Assessment Of The Baumol Model Of Growth Economics Essay

October 7, 2017 Economics

Invention is the execution of new or significantly improved merchandises and processes with alterations in techniques and equipment. Harmonizing to Joseph Schumpeter deficiency of invention brings the round flow of development to a stationary province ( W.J.Schumpeter, 1947 ) . The construct of invention in relation to growing has evolved over decennaries, delivering away assorted theoretical accounts and mechanisms from different invention economic experts such as William Baumol. This paper aims at in-depth analysis of the Baumol ‘s growing mechanism in relation to other invention mechanisms as proposed by Rosenberg and Mowery, William and Chandler, Joel Mokyr and Paul David.


Baumol sees economic growing as the primary merchandise of the free-market growing engine which derives its efficiency from a house ‘s battle against “ At hand death ” ( Baumol, 2002. Page 10 ) while invention is the primary beginning of the capitalist engine get downing off with the “ moving ridge of appliances ” ( Baumol, 2002. Page 12 ) . Basically, the house has to avoid outperformance as a affair of endurance and must introduce or decease. This occurs chiefly in the oligopolistic competitory market such as pharmaceutical and computing machine industries where by invention is the premier arm for competition devising monetary value the secondary arm. Other stipulations for the free-market machine include routinasation of advanced activities, productive entrepreneurship, regulation of jurisprudence on contracts and engineering merchandising and trading. Baumol ( Baumol, 2002 ) implies that capitalist economy owes its uniqueness to invention and non invention separating between both in a Schumpeterian sense of recognizing and rehearsing profitable alteration guaranting an effectual end-use. Early civilization in Rome and mediaeval China had a wealth of innovation in likes of Leonardo DaVinci whose thoughts every bit outstanding as they were did non happen and Baumol refers to as “ dead-ends in the absence of a systematic invention mechanism capable of guaranting that they would non pine away ” ( Baumol, 2002. Page 10 )


Baumol relates to the theory of Adam Smith that houses are driven to understate production cost and make the best assorted merchandise that meets the consumers demand although with an purpose of net income maximization, connoting that invention is demand driven while Rosenberg and Mowery agree to this, but farther suggest that invention is besides a supply constrained activity in footings of supply of cognition ( Rosenberg, 1979 ) .

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Baumol ‘s consideration of costs aligns with William and Chandler ‘s theory based on dealing costs and economic systems of graduated table. While Joel Mokyr ‘s theory puts positive feedback mechanism, propositional ( I© ) and normative ( I» ) cognition as the nucleus elements of economic growing, the Baumol ‘s theoretical account focuses more on normative cognition proposing that it has a greater impact on societal market ( Varian, sept. 2004 ) . Mokyr nevertheless emphasised that propositional cognition has to be invested in, as it sets epistemological footing for normative cognition, supplies the base cognition of societal capital which is applied to production procedure and is more by and large used in the society.

Rosenberg and Mowery did non establish the institutionalisation of invention on repertory but agree with Mokyr that establishments and society in general rely on the omega cognition ( Varian, sept. 2004 ) . On the other manus, Paul David in his theory of way dependance suggests market failure and that invention is a stochastic procedure based on historical development that lead to farther invention doing first mover advantage through web effects and lock-in of consumers ( Ruttan, 1997 ) . Paul David identifies making a critical mass as the chief purpose of the house instead than the demand goaded characteristic of bring forthing the best merchandise mix in the Baumol ‘s theoretical account, wholly opposing it. Paul David besides regulations out the 2nd mover in his theoretical account placing that all clients are locked-in to the first mover even if another engineering develops and this is extremely incompatible with the Baumol theoretical account. In contrast, Nelson and Winter aligns with Baumol that the most efficient houses in everyday changing will last in the long-run.

Baumol farther identifies invention as the preferable competitory arm in oligopolistic competition, seting every house at hazard of either non introducing or puting in failures since invention is chiefly an unpredictable procedure. This brings about a repertory of actions, which is the routinisation of corporate invention where houses incorporate invention in their production procedure thereby guaranting predictability in topographic point of incompatibility.

Consistent invention stimulates farther invention ensuing in a cumulative procedure with feedback. However, routinisation may be given the house towards zero net income from invention unless sunk costs create a barrier to entry. Mowery and Rosenberg identified invention to be driven by the supply of cognition ( Rosenberg, 1979 ) . It is besides demand driven being affected by modus operandi. They farther implied that routinisation will impact invention because specialization will take to a bottle cervix rendering the house incapable of variegation into production of other goods. This action would impede invention from being market driven by taking the focal point off demand.

The market for engineering creates extra net income for first movers through rent seeking and pushes 2nd movers to introduce, farther bring oning the first mover act ( the weaponries race ) . Harmonizing to Baumol this built-in construction of the invention machine consequences in equilibrium between protection and diffusion, and besides between first and 2nd mover advantages doing uninterrupted growing and productiveness ( Baumol, 2002 ) . Baumol highlighted the negative consequence of spill over which signifies that great benefits are enjoyed by the 2nd movers who contributed nil to invention. This development in bend discourages first movers from giving optimum resources to invention. If the first mover could maintain all the benefits, there would be more incentive for invention and other houses will be willing to put more. This spill-over job can be mitigated through engineering trading.

However, an inefficient growing procedure will happen if first movers deny other houses the usage of its invention due to secrecy or patents. This is because the invention will hold been optimally used by the industry and might even be improved on by other houses, thereby wholly eliminating inferior goods produced by disused procedures. Besides patents and rights may falsify invention since the clip difference between patents and termination will change merchandise development in so making distort competition. Conversely, a entire obliteration of patents may decline the job of spillover and promote destructive entrepreneurial activities such as actioning for pecuniary benefits. It may besides ensue in patent races which occur when viing houses rush through and double R & A ; D attempts to acquire in front of its rival thereby rendering the attempt of the 2nd mover wasted.

Baumol suggests that unroutinised invention contributes more to economic growing than routinised invention which merely concentrates on merchandise betterment. He arrived at that decision because Unroutinised invention is seldom put under force per unit area of routinised activities with illustrations such as the innovation of dial phone and scientific reckoners ( Baumol, 2002 ) . He agrees that the discoverer becomes an enterpriser and establishes a house which is big plenty to vie in the oligopolistic market with routinised and stable advanced system. This implies that Baumol relates productiveness and economic growing in footings of internal growing of houses while Kuznets suggests external economic growing: when the figure of new houses in an bing industry is more than the figure of houses go outing the industry. This highlights the fact that the Baumol ‘s invention theoretical account is based merely on the micro degree of merchandise development which is merely growing and adulthood in the merchandise life rhythm


The Baumol theoretical account can be given the recognition of first manus experience from Baumol ‘s consulting work and penetration on how houses operate in a competitory environment from treatments with corporate decision-makers. Sing the kineticss of invention, the Baumol theoretical account can be criticised as it does non see institutional diverseness and a instance of unfastened invention. This implies that the theoretical account may non use in every economic system although it will assist to place what have the economic system has that differs from others. It besides falls short in placing grounds why some houses do non introduce and others do why some innovate inefficiently and why the best invention may non win.

In decision, Baumol ‘s thoughts on how theory of the house should be mobilised taking invention into history are insightful particularly with respect to routinisation and engineering trading among houses and should be farther studied to polish its insufficiencies.


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