Allow me a personal anecdote: Back in 1982 my mother moved, and I helped tidy up her attic. My attention was caught by an old, faded volume of Reader’s Digest from around 1960 with a short article on The Car of the Future. As I recall, the article predicted that the car of the 1970s would be jet-driven, whereas the car engine of the 1980s would undoubtedly be nuclear. More than half a century later the vast majority of cars are still fuelled by petrol/gasoline. Electric cars have started making some headway, but the leap from one technological trajectory to another has proven extremely difficult.

As early as 1907 the Detroit Electric Company had introduced an electric car (as donaldists know, Grandma Duck had one), but despite much effort the electric car market of the 20th century absolutely remained a niche market. In 1994, Schot et al. gave the following explanation of the technological lock-in that had made it so difficult for electric cars to gain significant market shares:

“In evolutionary theories of technical change automobile history is often portrayed as an exemplar of lock-in. In 1895 the gasoline powered car was held to be the least promising option. Steam and electric vehicles contained attractive futures. Due to a series of circumstances gasoline got the lead and subsequently proved to be unassailable, so the story goes.” … Prevailing systems have gone through a series of incremental improvements and have gained precise user understanding. To solve compatibility problems a number of complementary technologies have been developed. Misfits with the societal and political system have been accommodated.

(Schot et al. 1994, p. 1061)

 

It is simple to illustrate the dynamic aspects of this lock-in (cf. Arthur 1988). Suppose the cost of using technology I (the first technology introduced) decreases with the cumulative usage of that technology.

Figure 1. The dynamic aspects of technological lock-in

 technology villy jan 29 2016

In Figure 1 the new technology is clearly superior to the existing technology at any level of cumulative usage. Shifting from the existing trajectory to the new one takes risk-willingness as well as deep pockets and long-term commitment.

It takes risk-willingness because the future trajectory of the new technology is bound to be uncertain. Deep pockets are obviously needed to match the cumulative technological knowledge built into the existing technology. And long-term commitment is needed to obtain the market shares and scale economies that will bring costs down.

Despite this, governments and, in some cases, city councils, have tried to jump start new technologies by subsidizing them in various ways. For example, Greentech Media in 2013 reported that Lancaster, California, had become the first US city to require solar panels on all new houses. More generally, Governor Schwarzenegger had introduced a plan in 2010 to exempt “green tech” from sales tax on their equipment. The Danish policy vis-à-vis the wind industry is a similar example of government intervention to boost a specific green technology and develop a local competitive position in supplying it.

Rather than airing my personal opinions, I would like to invite you to share your thoughts about the merits and demerits of such a technology policy.

  • Is it possible for governments to have the requisite knowledge to make such investments, or should they rather leave it to the market?
  • The environmental motivation for shifting to a greener trajectory may well be that the existing technology is associated with externalities which are not internalised in the private costs of using it. Suppose the new technology can be made commercially competitive only if this happens. Does this warrant a policy of permanently subsidising the new technology if in fact it doesn’t?
  • The previous two bullet points both reflect a scepticism concerning the wisdom of such policies. Faced with the serious threats of climate change, one could argue, however, that we need much more of this. Perhaps the EU could harness the resources required to engender technical change on the scale required to meet this challenge.

References

Arthur, W.B. (1988), ‘Competing technologies: an overview’, in G. Dosi, C. Freeman, R. Nelson, G. Silverberg and L. Soete, Technical Change and Economic Theory (London, Pinter Publishers, 1988), pages 59O-607.

Schot, J.; Hoogma, R. and B. Elzen (1994), Strategies for shifting technological systems. Futures 1994 26(10): 1060-l076

Image credit: http://mikelynchcartoons.blogspot.no/2007/08/our-future-world-in-1999-according-to.html