ABSTRACT
Introduction In this chapter I would like to explore some connections between innovation and productivity growth. It hardly needs to be added that this was a connection that was of central interest to Schumpeter. After all, it was axiomatic to Schumpeter that capitalism was capable - uniquely capable - of raising the standard of material wellbeing of the great mass of the population. It should be noticed that here too Schum peter was in agreement with Marx, but only up to a point. For Marx, capitalism's ability to generate growth eventually ran into certain inherent and insurmountable internal contradictions, whereas for Schumpeter capitalism was free of such purely economic flaws. Indeed, Schumpeter confidently asserted that a capitalist economy such as the US, if left to itself, would soon "do away with anything that according to present standards could be called poverty, even in the lowest strata of the population, pathological cases alone excepted." And, of course, Schumpeter was right. 1
But I have chosen to discuss the connections between innovation and productivity growth not only because it was of interest to a great economist whose memory we honor in these lectures; the subject is also, of course, one of compelling interest throughout the world today. I am tempted to say that, in one sense, Schumpeter may have been too successful in persuading economists of the contribution of innovation to productivity growth. I say this because, at least in the US today, a constant refrain is that we seem to be living in an era of dramatically rapid technological change, and yet these changes appear to be coexisting with an overall rate of productivity improvement that, since the early 1970s, has hovered far below the
rates that prevailed in the US in the century or so before 1970. Such discussions involve an almost obligatory reference to Moore's Law, which states that the computing power embedded in a silicon chip can be made to double every 18 months or so. But as often as one hears of Moore's Law, one also hears quoted the pithy observation of Robert Solow that "We see computers everywhere except in the productivity statistics." What, we must ask, is going on? Why do we not observe a higher rate of productivity growth in association with an apparently rapid rate of technological change? That is what I want to discuss in this chapter. Inevitably, the answer to such an unstructured question ("What's going on?") is that a great many things are going on, and I will necessarily have to be very selective in my treatment. But you will not be totally surprised to hear that the analysis will take us, in some important ways, back to Schumpeter.
