As 'common sense', the idea of technologies competing for market share under conditions of vigorous competition requires little elaboration here.
It is simple and intuitively appealing, requiring little or no consideration of any historical or empirical context beyond the relative costs and performance of various technologies in the market place. Governments and their advisors need to give no thought to who is doing the innovating, who is buying the innovations, how technologies relate to one another and diffuse through markets, the effects of previous innovations or expectations about the future, the role of institutions or any such 'complicating' factors. The idea is neat and is used in a normative way to justify laissez-faire policies towards certain technological sectors, but it is historically and empirically unsupportable, and countered by other strands of well-founded economic theory.
Part of the attraction of the 'common sense' perspective is that the technologies can be put centre stage: the people and institutions involved are 'black boxed' as stylised rational economic actors. A first step in getting to a more realistic picture of technical change is to shift the focus from single competing technologies to considering technology in terms of the know-how embedded in linked systems and subsystems. In this sense the vehicles we drive are one technological component of the larger technical system that includes roads, bridges and other infrastructure. Without this broader system the specific artefacts - the vehicles themselves - would have quite different costs and benefits, and relative market shares.
A second step to a more realistic view is to consider how market share grows in initial phases of successful technological development. In this phase returns to further investment are improving, drawing in more investors with expectations that they are joining an expanding and lucrative market. Arthur (1994) identified four classes of increasing returns: scale economies, learning economies, adaptive expectations and network economies. The first two are quite widely accepted: as production volume increases unit costs fall through engineering effects and through 'learning by doing'.
'Adaptive expectations' refers to the growing confidence in a technology that accompanies growing market share, as users and producers see performance improving and compatibility problems ironed out. Simply by gaining market share many potential adopters are reassured that the technology has a future, and that they will not be investing in something that will rapidly become outmoded.
Positive network economies or externalities develop when interrelated technologies, suppliers, users and infrastructures develop and complement one another. For example five- or ten-year old technology to access the internet, if used today, would be more useful than when it was new simply because so many more other users around the world are now connected into the same network. Road, rail, telephone and electricity networks all create positive network economies, with each part becoming more valuable with expansion of the whole.
To this point the discussion has focused on positive returns to scale, which create momentum towards further technical development and market penetration, arising purely from the ways that markets function. To better understand these dynamics researchers have studied how firms and industries actually behave during these phases of market expansion, and also in periods of falling market share or economic depression. Much of this empirical work was in place before David (1985) and Arthur (1989; 1994) formalised the concepts of 'path dependence' and 'lock-in' described above. The importance of the formalisation is that it provides reasons to expect technological change to follow evolutionary trajectories based on marginal changes purely associated with markets themselves. It begins to suggest reasons why suboptimal technologies and technological systems can emerge and exclude potentially superior alternatives through mechanisms in which governments are absent and markets are understood as self-adjusting. In 1934 J. M. Keynes said the following (quoted in Freeman and Perez, 1988, p. 41):
The strength of the self-adjusting school depends on its having behind it almost the whole body of organised economic thinking and doctrine of the last hundred years. This is a formidable power ... For it lies behind the education and the habitual modes of thought, not only of economists, but of bankers and businessmen and civil servants and politicians of all parties . thus if the heretics on the other side of the gulf are to demolish the forces of 19th century orthodoxy ... they must attack them in their citadel. No successful attack has yet been made . I range myself with the heretics.
Freeman and Perez (1988) were influenced by Schumpeter's analysis from the 1930s, which identified 'successive industrial revolutions' underlying long ('Kondratiev') cycles in modern economies. A different 'mode of growth' prevails in each successive cycle. Freeman and Perez (1988) describe five Kondratiev cycles as follows: 'early mechanisation' (1770s-1840s), 'steam power and railway' (1830s-90s), 'electrical and heavy engineering' (1880s-1940s), 'Fordist mass production' (1930s-90s) and 'information and communication' (from the 1980s).
Schumpeter explained these cycles of growth and technological revolutions in terms of the behaviour of entrepreneurs. Keynes accepted
Schumpeter's explanation, also stressing the important role of expectations and 'animal spirits' in creating a climate of confidence for investment in new technologies. As Freeman and Perez (1988, p. 43) put it: 'Under favourable conditions the Schumpeterian bandwagons roll and business confidence improves, leading to an atmosphere of "boom" in which, although there are still risks and uncertainties attached to all investment decisions, animal spirits rise. Such favourable conditions include complementarities between innovations and the emergence of an appropriate infrastructure as well as some degree of political stability and institutions which do not hinder too much the diffusion of new technologies.'
Keynes, however, largely neglected issues of technical change, and mainstream Keynesian economists thereafter were indifferent about which technologies were associated with growth. Monetarist economists have been similarly uninterested in technology, and certainly in the idea that governments have any role to play in affecting how technical change proceeds. Freeman and Perez (1988, p. 44) argue, however 'it does matter very much which are the important new technological systems, because they are unique and their effects on private and public R&D and investment strategies, and the government policies, and institutional changes, which are required to advance them, may be very different'.
Freeman and Perez (1988) used Kuhn's concept of 'paradigms' to understand Schumpeter's long cycles. Their discussion of 'techno-economic paradigms' associated with a characteristic institutional framework informs current debates about (un)sustainable 'technological regimes' and the prospects for regime shifts (Kemp, 1994; Smith et al., 2005), and the idea of 'techno-institutional complexes' (Unruh 2000; Marechal, 2007) explaining 'carbon-lock in' (Unruh 2000; 2002; 2006).
In these literatures the focus is not only on technologies or the behaviour of entrepreneurs, firms and industries, but also on the political economy and politics influencing the institutional context in which market actors operate and technologies are selected. Historians have persuasively argued the vital importance of considering these 'extra-market' efforts on the part of economic actors and policymakers (Rosenberg, 1976; Hughes, 1983). Sociologists have also enriched the picture, revealing how technology users have had an active role in shaping innovations such as the bicycle, and how technical change is 'socially constructed' in both a sociological and a material sense (Bijker et al., 1987; Bijker, 1997).
Unruh (2000) draws together insights from all of these strands (economics, history, sociology and political economy) into a general theory about the causes of 'carbon lock-in'. Discussing the role of private institutions in creating lock-in, Unruh describes how private and often non-commercial organisations emerged to facilitate, and to lobby for, expansion of private automobile use. Organisations were formed to train auto engineers, and academic disciplines and departments created to provide higher-level technical know-how. Unions, users' clubs and journalists all joined a 'large, self-sustaining network of like minded professionals and institutions that are invaluable to the growth of the system' (Unruh, 2000, p. 823). This creates a political constituency for further growth of road transport. Meanwhile societies co-evolve with technologies, and social norms, behaviour and even settlement patterns adapt such that people depend on (and therefore naturally have a preference for) car ownership and private transport.
Thus private actors and associations can create momentum behind a technology. Governments can respond by intensifying this momentum, for example by setting the 'rules of the game' in technology markets, and reducing investment risks and uncertainty about the future of a technology. Government bureaucracies typically change slowly once established, creating another source of technological inertia. Unruh identifies four ways in which governments justify actively extending a technological system through public policy: national security, natural monopoly arguments, universal service policies, and public safety. 'In regulated monopolies, for example, managing public service commission politics is as important a core competency as the physical management of electricity generating stations ... regulatory officials tend to be risk averse because the failure of a technological system, such as a brown or black-out, could mean the end to their tenure' (Unruh, 2000, p. 825).
Roads and fossil fuel lobbies are well organised and politically powerful, whereas those who suffer the effects of climate change are dispersed all over the world. Unruh explains the problem of collective action to break out of carbon lock-in as follows: 'the fossil fuel industries . are in the advantageous position of being smaller in number and able to coordinate their substantial resources to resist any change that threatens their interests, such as limits on the combustion of fossil fuels. On the other hand, the diverse beneficiaries of climate protection policies have much greater difficulty in coordinating their responses' (Unruh, 2000, p. 828). Breaking out of carbon lock-in and creating momentum behind energy efficient and low carbon technologies is possible for governments, but it is politically challenging and will require empowerment of the beneficiaries.
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