This paper distinguishes four types of public policies that seek to encourage growth-creating technological advance: technology, R&D, industrial, and science policies. The first three are typically treated under the single heading 'industrial policy', which is a source of confusion since each is administered by different agents and in different manners. Evidence of the many failures of industrial policy, as defined here, is often incorrectly assumed by its critics to apply to technology and R&D policies. Evidence for the many successes of technology policy's symbiotic relation between the public and the private sectors is outlined, although typically ignored by growth theorists. The massive influence of science policy on economic growth, also typically ignored by growth theorists, is a largely unintended byproduct of scientific advance

Dismissing industrial policy because 'governments cannot pick winners' is counter-productive. This Element studying selected major innovations illustrates the fact that virtually all major new technologies have been developed by a synergetic cooperation between the public and the private sectors, each doing what it can do best. By examining how R&D is financed, rather than where it takes place, the authors show that the role of the public sector is much more pronounced than is often thought. The nature of the cooperation − who does what − varies with the nature of each innovation so that simple, one-size-fits-all, rules about what each sector should do are suspect. These results are particularly important because they challenge the scepticism in the United states and elsewhere about the importance of industrial policy, a scepticism that threatens to undermine the long-term, and necessary cooperation, between the public and private sectors in promoting growth-inducing innovations.

Dismissing industrial policy because 'governments cannot pick winners' is counter-productive. This Element studying selected major innovations illustrates the fact that virtually all major new technologies have been developed by a synergetic cooperation between the public and the private sectors, each doing what it can do best. By examining how R&D is financed, rather than where it takes place, the authors show that the role of the public sector is much more pronounced than is often thought. The nature of the cooperation − who does what − varies with the nature of each innovation so that simple, one-size-fits-all, rules about what each sector should do are suspect. These results are particularly important because they challenge the scepticism in the United states and elsewhere about the importance of industrial policy, a scepticism that threatens to undermine the long-term, and necessary cooperation, between the public and private sectors in promoting growth-inducing innovations.

Dismissing industrial policy because 'governments cannot pick winners' is counter-productive. This Element studying selected major innovations illustrates the fact that virtually all major new technologies have been developed by a synergetic cooperation between the public and the private sectors, each doing what it can do best. By examining how R&D is financed, rather than where it takes place, the authors show that the role of the public sector is much more pronounced than is often thought. The nature of the cooperation − who does what − varies with the nature of each innovation so that simple, one-size-fits-all, rules about what each sector should do are suspect. These results are particularly important because they challenge the scepticism in the United states and elsewhere about the importance of industrial policy, a scepticism that threatens to undermine the long-term, and necessary cooperation, between the public and private sectors in promoting growth-inducing innovations.

This paper reviews some of the myriad, often complex, ways in which the private and public sectors interact in the invention and innovation of the new technologies that are a major driver of economic growth. Several terms have been used to describe the public sector’s activities in these matters: technology enhancement policy, innovation policy, industrial policy, and national systems of innovation. We use the term Industrial Policies to cover all the public sector’s activities that, either directly or indirectly, encourage technological advance. We first outline some important concepts and definitions: two views of the place of the public sector in technological advance; the definition of technology and the facilitating structure; the main public sector organizations that encourage technological advance; the four evolutionary trajectories of a new technology: invention, efficiency, applications and diffusion; the growing importance of science in technological advance; and an overview of a successful industrial policy. In Section II we study 13 important technologies developed over the last century and a half, showing the extent that the public sector has provided finance for the various trajectories of these technologies. In Section III we consider nine public policies designed to encourage technological advance in general. Then in section IV, we discuss over 20 cases in which the government has attempted to pick and encourage specific winners, some of which were successes while others were failures. After each of our case studies in our three main sections, we offer at least one tentative lesson concerning the conditions that favor success and/or that tend to lead to failure. Section V offers a few concluding remarks ending with the statement that “The cases considered here reveal that those who would dismiss industrial policy with statements such as ‘Governments cannot pick winners’ are relying on an empty slogan to avoid detailed consideration of the actual complicated, multifaceted relationship between the private and public sectors in encouraging the inventions and innovations that are the root of economic growth.”

We examine the sources of the finance that has enabled technological evolution, distinguishing between sources in the private, or for-profit, sector (FPS) and sources in the public or not-for-profit sector (NPS). We investigate the roles that agents in each sector have played, both directly and indirectly, in financing the creation and evolution of twelve major technologies that were innovated between the late 19th and early 21st centuries, many of which have been labelled GPTs. To document this, we describe the development of our selected technologies in some considerable detail. Although much of this is already well known, what has not been done, to the best of our knowledge, is to emphasise for all these developments the extent to which agents in the NPS and FPS provided the supporting finance. Studies of the physical location of R&D, inventions and innovations typically give heavy weight to the FPS and much less to the NPS. However, when we study the sources of the finance that enabled these technological developments, this greatly increases the relative weight attached do the NPS compared with that of the FPS. We distinguish four trajectories in the evolution of any new technology: the invention trajectory covers the scientific and technological developments that precede the emergence of an identifiable technology; the efficiency trajectory is the time path of the cost of producing a unit of the service provided by the technology; the applications trajectory is comprised of the technological products, processes, and forms of organization that depend on it; the diffusion trajectory is the spread of the technology to uses in other places and other times, both nationally and internationally. For each of these trajectories in each of our 12 technologies we indicate which developments were financed mainly by the NPS, mainly by the FPS, or by some combination of both. We divide our technologies into five main groups (groups that were discerned after completing our case studies rather than being imposed a priori): Group 1, little NPS support except for the applications trajectory, the internal combustion engine; Group 2, NPS support mainly for the invention trajectory, refrigeration; Group 3, NPS support mainly for the efficiency and applications and diffusion trajectories, railways, automobiles, aircraft and agriculture; Group 4, NPS support mainly for the invention and efficiency trajectories, the iron steam ship; Group 5, NPS Support for all trajectories, electricity, computers, the Internet, and lasers. After reporting on each of our 12 technologies, we suggest lessons that are drawn from them and are appropriate to industrial policy. For example, when there is much uncertainty about the technology early on, as it is so often and was with refrigeration, certain practical components of it need to be demonstrated by agents in the NPS before those in the FPS can foresee profitable investments in the technology. In such cases NPS support is needed early in the invention trajectory.After completing our case studies, we draw several lessons that seem appropriate to most or all of them. Two examples follow. First, the more does a technology depend on science, the larger the place for NPS support for the relevant trajectories. Second, major technologies have significant co-evolutionary complementarities amongst themselves. As a result, NPS support in the development trajectories of any one technology has significant positive and often difficult-to-foresee, impacts, on the development trajectories of other technologies, including some that were not directly supported by NPS themselves. NPS investments can also help to create positive feedbacks through these indirect impacts by creating further complementarities that subsequently operate on the originally supported technology. Thus, calculations of the “return to NPS support” for a particular technology typically underestimate that return, unless they take account of the impact on the entire interconnected, complementary system.The work concludes that dismissing industrial policy with statements such as ‘governments cannot pick winners’ relies on an empty slogan to avoid detailed consideration of the actual complicated, multifaceted relationships between the private and public sectors in encouraging the inventions and innovations that are the root of economic growth.

Distinguishing characteristics of General Purpose Technologies (GPTs) are identified and definitions discussed. Our definition includes multipurpose and single-purpose technologies, defining them according to their micro-technological characteristics, not their macro-economic effects. Identifying technologies as GPTs requires recognizing their evolutionary nature, and accepting possible uncertainties concerning marginal cases. Many of the existing tests' of whether particular technologies are GPTs are based on misunderstandings either of what GPT theory predicts or what such tests can establish. The development of formal GPT theories is outlined, showing that only the early theories predicted the inevitability of GPT-induced showdown and surges. More recent GPT theories, designed to model the characteristics of GPTs, do not imply the necessity of specific macro effects. We show that GPTs can rejuvenate the growth process without causing slowdowns or surges. We conclude that existing criticisms of GPT theory can be resolved and that the concept remains useful for economic theory.

This paper reconsiders the explanations of why a firm’s costs vary when its scale of operations varies over the long run, as expressed by its long run average cost curve and described as economies and diseconomies of scale. The first half of the paper deals with considerations of theory. It is argued that the nature of our world, with its 3-dimensions, its physical laws and the many random elements in its behaviour, is such that when the scale of anything changes, we should always expect to encounter non-linear scale effects. Static effects concerning the nature of the cost and production functions at a moment in time, which are the concern of this paper, are distinguished from dynamic effects over time, the concern of Allyn Young and his followers. It is argued that both treatments are valid but deal with distinctly different issues. A treatment of the sources of scale effects, particularly in the reconfiguration of capital goods, leads to a distinction between the set of production functions that are consistent with Viner’s treatment of long run cost curves and the single production function that is found in virtually all modern microeconomic textbooks. It is argued that the inconsistencies and ambiguities relating to the use of such a single production function to cover all possible scales of a firm’s production are such that it is an imperfect tool for analysing the scale effects that firms actually face. The second half of the paper critically assesses the treatment of scale issues in a large sample of the existing literature. Most authors list a series of examples of sources that are assumed to give rise to scale effects but seldom attempt to show in any detail how these are supposed to work. When we do this, some alleged sources are found not to give rise to scale effects at all, while others have effects that differ from what has been assumed. Furthermore, there is seldom agreement among authors whether a particular source is a cause of varying returns to scale or economies of scale. Most authors argue that indivisibilities are an important source of scale effects, although these are seldom well defined, nor are the precise ways in which these are supposed to work typically analysed. When we do this, we identify two basic types of indivisibilities, ex post and ex ante, plus several variations of each of these main types. We then argue that the discussion of indivisibilities has been confused by use of different implicit definitions of the term and also that their importance as a source of scale effects has been greatly over stated. The ability to replicate production facilities is found to be consistent with ranges of rising followed by ranges of falling unit costs and, in some important circumstances, to be consistent with falling unit costs over an indefinite range of output. Constant returns production functions are found to be inconsistent with much that is known about actual production techniques, even when firms expand by duplicating identical plants. Although several authors argue that the US market is large enough for scale effects to be exhausted, this may be true of some industries, but is clearly not true for the many industries in which non-plant specific costs are significant enough to confer an economy of scale on the firm as it increases the number of its ‘plants’ indefinitely. Unless ruled out by definition, decreasing returns are found to be a real possibility in many circumstances.

This paper contrasts the static neoclassical and the evolutionary views of the economy and economic policy. It responds to Ng's comments on Lipsey's original criticism of third-best theory. Under a relevant definition of informational poverty and Ng's other assumptions, the expected value of any policy-created divergence from the status quo is negative: If there is not enough known to determine what to do, nothing should be done, rather than establishing first-best conditions as Ng's analysis has it. It is argued that Ng's analysis of his two other information states adds little to what common sense suggests. To address Ng's argument that policies using context-specific objective functions lack the required welfare basis, the present paper studies how economic policy is actually pursued absent guides provided by welfare economics. Policies that follow from evolutionary economic theory imply that many things that are seen as distortions' in welfare economics are actually desirable forces that drive economic growth.

This paper presents the editors' introduction for a symposium on Second and Third Best Theory forthcoming in The Pacific Economic Review, 22:2, May 2017. Unusual in such cases, the editors are the major protagonists in the debate. In the symposium Ng maintains that second-best theory appears to preclude giving theory-based policy advice because full second-best optima can never be determined in practical cases. While agreeing about second-best optima, Lipsey disagrees with Ng's conclusion regarding policy and discusses the development of context-specific policies not based on the theory of optimal resource allocation. To allow for theory-based policy, Ng offers his theory of third best. The major disagreement over this theory concerns its proposition: first-best rules for third-best worlds under Informational Poverty (not enough is known to determine the desirable direction of change of some the policy variable from the first-best value). Lipsey argues that, if correct, this rule would upset the main result of second-best theory that the sign of the change in the objective function may be either positive or negative when first-best rules are fulfilled piecemeal in second-best worlds. Woo supports Ng's third-best theory and derives additional rules, while Boadway surveys the application of second-best theory in several cases from the literature of public economics.

Second-best theory established that a policy's effect on community welfare (or any other objective function) varies with its specific context. In contrast, Ng argues that fulfilling first-best conditions piecemeal is optimal whenever the policy-maker's information is insufficient to determine the direction of the change in the variable under consideration that will raise welfare, irrespective of the conditions in that market. It is argued in the present paper: (i) that Ng's own assumptions imply not that first-best conditions should be established under these circumstances, but that the status quo should be maintained; (ii) that when Ng's key assumption is altered to be empirically relevant, all policy decisions become fully context-specific; and (iii) that Woo's argument for accepting Ng's conclusions in spite of point (ii) is incorrect. The conclusion discusses valid uses of piecemeal welfare theory in spite of second best.

In this final piece to the symposium for a special issue of Pacific Economic Review on the theories and applications of second-best and third-best theories, Richard Lipsey and Yew-Kwang Ng provide their final comments to the debate. Several issues of agreement and disagreement are discussed. Most importantly, while both agree on the formal correctness of both the second-best and third-best theories, Lipsey believes the main proposition of third-best theory (following the first-best rules under Informational Poverty) is applicable only to a situation (status quo) where the first-best rule (such as taxing a pollution at the marginal damage of $N) is already being followed; Ng regards it as applicable whether or not the first-best rule is currently being followed. This also partly explains their difference on the practical policy relevance and the importance of that theory.

An early post-WWII debate concerned the most desirable demand and inflationary pressures at which to run the economy. Context was provided by Keynesian theory devoid of a full employment equilibrium and containing its mainly forgotten, but still relevant, microeconomic underpinnings. A major input came with the estimates provided by the original Phillips curve. The debate seemed to be rendered obsolete by the curve’s expectations-augmented version with its natural rate of unemployment, and associated unique equilibrium GDP, as the only values consistent with stable inflation. The current behavior of economies with the successful inflation targeting is inconsistent with this natural-rate view, but is consistent with evolutionary theory in which economies have a wide range of GDP-compatible stable inflation. Now the early post-WWII debates are seen not to be as misguided as they appeared to be when economists came to accept the assumptions implicit in the expectations-augmented Phillips curve.

The theory of second best established that the effect on community welfare of any one policy change varies with the specific context in which that change occurs. In paper that has been frequently quoted to justify specific policies, Ng argues that fulfilling firstbest conditions piecemeal is an optimal policy under quite general conditions when neither full first nor second best optima are achievable. This paper first argues that Ng's conclusion does not follow from his own assumptions, which imply instead that the status quo should be maintained, whatever it might be. Next it gives one illustrative example showing how much damage can be caused by following Ng's advice. It then argues that when Ng's key assumption is replaced by one that is closer to the facts, there is no general a priori presumption for adopting any specific policy, including maintaining the status quo. The paper closes with some observations on the usefulness of welfare economics even when the full implications of second best theory are accepted.

The evolutionary vision in which history matters is of an evolving economy driven by bursts of technological change initiated by agents facing uncertainty and producing long term, path-dependent growth and shorter-term, non-random investment cycles. The alternative vision in which history does not matter is of a stationary, ergodic process driven by rational agents facing risk and producing stable trend growth and shorter term cycles caused by random disturbances. We use Carlaw and Lipsey's simulation model of non-stationary, sustained growth driven by endogenous, path-dependent technological change under uncertainty to generate artificial macro data. We match these data to the New Classical stylized growth facts. The raw simulation data pass standard tests for trend and difference stationarity, exhibiting unit roots and cointegrating processes of order one. Thus, contrary to current belief, these tests do not establish that the real data are generated by a stationary process. Real data are then used to estimate time-varying NAIRU's for six OECD countries. The estimates are shown to be highly sensitive to the time period over which they are made. They also fail to show any relation between the unemployment gap, actual unemployment minus estimated NAIRU and the acceleration of inflation. Thus there is no tendency for inflation to behave as required by the New Keynesian and earlier New Classical theory. We conclude by rejecting the existence of a well-defined a short-run, negatively sloped Philips curve, a NAIRU, a unique general equilibrium, short and long-run, a vertical long-run Phillips curve, and the long-run neutrality of money.

We summarise salient developments in the interaction of the multilateral trading system and multilateral trading agreements (MTAs) on the one hand and regional trading agreements (RTAs) on the other. We then consider the economic effects of RTAs, comparing customs unions with free trade agreements. We argue, contrary to much received wisdom, that either may produce more economic benefits than the other, depending on the specific context in which they are introduced. There follows a discussion of the political economy effects of RTAs. Some of these have unfavourable, some neutral and some favourable effects on the progress of further MTAs. We conclude that the case against RTAs as eroding the MTS and inhibiting further MTA negotiations, as expounded by such economists as Krueger and Bhagwati, is not well founded. There remain grounds for optimism that the process of competitive liberalisation in RTAs will lead eventually to further multilateral liberalisation.

We address two interrelated issues: structured technology and non-stationary equilibrium growth. We do this by modelling multiple, co-existing, non-identical general purpose technologies (GPTs). Three sectors producing pure and applied research and consumption goods, employ different, evolving, technologies. Agents within each sector operate under conditions of Knightian uncertainty and path dependence, employing technologies that differ in specific parameter values. This behaviour produces a non-stationary (non-ergodic) growth process. Important characteristics of structured technology, previously only described historically, are successfully modelled, including co-existing GPTs some of which compete with each other while others complement each other in varying degrees. Because changes in technology are partial causes of, but not contemporaneous with, GDP changes, their separate evolutions can be studied.

This authoritative research review provides a comprehensive anthology of many of the most important and influential articles written since the publication of Phillips’ 1958 study – the most-cited macroeconomic paper published in the 20th century. The papers evaluate the original contribution and place it in its historical context. The works also discuss the strengths and weaknesses of the New Classical critique and the expectations augmented Phillips Curve that resulted from it, and critique the part played by the ‘New Keynesian Phillips Curve’ in the New neo-Classical Synthesis that has emerged in macroeconomics. This indispensable review will be of immense value to students, scholars and practitioners interested in the field of economics, and the Phillips Curve in particular.