Lecture 1 Flashcards
(24 cards)
What is Innovation and How Is It Related to the Macroeconomy?
-Innovation refers to the developement and application of new ideas and technologies which improve goods/services and productive efficiency (European Central bank). Innovation is driven by RnD.
-Two types product (new or improved goods eg) colour tv) and process innovaton (more eff production)
-Macro links:
lowers production costs, improves product wuality, boosts job creation/long term economic growth which then funds further rnd cyclical relationship. Increases supply.
Describe Schumpters creative desctruction model of innvatoon (classic view of innovation)
-described how innovation leads to tempporary monopoies through supioror products and these monoplies are eventally creatively destroyed by new/better innovations.
-Firms innovate for ‘monopply rents’.
-This continous cycle drives economic growth and competion, but can threaten current firms. Innovation builds on past ideas.
-Suggests Monopolists may try to block innovation by creating barriers to entry and that innovation thirves in dynamic competitive environments
According to Shumpter and arrows view how does firm size affect innovation
-Shcumpter describes how Large firms can afford high R&D by spreading costs and applying economies of scale. Suggesting larger firms are better at financing and executing innovaiton.
-Arrow provides a different view known as the replacement effect, reffering to how monoploists Monopolists gain less from innovation—they only replace themselves with a more effiecint version.
-suggesting smaller firms have stronger incentives to innovate in order to capture market share.
show gra[hically the solow swan model and implications
-x axis K Y axis Y, output and capital per worker. Curved graphs are Y = aK^a,prod function and Sy (investment per worker). dK is capital dep per worker and is stragiht line.
-At KY economy in steady state equilbirum sy and dk are equal no further growth will occur until something, A/innovation changes Shows without A no long run economic growth.
-Shows diminishing returns to capital
Describe how early classical economists view innovation eg authors
Early classical economists explored innovation’s role in growth.
Francis Bacon (1629): Argued monopolies may be needed to drive technical innovation; saw science and tech as drivers of economic progress.
Adam Smith (1776): Introduced concept division of labour—a key form of process innovation boosting productivity and growth.
David Ricardo (1817): Discussed technology reducing human workload.
Karl Marx (1865): Framed innovation as a social process tied to capital and labour—leading to class conflict and distributional issues.
Marx’s overall view on innovation/value and commodies
-Marx believed value comes from labour, and this idea shapes how we understand innovation.
Marx described:
Use Value: A good’s ability to meet a need (e.g., food when hungry).
Exchange Value: How much of one use values of a good can be traded for specific number of use values of another.
Commodity: A useful item made to be sold, not just used.
Exchange value depends on how much labour is needed to produce each good.
Describe marx’s labour theory of value relating to innovaton
-Described the value of a commodirity coming from the labour used to produce it, being the whole source of value.
Machines and materials also embody labour — known as “concealed” labour.
-Described exchange value being based on socially necessary labour time — the minimum time needed to produce something with current tools and skills.
-With Competition among labour/workers pushes this exchange value down.
-In marx’s theory innovation reduces labour time needed to produce goods, lowering their value which effects prices and profits and contributing to shifting class dynamics and exploitaiton under caplitilis,.
Describe surplus value within Marx’s view of innovation (classical view)
Surplus value refers to the difference between the value a worker is paid (wage) and the value they produce.
If a worker produces value equal to a full day (e.g., 8 hours) but is only paid for 5 hours (the cost of a ‘worker day’), the remaining 3 hours is surplus value.
This surplus is kept by the capitalist as profit.
Workers accept this because they don’t own the means of production and can be replaced by others willing to work for a subsistence wage.
Formula for surplus value under marx’s view on innovation rate of profit and exploitation
-Developed under view of surplus value
C’ = c + v + s
𝑐’ is value of output, c is constant capital, v is variable capital and s is surplus value.
-Rate of profit is P = s / (c+v), Rate of exploitation e = s/v
Define constant and variable capital
-This distinction between types of capital shows how surplus value arises from labour, linking to marx’s general ideas on innovatoon/labour.
-Constant capital refers to the materials, tools, machinery within a commodity, these do not create value.
-Variable capital refeers to capital invested in wages/labour, this capital creates value because workers produce more than their subsistence needs.
Marx arguemnt on innovaiton and the falling rate of profit
-Argues capatalists compete by hiring workers, raising wages and reducing profit. In order to cut costs invest in labour savving’ machines (process innovation) to becom more efficient.
-Despite efficiency gains, output value is still based on labour input.Short-term profits rise, but replacing labour (source of surplus value) lowers the long-term profit rate.
-Prof rate = e(1-q), exploitation rate, q is ratio of constant capital to total capital. Therefore as investment in machines q increases profit rate falls
Describe marx view on Law of Accumulation and the Falling Rate of Profit
Profit is the money form of surplus value.
The declining profit rate shown by higher q drives capitalist crises like overproduction and business cycles.
Making Higher profits attract more competition. innovation thorih New production methods become standard, lowering value and prices.
Falling prices cause profit rates to decline.
Therefore thorugh innovatin Expansion causes overproduction, leading to economic crisis and contraction.
Define the neo-classical view of innovation (solow swan mdoel)
The Solow-Swan model examines how capital accumulation, savings, depreciation, and population growth affect economic growth.
-Y = af(K,L), output depends on technology A, K and L
-Assumes Capital accumulates based on savings and depreciates over time:
dk/dt = sY - δk, savings rate s and δ dep rate.
Growth in capital K alone faces diminishing returns, meaning each additional unit of capital adds less output.
Technology (innovation) A is needed
to boosts productivity and helps avoid these diminishing returns.
Describe the implications of the SOLOW-swan model
Long-term GDP growth per worker cannot rely solely on capital accumulation, innovation needed.
Sustained growth requires continuous technological progress (growth in A)
Innovation increases total factor productivity, raising output without more inputs.
Policies should focus on incentivising innovation and technological adoption, not just K investment.
Ignoring innovation leads to stagnation due to diminishing returns on capital.
Why is innovation policy needed? + incentives for Rnd
There are issues regarding, uncertainty of innovation, spillover effeects, appropiablity, research joing ventures leading to collusion and wasteful duplication.
-Provide incentives to promote RND such as financial incentives, indirect support to Rnd, Rnd Cooperation and IP rights.
General benefits of innovation for the economy
Drives economic growth
Increases productivity and efficiency
Creates new industries and job opportunities
Enhances competitiveness in global markets
Promotes higher standards of living
Encourages investment and entrepreneurship
Describw how financial incentives and indirect support promote RnD
Financail incentives incentivise Rnd By improving expected returns
-Gov subsidies and tax benefits reduces the cost of Rnd for firms.
-Goverment contracts with labratories boost demand for innovation
-Innovation awards, eg) KTP awards, recognise and encourage.
Indirect incentives:
-Government backing reduces perceived investment needed risk for innovaters.
Access to proprietary tools supports technical development.
University R&D funding and defence contracts (e.g., USA) build long-term innovation ecosystems.
Decribe how RnD cooperation is an incentieve to promote RnD + benefits and some limitations of Rnd Cooperation
-Inolves unrealted firms/competitors cooperating on innovation of the same product. Eg) New United Motor Manufacturing Inc which was a joint venture by General Motors and Toyota to produce small cards to be marketed respectively by parent firms.
-Benefits: Risk of innovating is shared, firms can jointly make greater investments, wastful dulpication of the Rnd Process is avoided, The spillover effect is internalised with free riding being avoided.
Limitations:
-Firms may tactically collude in the final market or avoid product innovations which lower industry profits (eg) calafornia green tech industry)
-May lead to lower rnd incentives, joint RnD reduces competitve pressure, firms lose the fear of being out-innovated therefore lowering overall RND investment.
How Can Policy and Secrecy in Innovation (limitation) Address Limitations of R&D Cooperation?
-Policy solutions
-Gov provides subsidies or tax incentives to promote joint Rnd and constantly moitor actions to ensure effectiveness.
-Ease antitrust laws to avoid tacit collusion eg) US Cooperative Research Act.
-Secrecy in innovation (not patenting innovations)
-Firms may avoid patents if IP laws are weak or if secrecy offers a long-term edge. Even small Spillovers may effect profits.
-A stronger IPR system can address this limitation, helping to protect returns and ecourage disclosures
How does IPR’s support innovation and RnD cooperation?
IPRs are temporary state-enforced monopolies granting exclusive rights to use or produce innovations. They incnetive innovation, incentive discloure.
-Purpose of IPR’s is to enable monopoly profits for innovatprs, financially incentivising Rnd and reducing risk of spillover effects.
-Types of IPR: Patent (exclusive use for 17-20 years), Licence (Permission to produce a product for a limited time), Trademark (protects specific brand identity.) and copyright (Protects the expression of ideas (not the idea itself)
Benefits and consequences of intelectual propery rights IPR
Pros:
-Recognizes natural ownership over one’s work
-Incentivises R&D investment and disclosures (lack of secrecy)
-Reduces fear of spillovers → promotes disclosure
-Prevents final market collusion
Cons:
Creates monopolies → lowers social welfare
Inactive patents used to block competition
Smaller firms may lack incentive to invest in R&D
The Ideal patent length is unclear and debated
Descibre how Appropirabilty is an issue with Rnd
-Appropriability refers to a firm’s ability to capture the full benefits of its R&D investments. May disincentivise incentives to innovate and justifies need for policy.
-May lead to spillover effetcs Knowledge leaking to other firms (intentionally or not), reducing the innovator’s profits.
-Other firms may imitate/build upon creations of others without incuring original Rnd Cost.
-Firms may underinvest in Rnd if beelvei other firms will absorb the benefits.
why is a monopoly threatend by entry the best market structure to incentivise innovation
Existing monopolist faces competition from an entrant trying to win a patent race.
Both spend heavily on R&D to secure or keep the patent and market control.
Winner enjoys monopoly profits (πM), while loser gets reduced duopoly profits (πD).
The threat of losing monopoly status pushes the current holder of monopoolt firm to innovate aggressively.
This dynamic leads to higher overall R&D investment than either pure monopoly or perfect competition.
How to show that a monopoly threated by entry is best market structure to incentive rnd
-Draw monopoly curve and Show monopoly equilibrium where MR = MC, setting price and quantity.
-When an entrant t threatens the monopoly (patent race), the monopoly holder invests more in R&D to maintain market power.This can shift the MC.
-If entrant wins, they shre profit (duopoly) πd, new duopoly has lower market profits due to compeition.
-Entrant can win/gain at most πd therefore will only spend π in a patent race.
-For the current monopolist benefit of winning is πm - πd - cost of patent, so spends πd + cost of patent on rnd to win race and makes profit of πm - πd - cost of patent > πd
he graph illustrates how threat of entry encourages innovation investment by the incumbent to defend its position
