Of course, as you say, I have no idea whether this is actually a major issue – it was just the only niggle I could think of in response to your initial excellent comment.

In broad terms I completely believe that the institutional structure we create helps to determine technological progress – however, this process is often treated in a black box fashion by economists, hence the constant assumptions about random technological shocks 🙂

At the very cutting edge of science that is done in universities, knowledge can be excludable because to learn, you have to work with the very best and they can control access to their research teams. If part, this is due to physical limits: you can only supervise a fixed number of students to the standards required by a research university.

Firms can, and do, go to great lengths to protect their trade secrets, even if it might be technically possible to reverse engineer their products to work out what has been done. Reverse engineering often can’t discover the process by which something has been made, which is often the key to success.

Fame is also excludable. You get the Noble Prize for discovering stuff, not for replicating someone else’s results.

Related to this, the buzz that inventors get from plying their trade is also excludable. Building a better mouse trap is just a fun thing to do, even if someone else is doing to use it to do the rodent eliminations without paying you. Being the first to market with a new product is also a fun thing to do, even if it does cost your shareholders a lot of money.

Happy New Year to you too 🙂

“It is only the hot bead of a fiercely competitive market, where property rights are secure and contracts are respected, that can produce sustained economic and social progress.”

True. However, there are some niggles.

True technological progress occurs when people reap the gains of what they sow – as a result, there are occasions when perfect competition does not lead to the best outcomes, as if the technology is non-excludable, entrepreneurs may under-invest.

The Soviet Union – and planned economies more generally – gives us a very good example of why pure science and engineering, the building blocks of technology, are necessary but not sufficient conditions for economic progress.

The sufficient condition is competitive, free markets; where entrepreneurs have the incentive to take risks and reap the rewards.

In the short term, again as the Soviets showed, it is possible to use science and engineering to greatly improve economic conditions (but maybe not social and political conditions). But over time, a command and control economy will ossify, as managers seek out what Sir John Hicks identified as the greatest benefit of monopoly, a quiet life.

It is only the hot bead of a fiercely competitive market, where property rights are secure and contracts are respected, that can produce sustained economic and social progress.