RESPONSES TO THE ECONOMIC QUESTIONS

PUT BY THE
PRIME MINISTERS ADVISORY COMMITTEE ON
SCIENCE AND TECHNOLOGY(PMACST)

Richard G. Lipsey, OC, FRSC

Emeritus Professor of Economics
Simon Fraser University

12/09/2021 1
 HOW IS THE DISMAL SCIENCE
CHANGING?
 Called the dismal science because:
 capital accumulation in the context of constant technology was thought
to be the main vehicle for economic growth.
 The law of diminishing returns predicted that as more capital was
applied to fixed resources, growth of output would slow and eventually
halt  the stationary state.
 The new economic view:
 typically technological change is rapid and pervasive.
 because new capital embodies new technological knowledge there is
no reason to expect diminish returns.
 emphasizes that knowledge is non-rivalrous, in the sense the once
discovered, one person’s use of it does not reduce another person’s
ability to use it  in contrast to a piece of capital equipment, which
cannot be used in two places at the same time.

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 Much attention given to the phenomenon of technological
change.
 Particular interest attaches to what are called ‘General
Purpose Technologies (GPTs)’.
 Pervasive technologies that provide new research agendas to apply them across the
whole economy as did the steam engine, the electric dynamo, and the computer.
 There is no reason to expect that each successive GPT will bring less rich
possibilities than each previous one.
 Indeed, it is clear that the dynamo brought with it a much richer research program
than did the steam engine

 Since knowledge is not subject to decreasing returns in the

way that physical capital is when it is accumulated in the
context of static technology, there is no technological
reason to expect that growth cannot be sustained into the
indefinite future

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 But is continued growth sustainable?
 Growth based on technological change typically reduces the all
resource inputs per unit of output.
 Nonetheless, it has increased the demands on inputs because
over the last two centuries total output has increased faster than
inputs per unit of output have decreased.
 Although we will run out of specific non-renewable resources,
there is no reason to think we will run out of all useful
resources.
 For example, if we held the rate of increase of output to the rate
of reduction in input use per unit of output, output could grow
indefinitely with no increase in resource use.
 Pollution and environmental degradation may well stop growth.
If they do, it will not be for technological reasons but for want of
human willingness to control them, which can be done with
existing or easily foreseeable technologies.

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A Digression on GPTs
 Technological changes  new products, process and forms
of organization  have been the driving force of growth for
the last 10,000 years.
 These changes have also dramatically altered our social and
political relations.
 Technological changes run the whole gamut from continuous,
small, incremental changes, through discontinuous radical
inventions, to occasional ones that evolve to pervade the
entire the economy.
 These latter ones are called General Purpose Technologies (GPTs). (This is a
somewhat narrower, and more tightly defined concept than those of
‘disruptive’ or ‘transforming’ technologies, which include GPTs but more.)
 Typically, GPTs begin as fairly crude technologies with a limited number of
uses
 They evolve into much more complex technologies with dramatic increases
in the range of their use across the economy and in the range of economic
outputs that they help to produce.
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 Adapting to new GPTs effectively, typically requires
major changes in and in government policies and in the
whole structure of the economy)(what we call the
facilitating structure) which includes

 human capital and where people live;

 the physical organisation of production facilities, including labour practices;
 the managerial and financial organisation of firms;
 the geographical location of productive activities;
 industrial concentration;
 infrastructure;
 private-sector financial institutions, and financial instruments;
 educational practices.

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GPTs IN HISTORY
 The domestication of plants (9,000-8,000 BC) (Pr)
 The domestication of animals (8,500-7,500 BC) (Pr)
 Smelting of ore. (8,000–7,000 BC) (Pr)
 The wheel (4,000-3,000 BC) (P)
 Writing (3400-3200 BC) (Pr)
 Bronze (2800 BC) (P)
 Iron (1200 BC) (P)
 The water wheel Early medieval Period) (P)
 The three-masted sailing ship (15th century) (P)
 Printing (16th century) (Pr)

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 The steam engine (late 18th-early 19th century) (P)
 The factory system (late 18th-early 19th century) (O)
 The railway (mid 19th century) (P)
 The iron steam ship (mid 19th century) (P)
 The internal combustion engine (late 19th century) (P)
 Electricity (late 19th century) (P)
 The motor vehicle (20th century) (P)
 The airplane (20th century) (P)
 The mass production, continuous process, factory (20th
century) (O)
 The computer (20th century) (P)
 Lean production (20th century) (O)
 The Internet (20th century) (P)
 Biotechnology (20th century) (Pr)
 Nanotechnology (sometime in the 21st century) (Pr)
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 Only about two dozen in all of civilized times but seven in the
20th century and already one, nanotechnology, that can be
foreseen in the 21st.
 A new GPT brings with it a research program to improve the
efficiency with which it delivers its own services (along what
we call its ‘efficiency curve’) and to learn how to apply it to
new products, processes, and forms of organization across the
entire economy (along what we call its ‘applications curve’).
 For example, the shift from the Victorian mechanical age to the
modern electronic age transformed just about everything in the
society as applications of electricity slowly spread through it.

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 We are still living in the midst of the revolution in Information and
Communications technologies (ICTs)  a set of technologies that have the
computer at its centre.
 The latest new GPT that is beginning to emerge is biotechnology, which is
just beginning to transform  eg, criminology and food production but
will have massive transforming effects over the first half of the 21 st century.
 Further away is nanotechnology. The greatest advance in materials
technology since we first began to shape stone tools, nanotechnology will
transform just about everything we know, products, processes, and forms of
organization.
 Although there is always much uncertainty attached to the evolution of any
new GPT, there are enough commonalities that study of past GPTs, combined
with knowledge of the main characteristics of the new one, allow quite a bit
to be forecast about the impacts of both bio- and nano-technologies on the
economy and our social and political relations.

Recommendation: The government should be studying both of these new

technologies to determine their probable economic effects and the changes in
infrastructure and policies that will be needed if they are to be accommodated with
the minimum of disruption and the maximum of benefit.
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PERSPECTIVES ON HOW THE ECONOMY IS
EVOLVING AT THE MACRO LEVEL
 Inflations are unlikely for a long time to come
 Slumps similar to the 1930s are also unlikely.
 The distribution of income. For the first seven decades of
this century, inequalities narrowed. Then, starting in the
1970s and driven by technological changes connected
with the ICT revolution, inequalities in the pre-tax-
transfer distribution of income began to widen.
 Since then, wages have been constant or only slowly rising while top
incomes have risen dramatically.
 In Canada, the tax-transfer system has mitigated these changes to a
significant extent.
 In the US, the tax-transfer system has done little to alter the distribution
of income that is determined by the market.
 How long can the US can avoid major social unrest as a result of the
widening gap between rich and poor?
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 Government budgets are well under control in Canada and
more or less in the EU.
 So a fiscal crunch to deal with rising deficits is not in the foreseeable future
for Canada.
 The US in contrast is on an unsustainable budget path
 rising deficits both in the present and built into the future.
 This deficit largely financed by the Chinese.
 Many US Neocons see the deficit as a tool for greatly reducing, or even
eliminating, the remaining parts of the US social safety net.
 Canadian macro policy makers should be concerned to estimate the fallout
for Canada when the US finally comes to terms with its growing debt.
 Will the US have a ‘soft landing’ or a ‘hard landing’ and how would each
affect Canada by presenting it certainly with problems and possibly with
opportunities?

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 Global warming, now an accepted reality, will:
 cause serious problems in the near future as the artic ice continues to melt.
 cause catastrophic effects unless it is soon checked.
 the point of no return is near, if not already past, after which, whatever we do,
the melting of major ice accumulations, including the Greenland ice cap, will
be inevitable.
 once increases in the level of the oceans come to be measured in meters rather
in millimetres, catastrophe becomes hard to avoid.

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PERSPECTIVES ON HOW THE ECONOMY IS
EVOLVING AT THE MICRO LEVEL
 The ICT revolution has transformed the economy
altering among other things:
 the way businesses are organized and run
 the way goods are designed, how they are produced on the shop floor,
and how they are distributed and marketed.
 the way scientific and social research is done.
 the location of economic activity by allowing the globalization of
production based on a degree of world-wide coordination that was
impossible 60 years ago.
 personal communications, and in combination with the internet,
allowing NGOs to recruit and organise masses of people and to be
effective (for better and for worse) in influencing policy.
 and so on ad infinitum.
 My list of the transforming effects of the CIT revolution fills 10 closely
printed pages in one publication.

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 Common after the dotcom crash to argue that the force had
gone out of the ICT revolution.
 Not so, as will be seen from a study that Ken Carlaw and I are currently
doing for Industry Canada to determine where ICTs are on their efficacy and
applications curves relative to earlier GPTs, such as electricity.
 Many tend to look at ICTs as being just the hi-tech sector.
 That sector could not exist without computers.
 But the ICTs brought a revolution precisely because they were used
throughout the entire economy.
 It is the stream of continuing applications of computers and related ICTs that
is driving much of the modern economic growth.
 Much of future growth will continue to be driven by ICTs.
 The structure of the economy is pretty well adopted to them and they are
still being used to create many new products, new processes and new forms
of organization.
 These development need to be encouraged by policy not
ignored.
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 Biotechnology is beginning to alter things dramatically as
seen for example in criminology and in food production.
 Over the next decades its rate of penetration into other sectors of the economy
will accelerate with profound changes in many if not all sectors.
 How much it will affect social and political structures is less clear, but
probably not anything like as much as the ICTs did.
 Nano-technology will begin to impact in significant ways in
a decade or so and will probably cause as profound a
transformation of our economic and social life as did
ICTs.

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 Canada’s productivity performance has been poor relative to
the US
 the resulting gap between the average income of the US and Canada has been
widening for several decades,
 raising worries about continued competitiveness and a possible brain drain.
 Low levels of overall R&D compared with our major
competitors has been a persistent worry in Canadian policy
circles and many relate it to our poor productivity
performance.
 Not easy to judge its importance, given the large amount of
technology transfer that occurs in modern industrialised
economies.

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 Nonetheless there is some cause for concern.
 A much higher proportion of Canadian R&D takes place in the public sector than in
other countries.
 Taking the US and Finland for comparison, the ratio of private/public R&D in the two
years 1997/8 and 2002/3 was
 1.94 and 2.46 for Finland
 2.82 and 2.70 for the US
 1.48 and 1.18 for Canada
 The Canadian public/private ratio is much lower than the American or the Finish.
 While it is stable in the US and rising in Finland, it is falling in Canada.
 The number of new product opportunities that is produced per dollar or R&D
in the private sector is about 15 times that of the public sector.
 Thus the payoff in terms of product opportunities per dollar of Canadian R&D
is less than in other countries.
 Over the two periods in question, 1997/8 and 2002/3, the three countries had
the following product opportunities created per million dollars of R&D
expenditure:
 Finland, rising from 0.45 to 0.49;
 The US, steady at 0.50
 Canada, falling from 0.42 to 0.38.
 Thus the effect of our R&D on our immediate competitiveness seems to be
significantly less than would appear from a mere look at the total R&D
figures.
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 Skilled labour shortages, will become an increasing problem
when the baby boomers start to retire in about five years.
 By 2010, there will be serious shortfalls in the jobs now occupied by senior
workers,
 the shortages will grow for at least two decades after that.
 Already, Canadian employers are finding difficulty filling jobs for sales and
customer service representatives, customer support, engineers, and so on
down a long list mentioned in the Globe and Mail of February 21.

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 China and India’s evolution towards becoming economic
powerhouses presents:
 competitive threats and
 new market opportunities for Canadian business.
 Is enough effort is going into reacting to these developments
in both the private and public sectors. Every effort should be
made to encourage students to acquire foreign language
abilities.
 Firms should be exploring possibilities in the expanding markets of these and
other developing countries.
 Because these markets are not easy to enter for cultural and bureaucratic
reasons there is scope for private-public sector cooperation here.

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TO WHAT EXTENT ARE CANADA’S ECONOMIC
ENTERPRISES AND INFRASTRUCTURE EQUIPPED
TO MEET AND COMPETE IN THIS RAPIDLY
SHIFTING ENVIRONMENT?

Not too much is known about how well prepared

both the infrastructure and firms are and, failing
a detailed commissioned study, only a few
general points can be made.

 Virtually all nations provide for public sector

assistance to invention and innovation.
 Canada has a number of initiatives in this direction but they
need full government commitment plus careful and continued
comparisons with design and performance of such schemes in
other countries.

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 Procurement is a major tool for technological advance in many countries.
 It is not clear that Canada has used this tool as effectively as the US.
 What if, for example, instead of buying a submarine, the money had been put
into R&D to develop a superior all-weather vehicle for operating in the artic?
 Is the education infrastructure doing everything it can to encourage the
training needed in coming decades and to inculcate an ethos of
entrepreneurship and scientific investigation?
 With respect to personnel we need to operate the margin rather than
rewarding those who would go on to train anyway, as many of the Millennium
Scholarships probably do.
 What is needed if change is sought is to support those who are on the
border of doing what policymakers want and doing something else.
Typically these will not be the very best students.
 Also, we need not just to start with stated objectives  what we are want
to accomplish  and then ask if given measures, such as a scholarship
fund, will actually do that job efficiently, or even do it at all.
 It is not clear to me, for example, that the designers of the millennium
scholarships engaged in such a cost benefit calculation.

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 We urgently need to improve our infrastructure of health care.
 The well off are likely to receive better and more timely health care in the US
than under the Canadian Health Act.
 But it is those who are successful at business, science and engineering that we
most wish to keep in Canada.
 If we fail to do improve our system significantly we risk a brain drain of those
we most want to held in Canada

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 Are Canadian firms aware of the importance of
keeping up with the cutting edge of
technological advances?

 For larger Canadian firms, the answer seems to be yes. But

how about small and medium sized firms?
 Surveys continue to show that many Canadian managers seem
to be more risk adverse and less willing to accept the
uncertainties that go with major innovations than their US
counterparts.
 If so, it is not clear what can be done about this, other than the
long-term strategy of trying to work through the education
system with courses, scholarships and workshops on
entrepreneurship.

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