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Chapter 8: The Role of Technology in Growth
At the beginning of this chapter, David Weil discusses the role of technologies in increasing economic growth and productivity. In particular, he refers to the Cobb-Douglas production function, which involves such variables as productivity, physical capital, and human capital. According to the author, technology enables an organization to overcome the barriers posed by diminishing returns.
Apart from that, David Weil focuses on the creation of technology. He argues that before the second half of the nineteenth century, industrial development was shaped by the efforts of individual inventors who often did not have formal scientific training. However, in later years, the creation of technologies began to be driven by governmental organizations or large corporations. Furthermore, one should take into account that R8D efforts require significant investments that cannot be afforded by separate individuals.
Additionally, David Weil discusses the transfer of technologies. One of his main arguments is that the ideas which underlie new technologies are non-excludable. In other words, it is difficult for an inventor to prevent other people from recreating the technology and using it for commercial purposes. The managers of companies consider several criteria when deciding whether it is necessary to invest in the development of new technology. They pay attention to the following issues:
- the competitive advantage that an invention can yield;
- the number of customers who can purchase the product based on technology;
- the period during which the firm will have a competitive edge, and
- various uncertainties that are related to the project.
Moreover, this chapter presents a discussion of such a concept as creative destruction introduced by Joseph Schumpeter. This notion is used to describe a situation when the arrival of new technologies harms both individuals and groups. For example, the industrial revolution displaced many workers in the nineteenth century.
Furthermore, much attention is paid to the importance of patents that are supposed to protect the rights of inventors. The validity of the patent depends on the novelty of the technology and its non-obviousness. The author closely examines various problems related to the existing patent system. For instance, one can mention firms that patent non-existent technologies and later sue companies that produce commercially successful products. This is one of the reasons why technology companies have to spend millions on litigation. Moreover, sometimes commercial organizations choose not to patent their inventions. The most famous example is the formula for Coca-Cola.
Finally, this chapter is aimed at examining the barriers that obstruct the transfer of technologies from one country to another. In particular, one can speak about the differences in human and physical capital. For instance, the production of magnetic levitation trains will not bring dramatic improvements to a country in which people rely mostly on buses or bicycles. Apart from that, it is important to remember such a barrier as tacit knowledge. In this context, this term can be defined as the experience that is derived from many years of practice, but not from formal training. In turn, the transfer of technologies to less advanced countries can be obstructed because local engineers lack this tacit knowledge.
On the whole, this chapter throws light on the close relationship between technologies and economic development. Moreover, it enables the readers to understand the barriers that limit the transfer and development of technologies. These are the main aspects that can be identified.
Chapter 10: Efficiency
In this chapter, David Weil examines such measure of productivity as efficiency. One of the arguments that the author makes is that the differences in economic performance cannot be attributed to only technological superiority or inferiority. This section of the book contains a series of mathematical equations that enable economists to estimate the levels of efficiency.
Furthermore, there are specific examples demonstrating that technologies cannot be the only factor that determines the productivity of an economy. For instance, the author examines the economy of the Soviet Union since this country could get access to the most advanced technologies. In some cases, the engineers working in this state could design very innovative technological solutions. Nevertheless, the economy of this country lagged behind many Western states.
To a great extent, this problem can be attributed to the so-called central planning. This approach is based on the premise that the government should be responsible for allocating resources and capital. Moreover, the state is supposed to determine the amount of output that each industry should produce. Overall, this strategy proved to be less efficient than the market economy. Moreover, the author points out that the differences in productivity can exist across various industries in advanced countries. For example, the productivity of the automobile industry in Japan is higher than in the United States. Therefore, much attention should be paid to the organization of labor.
Furthermore, this chapter illustrates various types of inefficiencies that greatly diminish the productivity of companies or even national economies. In particular, one should focus on unproductive activities such as rent-seeking or hiring ones’ relatives instead of the most talented candidates. Additionally, it is important to mention such a problem as idle resources. In this case, one can speak about complex bureaucracies existing in various governmental organizations. In many cases, these bureaucracies do not improve the performance of these agencies. In fact, these complex hierarchies only slow down the work of employees.
One should also examine the misallocation of factors among various sectors. This means that the governments poorly allocate resources and leave many sectors of the economy underdeveloped. Such a problem is typical of central planning economies. Furthermore, David Weil notes that barriers to mobility can also slow down the growth of the economy; for instance, one can speak about geographic isolation and underdeveloped infrastructure.
Additionally, there are obstacles that obstruct social mobility. Among them, one can mention discriminatory policies that prevent high-skill workers from climbing the social ladder. This barrier can adversely affect the performance of companies and even the national economies.
Much attention should be paid to technology blocking, which means that certain groups of people can hinder scientific or industrial progress in order to retain their economic stability. The problem is that the advent of new technology can pose a threat to a great number of organizations and individuals. For example, the invention of spinning machines displaced thousands of artisans in the nineteenth century. This is why this person started the Luddite movement in order to oppose the technological transformation of society. Similar strategies are nowadays adopted by large corporations in an effort to retain their competitive advantage.
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On the whole, this chapter highlights the importance of eliminating inefficiencies in the economies. It is vital to develop strategies that can improve the allocation of labor in organizations and national economies. This is of the main problems that should be resolved.
Chapter 11: Growth in the Open Economy
This chapter is aimed at examining the peculiarities of growth in open economies. In the beginning, David Weil examines such concepts as autarky and openness. Such a term as autarky is supposed to describe a country that does not interact economically with other states. For example, one can mention such a country as North Korea. In contrast, there are open economies that do not hinder the flow of goods and services. Furthermore, they facilitate the flow of production factors, such as capital and labor. Overall, open economies are usually characterized by the law of one price. This means that identical products cost the same amount of money in various countries, provided that transportation costs are minimized.
Additionally, the author discusses the forces that increase the intensity of globalization. It is possible to identify the following factors:
- declining transportation costs;
- increasing availability of information about the economies in various countries,
- the adoption of policies that eliminate barriers to trade.
Each of them contributes to economic development. Moreover, David Weil examines the impact of openness on economic growth. In particular, this scholar examines the relations between such variables as income per capita or growth rate and the degree of openness. His findings suggest that open countries have been able to achieve higher levels of economic prosperity. Nevertheless, there are several barriers to globalization and trade. In part, it is necessary to focus on the geographic location of a country and lack of infrastructure.
Openness affects various aspects of the economy. One of these impacts is the accumulation of production factors, especially physical capital. This growth is achieved through various channels. One of them is a foreign direct investment or the situation when a company builds a manufacturing facility in a foreign country. Furthermore, one should remember about portfolio investment or the purchase of a company’s bonds by foreign businesses. Additionally, David Weil examines the way in which the flow of capital affects growth. This issue is examined with the help of the Solow model. It is based on the assumption that there is an unobstructed flow of capital from one country to another.
The efficiency of an open economy is based on the idea that a country has a comparative advantage in a certain area, such as the production of wine. Provided that the trade barriers are absent, the resources and investment are allocated to the most efficient sectors of the economy. Additionally, the openness of a country improves the transfer of technologies. For instance, when a company builds its facilities in a foreign country, this organization has to move its technologies to a foreign country. Furthermore, such initiatives help local engineers and managers to get better insights into new production processes.
One should not assume that an open environment inevitably leads to the demise of local businesses. Such an assumption is not accurate. The main issue is that local firms will have an incentive to improve their services, products, or production services in an effort to withstand foreign competition. Many of these initiatives eventually bring improvements in organizational and financial performance. Many Indian companies had to face such a challenge, and they managed to overcome it.
Finally, it is vital to examine the opposition to economic openness. One can cite the following reasons:
- the inability of businesses in foreign counties to compete with foreign rivals;
- increased threats to job security,
- the detrimental effects to the environment of developing countries.
These risks can be addressed with the help of effective governmental policies, but protectionism is not the most optimal strategy.
Chapter 12: Government
At the beginning of this chapter, David Weil provides examples showing that the form of government profoundly affects the economic development of a country. To demonstrate this point, he refers to counties as North and South Koreas. These countries were similar in terms of culture, educational level, or availability of natural resources. The main differences were related to the political regimes of these countries. To a great extent, these differences led to the large economic discrepancies between these states.
Furthermore, the author focuses on the cases when governmental intervention in the economy is justified. The main task that the state should do is to address market failures and provide public goods. Among such public goods, one can distinguish national defense or the development of infrastructure. Additionally, the government is supposed to take action in order to address negative externalities.
In this context, the negative externality can be explained by the adverse effects of economic activities on the community. One of such adverse effects is the pollution of the environment. Moreover, states intervene in the market to limit the power of the monopolies, such as those industries that are engaged in energy transmission. Another important role of the government is the redistribution of wealth in society.
The main question is the extent to which the government should regulate the market. David Weil notes that there is no consensus regarding this issue. For example, before the crisis of 2007, the majority of scholars believed that the laisser-faire economy was the most efficient approach. Yet, after this event, many economists tend to give a more positive assessment of governmental control.
One of the main goals of the state is to ensure the rule of law in the country. In other words, the government should create a legal environment that safeguards the rights of individuals and groups. In this case, one should emphasize the importance of property rights. The statistical examples offered by the author indicate that the rule of law is closely related to the economic performance of the country.
Moreover, the author examines such questions as the size of government, taxation, and the efficiency of state policies. One of the issues is the law developed by Adolph Wagner. According to this law, the size of the government increases as the nation becomes wealthier. David Weil points out that in many poor countries, there are extremely complex governmental bureaucracies, but these institutions do not bring significant improvements to the public welfare. In many cases, these agencies only create barriers for businesses, especially start-up companies.
Additionally, David Weil discusses those cases when the governments act as a market player. In some cases, states tried to coordinate every industry. Overall, state-run enterprises proved to be mostly unsuccessful because they did not have to withstand competition and respond to the concerns of shareholders. Yet, there were situations when governments had to play an important economic role. For instance, one can refer to World War II during states had to produce such public good as national defense.
Furthermore, there are several factors that greatly contribute to the inefficiency of the government. The main threats are corruption and the desire of politicians to retain power at any cost. In this chapter, David Weil examines the work of governments in less advanced countries. One of the main tasks is to determine why these states prove to be mostly inefficient, and this question has not been fully addressed by economists.