Friday, January 30, 2015

What Vernengo said

If I was talking I'd be tripping over my tongue. But I'm writing -- writing things out of sequence, because I can't stop to organize my thoughts. I have discovered Matias Vernengo, discovered what fascinates him: Productivity and Demand.

Fascinates me, too. Matias Vernengo says
Technological determinism is widespread. The Solow model basically suggests that it is technological progress, measured incorrectly as Total Factor Productivity (TFP), that drives growth. The same is true of Schumpeterian models...

What is NOT discussed in most analyses of the technological determinism by conventional and more than a few heterodox authors is the role of demand in creating the conditions for technological change. In that case, technological change is not the cause of growth, but the result. As in Adam Smith's story, it is the extent of the market (demand) that limits the division of labor (productivity). In modern parlance the idea is known as the Kaldor-Verdoorn Law.

"Sure enough" Vernengo says, "a demand driven story has space for the sort of external supply-side effects that allow technology and innovations to thrive... [A] demand driven story does not imply that supply side factors are irrelevant, they are simply not the prime movers."

I think he's onto something. That paragraph about technological change got me going. Reminded me of Arnold J. Toynbee. Regarding the abandonment of the irrigation system in the Tigris-Euphrates Basin, Toynbee wrote: "This lapse in a matter of technique was in fact not the cause but the consequence of a decline in population and prosperity..." In other words, the lapse was due to a lack of demand.

Regarding the abandonment of Roman roads, Toynbee wrote:
When a civilization is in decline it sometimes happens that a particular technique, that has been both feasible and profitable during the growth-stage, now begins to encounter social obstacles and to yield diminishing economic returns; if it becomes patently unremunerative it may be deliberately abandoned...

An obvious case in point is the abandonment of the Roman roads in Western Europe....

Matias Vernengo says demand drives technology. Arnold J. Toynbee says the lack of demand drives the decline of technology. These are two expressions of one thought.

1 comment:

The Arthurian said...

Robert Waldmann, in a comment at Brad DeLong's, says:

Of course the key question is the one you ask -- if there are permanent effects of low demand why aren't there permanent effects of high demand?