A structural-evolutionary rationale for public support of private technological innovation

Dynamic competition in technological innovation drives long run economic growth. The rationale for technological innovation policy is in that dynamic process. Two modelling approaches for understanding economic growth are classified as static equilibrium and structural-evolutionary. In the equilibrium approach, fully-informed agents allocate resources based on calculations of optimal returns. This produces a series of optimal stationary equilibria in each of which the dynamic transitions induced by technological innovation are complete. Because growth is on a balanced growth path of such equilibria, the past history of the system has no effect on its present or future state. Industrial policy’s sole purpose is the correction of divergence between social and private returns. In contrast, dynamic processes are central to the structural-evolutionary approach. Because agents face uncertainty, they allocate resources to innovative endeavors based on subjective perceptions of opportunities. These opportunities are generated by and limited to the structural context in which the agents operate. Innovative efforts cannot be evaluated on optimality criteria because much of the value that may come to be associated with originating innovations is yet to be determined over the uncertain futures of their development trajectories. The system’s history determines its present and future states. Influencing the behaviour of profit-seeking agents with respect to technological innovation alters the evolutionary path of economic growth. Industrial policy that is historically conditioned, selectively focused and embedded in the structure of technology and the economy has a role to induce socially beneficial technological innovation trajectories. This role is absent from the equilibrium approach.