of aggregate output were all that large. The
majority of the labor force was still employed in agriculture where progress was exceed-
ingly slow (even if over the long centuries between 800 and 1300 the three-field system
and the growing efficiency at which livestock was employed did produce considerable
productivity gains).
Moreover, it is true for the pre-1750 era – as it was a fortiori after 1750 – that tech-
nology itself interacted with Smithian growth because on balance improved technology
made the expansion of trade possible – above all maritime technology in all its many
facets, but also better transport over land and rivers, better military technology to defea
pirates, better knowledge of remote lands, and the growing ability to communicate with
strangers. A decomposition of growth into a technology component and a trade-and-
institutions component must take into account such interactions.
All the same, the main reason why technological progress was at best an also-ran
in the explanation of economic growth before 1750 is that even the best and bright-
est mechanics, farmers, and chemists – to pick three examples – knew relatively little
of what could be known about the fields of knowledge they sought to apply. The pre-
1750 world produced, and produced well. It made many pathbreaking inventions. But
it was a world of engineering without mechanics, iron-making without metallurgy,
farming without soil science, mining without geology, water-power without hydraulics,
dye-making without organic chemistry, and medical practice without microbiology and
immunology. Not enough was known to generate sustained economic growth based on
technological change.
7
Such statements are of course to some extent provocative and
perhaps even irresponsible: how can we define “what could be known” in any mean-
ingful sense? Who knew “that which was known” and how did they use it? In what
follows I shall propose a simple framework to understand how and why new technology
emerges and how it was limited before the eighteenth century and then liberated from
its constraints. I will then argue that “technological modernity” means an economy in
which
sustained
technological progress is the primary engine of growth and that it de-
pended on the persistence of technological progress. What is needed is a good theory of
the kind of factors that make for sustained technological progress.
Such a theory needs to stress the basic complementarity between the creation and
diffusion of new technology and the institutional factors that allowed this knowledge
to be applied, become profitable, and lead to economic expansion. These institutional
factors – such as the establishment of intellectual property rights, the supply of venture
capital, the operation of well-functioning commodity and labor markets, and the pro-
tection of innovators and entrepreneurs against a technological reaction – are of central
importance but they have been discussed elsewhere
[Mokyr (1998a, 2003b)]
and in what
follows the focus will be on the growth of knowledge itself. All the same, it should be
kept in mind that growth cannot result from a growth of knowledge
alone
. It needs to
occur in an environment in which knowledge can be put to wor
A historical theory of technology
Technology is knowledge. Knowledge, as is well known, has always been a difficult
concept for standard economics to handle. It is at the core of modern economic growth
but many characteristics make it slippery to handle. Knowledge is above all a non-
rivalrous good, that is, sharing it with another person does not diminish the knowledge
of the original owner. It is not quite non-excludable, but clearly excludability is costly
and for many types of knowledge exclusion costs are infinite. It is produced in the
system, but the motivation of its producers are rarely purely economic. Indeed, the pro-
ducers of scientific knowledge almost never collect but a tiny fraction of the surplus they
produce for society. It is the mother of all spillover effects. A more fruitful approach
than to view knowledge as an odd sort of good, pioneered by

Olsson (2000, 2003)
,is
to model knowledge as a set, and to analyze its growth in terms of the properties of
existing knowledge rather than looking at the motivations of individual agents.
The basic unit of analysis of technology is the “technique”. A technique is a set of
instructions, much like a cookbook recipe, on how to produce goods and services. As
such, it is better defined than the concept of a stock of “ideas” that some scholars prefer
[e.g.,
Charles Jones 2001
]. The entire set of feasible techniques that each society has at
its disposal is bound by the isoquant. Each point on or above the isoquant in principle
represents a set of instructions on how to combine various ingredients in some way
to produce a good or service that society wants. While technology often depends on
artifacts, the artifacts are not the same as the technique and what defines the technique
is the content of the instructions. Thus, a piano is an artifact, but what is done with
it depends on the technique used by the pianist, the tuner, or the movers. Society’s
production possibilities are bound by what society knows. This knowledge includes the
knowledge of designing and building artefacts and using them.
But who is “society”? The only sensible way of defining knowledge at a social level is
as the
union
of all the sets of individual knowledge. This definition is consistent with our
intuitive notion of the concept of an invention or a discovery – at first only
one
person
has it, but once that happens, society as a whole feels it has acquired it. Knowledge
can be stored in external storage devices such as books, drawings, and artifacts but
such knowledge is meaningless unless it can be transferred to an actual person. Such a
definition immediately requires a further elaboration: if one person possesses a certain
knowledge, how costly is it for others to acquire it? This question, indeed is at the heart
of the idea of a “technological society”. Knowledge is shared and distributed, and its
transmission through learning is essential for such a society to make effective use of it.
Between the two extremes of a society in which all knowledge acquired by one member
is “episodic” and not communicated to any other member, and the other extreme in
which all knowledge is shared instantaneously to all members through some monstrous
network, there was a reality of partial and costly sharing and access. But these costs were
not historically invariant, and the changes in them are one of the keys to technological
change.
Progress in exploiting the existing stock of knowledge will depend first and foremost
on the efficiency and cost of access to knowledge. Although knowledge is a public good
in the sense that the consumption of one does not reduce that of others, the private costs
of acquiring it are not negligible, in terms of time, effort, and often other real resources
as well
[Reiter (1992, p. 3)]
. Access costs include the costs of finding out whether an
answer to a question actually exists, if so, where it can be found, then paying the cost
of acquiring it, and finally verifying the correctness of the knowledge. When the ac-
cess costs become very high, it could be said in the limit that social knowledge has
disappeared.
8
Language, mathematical symbols, diagrams, and physical models are all
means of reducing access costs. Shared symbols may not always correspond precisely
with the things they signify, as postmodern critics believe, but as long as they are shared
they reduce the costs of accessing knowledge held by another person or storage device.
The other component of access cost, tightness, is largely determined by the way soci-
ety deal with authority and trust. It is clear that propositional knowledge is always and
everywhere far larger that any single individual can know. The concepts of trust and
authority are therefore central to the role that propositional knowledge can play in soci-
ety, and how it is organized is central to the economic impact of useful knowledge. In
the scientific world of the late seventeenth and eighteenth centuries, a network of trust
and verification emerged in the West that seems to have stood the test of time. It is well
described by
Polanyi (1962, pp. 216–222)
: the space of useful knowledge is divided in
small neighboring units. If an individual B is surrounded by neighbors A and C who
can verify his work, and C is similarly surrounded by B and D and so on, the world of
useful knowledge reaches an equilibrium in which science, as a whole, can be trusted
even by those who are not themselves part of it.
The determinants of these access costs are both institutional and technological: “open
knowledge” societies, in which new discoveries are published as soon as they are made
and in which new inventions are placed in the public domain through the patenting sys-
tem (even if their application may be legally restricted), are societies in which access
costs will be lower than in societies in which the knowledge is kept secret or con-
fined to a small and closed group of insiders whether they are priests, philosophers, or
mandarins. Economies that enjoyed a high level of commerce and mobility were sub-

ject to knowledge through the migration of skilled workmen and the opportunities to
imitate and reverse-engineer new techniques. As access costs fell in the early modern
period, it became more difficult to maintain intellectual property rights through high
access costs, and new institutions that provided incentives for innovators became neces-
sary, above all the patent system emerging in the late fifteenth and sixteenth centuries.
The printing press clearly was one of the most significant access-cost-reducing inven
tions of the historical past.
9
The nature of the books printed, such as topic, language,
and accessibility, played an equally central role in their reduction. People normally ac-
quired knowledge and skills vertically, but also from one another through imitation.
Postdoctoral students in laboratory settings full-well realize the differences between
the acquisition of codifiable knowledge and the acquisition of tacit knowledge through
imitation and a certain
je ne sais quoi
we call experience.
10
Improvements in trans-
port and communication technology, that made people more mobile and speeded up the
movement of mail and newspapers also reduced access costs in the second half of the
eighteenth century, a movement that continued through the nineteenth century and has
not stopped since.
Techniques constitute what I have called
prescriptive
knowledge – like any recipe
they essentially comprise instructions that allow people to “produce”, that is, to exploit
natural phenomena and regularities in order to improve human material welfare.
11
The
fundamental unit of set of prescriptive knowledge has the form of a set of do-loops
(often of great complexity, with many if–then statements), describing the “hows” of
what we call production.
There are two preliminary observations we need to point out in this context. One is
that it is impossible to specify explicitly the entire content of a set of instructions. Even
a simple cooking recipe contains a great deal of assumptions that the person executing
the technique is supposed to know: how much a cup is, when water is boiling, and so on.
For that reason, the person executing a technique is supposed to have certain knowledge
that I shall call
competence
to distinguish it from the knowledge involved in writing
the instructions for the first time (that is, actually making the invention). Competence
consists of the knowledge of how to read, interpret, and execute the instructions in the
technique and the supplemental tacit knowledge that cannot be fully written down in
the technique’s codified instructions. There is a continuum between the implicit under-
standings and clever tricks that make a technique work we call tacit knowledge, and
he minor improvements and refinements introduced subsequent to invention that in-
volve actual adjustments in the explicit instructions. The latter would be more properly
thought off as microinventions, but a sharp distinction between them would be arbitrary.
All the same, “competence” and “knowledge” are no less different than the differences
in skills needed to play the Hammerklavier sonata and those needed to compose it. One
of the most interesting variables to observe is the ratio between the knowledge that goes
into the first formulation of the technique in question (invention) and the competence
needed to actually carry out the technique. As we shall see, it is this ratio around which
the importance of human capital in economic growth will pivot.
The second observation is the notion that every technique, because it involves the
manipulation and harnessing of natural regularities, requires an
epistemic base,
that is,
a knowledge of nature on which it is based. I will call this type of knowledge
proposi-
tional
knowledge, since it contains a set of propositions about the physical world. The
distinction between propositional and prescriptive knowledge seems obvious: the planet
Neptune and the structure of DNA were not “invented”; they were already there prior to
discovery, whether we knew it or not. The same cannot be said about diesel engines or
aspartame.
Polanyi (1962)
notes that the distinction is recognized by patent law, which
permits the patenting of inventions (additions to prescriptive knowledge) but not of dis-
coveries (additions to propositional knowledge). He points out that the difference boils
down to observing that prescriptive knowledge can be “right or wrong” whereas “ac-
tion can only be successful or unsuccessful” (p. 175). Purists will object that “right”
and “wrong” are judgments based on socially constructed criteria, and that “success-
ful” needs to be defined in a context, depending on the objective function that is being
maximized.

The two sets of propositional and prescriptive knowledge together form the set of
useful knowledge in society. These sets satisfy the conditions set out by
Olsson (2000)
for his “idea space”. Specifically, the sets are infinite, closed, and bounded. They also
are subsets of much larger sets, the sets of knowable knowledge. At each point of time,
the actual sets describe what a society knows and consequently what it can do. There
also is a more complex set of characteristics that connect the knowledge at time
t
with
that in the next period. Knowledge is mostly cumulative and evolutionary. The “mostly”
is added because it is not wholly cumulative (knowledge
can
be lost, though this has
become increasingly rare) and its evolutionary features are more complex than can be
dealt with here
[Mokyr (2003a)
There are and have been some techniques, invented accidentally or through trial
and error, about whose modus operandi next to nothing was known except that
they worked. We can call these techniques
singleton
techniques (since their do-
main is a singleton).
2. Some techniques require a minimum epistemic base larger than a singleton for
a working technique to emerge. It is hard to imagine the emergence of such
techniques as nuclear resonance imaging or computer assisted design software
in any society from serendipitous finds or trial-and-error methods, without the
designers having a clue of why and how they worked.
3. The actual epistemic base is equal to or larger than the minimum epistemic base.
It is never bound from above in the sense that the amount that can be known about
the natural phenomena that govern a technique is infinite. In a certain sense, we
can view the epistemic base at any given time much like a fixed factor in a pro-
duction function. As long as it does not change, it imposes concavity and possibly
even an upper bound on innovation and improvement. On the other hand, beyond
a certain point, the incremental effect of widening the actual epistemic base on
the productivity growth of a given technique will run into diminishing returns
and eventually be limited.
4. There is no requirement that the epistemic base be “true” or “correct” in any
sense. In any event, the only significance of such a statement would be that it
conforms to contemporary beliefs about nature (which may well be refuted by
future generations). Thus the humoral theory of disease, now generally rejected,
formed the epistemic base of medical techniques for many centuries. At the same
time, some epistemic bases can be more effective than others in the sense that
techniques based on them perform “better” by some agree-upon criterion. “Ef-
fective knowledge” does not mean “true knowledge” – many techniques were
based on knowledge we no longer accept yet were deployed for long periods
with considerable success.
13
5. The wider the actual epistemic base supporting a technique relative to the min-
imum one, the more likely an invention is to occur, ceteris paribus. A wider
epistemic base means that it is less likely for a researcher to enter a blind alley
and to spend resources in trying to create something that cannot work.
14
Thus,
a wider epistemic base reduces the costs of research and development and in-
creases the likelihood of success
There are and have been some techniques, invented accidentally or through trial
and error, about whose modus operandi next to nothing was known except that
they worked. We can call these techniques
singleton
techniques (since their do-
main is a singleton).
2. Some techniques require a minimum epistemic base larger than a singleton for
a working technique to emerge. It is hard to imagine the emergence of such
techniques as nuclear resonance imaging or computer assisted design software
in any society from serendipitous finds or trial-and-error methods, without the
designers having a clue of why and how they worked.
3. The actual epistemic base is equal to or larger than the minimum epistemic base.
It is never bound from above in the sense that the amount that can be known about
the natural phenomena that govern a technique is infinite. In a certain sense, we
can view the epistemic base at any given time much like a fixed factor in a pro-
duction function. As long as it does not change, it imposes concavity and possibly
even an upper bound on innovation and improvement. On the other hand, beyond
a certain point, the incremental effect of widening the actual epistemic base on
the productivity growth of a given technique will run into diminishing returns
and eventually be limited.

4. There is no requirement that the epistemic base be “true” or “correct” in any
sense. In any event, the only significance of such a statement would be that it
conforms to contemporary beliefs about nature (which may well be refuted by
future generations). Thus the humoral theory of disease, now generally rejected,
formed the epistemic base of medical techniques for many centuries. At the same
time, some epistemic bases can be more effective than others in the sense that
techniques based on them perform “better” by some agree-upon criterion. “Ef-
fective knowledge” does not mean “true knowledge” – many techniques were
based on knowledge we no longer accept yet were deployed for long periods
with considerable success.
13
5. The wider the actual epistemic base supporting a technique relative to the min-
imum one, the more likely an invention is to occur, ceteris paribus. A wider
epistemic base means that it is less likely for a researcher to enter a blind alley
and to spend resources in trying to create something that cannot work.
14
Thus,
a wider epistemic base reduces the costs of research and development and in-
creases the likelihood of success
6. The wider the epistemic base, the more likely an existing technique is to be im-
proved, adapted, and refined through subsequent microinventions. The more is
known about the principles of a technique, the lower will be the costs of de-
velopment and improvement. This is above all because the more is known
why
something works, the better the inventor can tweak its parameters to optimize and
debug the technique. Furthermore, because invention so often consists of analogy
with or the recombination of existing techniques, lower access cost to the catalog
of existing techniques (which is part of propositional knowledge) stimulates and
streamlines successful invention.
7. Historically, the epistemic bases in existence during the early stages of an inven-
tion are usually quite narrow at first, but in the last two centuries have often been
enlarged following the appearance of the invention, and sometimes directly on
account of the invention.
8. Both propositional and prescriptive knowledge can be “tight” or “untight”. Tight-
ness measures the degree of confidence and consensualness of a piece of knowl-
edge: how sure are people that the knowledge is “true” or that the technique
“works”? The tighter a piece of propositional knowledge, the lower are the costs
of verification and the more likely a technique based on it is to be adopted, and
vice versa. Of course, tightness is correlated with effectiveness: a laser printer
works better than a dot matrix, and there can be little dispute about the charac-
teristics here. If two techniques are based on incompatible epistemic bases, the
one that works better will be chosen and the knowledge on which it is based will
be judged to be more effective. But for much of history, such testing turned out
to be difficult to do and propositional knowledge was more often selected on the
basis of authority and tradition that effectiveness. Even today, for many medical
and farming techniques it is often difficult to observe what works and what does
not work as well without careful statistical analysis or experimentation.
9. It is not essential that the person writing the instructions actually knows himself
everything that is in the epistemic base. Even if very few individuals in a society
know quantum mechanics, the practical fruits of the insights of this knowledge
to technology may still be available just as if everyone had been taught advanced
physics. It is a fortiori true that the people carrying out a set of instructions do
not know how and why these instructions work, and what the support for them
is in propositional knowledge. No doctor prescribing nor any patient taking an
aspirin will need to study the biochemical properties of prostaglandins, though
such knowledge may be essential for those scientists working on a design of
an analgesic with, say, fewer side effects. What counts is collective knowledge
and the cost of access as discussed above. It is even less necessary for the people
actually carrying out the technique to possess the knowledge on which it is based,
and normally this is not the case.
10. The existence of a minimum epistemic base is a necessary but insufficient con-
dition for a technique to emerge. A society may well accumulate a great deal
of propositional knowledge that is never translated into new and improved tec

Technology and economic growth

Technology and economic growth

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