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Technological Change, Economic Growth, and Business Education

In the late 1950’s, MIT professor Robert Solow published a series of influential articles describing a new framework for understanding economic growth. He showed that increasing labor and capital investment explained very little of the growth in the US between 1909 and 1949. Nearly all the growth was, instead, attributed to a broad set of “technological” factors (called total factor productivity). For this work, he was awarded the 1987 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

Solow’s work helped us to understand and appreciate the economic importance of technological change. But it also drew attention to how little we knew about the relationship between technology and growth. To this day, economists have not been able to unpack the components of total factor productivity and isolate the economic consequences of specific innovations. Solow himself called total factor productivity, “a measure of our ignorance” about innovation. Another frustrating aspect of the Solow model was that, like labor and capital, technological change was “exogenous,” meaning that it existed outside of the model, independently determined by external factors. As a consequence, the Solow framework offered little guidance about how economic policy can foster long-term economic growth.

Not surprisingly, growth theory languished as economists struggled to address these and other challenges. It was “dead” according to Paul Romer, when he picked up the topic as a doctoral student in the 1980’s. Yet, Romer ended up pioneering what’s called endogenous growth theory, by introducing a model with technological change driven by the choices of economic actors, such as entrepreneurs, inventors, and scientists, responding to market incentives. Suddenly, anything that affects their choices (such as taxes, funding, education, etc.) can shape long-run productivity and growth.

The implications of Romer’s work were exciting of course, but I was especially interested in the underlying assumptions. At the time, I was trying at the time to rethink the MBA microeconomics course considering the digital revolution which was starting to happen. A lot would stay the same, but there were some critical differences.

There were three premises central to Romer’s work. The most fundamental had to do with the nature of ideas. When most of us think of goods and services, they are what economists call rivalrous, meaning that if one person is using it, others are precluded from also using it. Like my toothbrush. But Romer pointed out that ideas or “technology” (he refers to “instructions”) are different. They are non-rival goods. The Pythagorean Theorem is often used as an example. Its use by one person does not prevent others from also using it. Indeed, it is possible that the more people who use it, the more valuable it is to everyone. From there, it is not difficult to imagine a community in which ideas cross-pollinate each other and generate increasing returns.

But Romer’s model also had to address a second attribute of goods, excludability, which has to do with whether the owner of a good can prevent others from using it. That depends in part on the legal system. What is interesting (and to some, problematic), is that ideas/instructions must be at least partially excludable to motivate individuals to invest in developing them. This point explains why patents and copyrights are useful and their owners have at least some degree of market power in the short term.

The fundamental starting point, that “technology” is a non-rival good, is central to understanding the digital revolution, as well as productivity and economic growth. When combined with advances in technology infrastructure (for storing, retrieving, manipulating, and transmitting data), it is easy to see how powerful the digital revolution can be in improving lives. Romer admits that the conclusion of his research was not really all that surprising, since people intuitively understood that technological change is the key driver of growth. For him, it was the surprise connection—this “non-rivalry or shareability of discoveries that is… why is there so much benefit from connecting with so many people.”

Why is all this important? It serves as a launch point for understanding what we need to do moving forward in business schools. For example, we can debate whether economic growth (with GDP) is the most appropriate yardstick for comparing economies. Economists continue to be perplexed by the fact that enormous advances in technology have not translated into faster growth as measured by GDP, a paradox aptly described by Solow, “you can see the computer age everywhere but in the productivity statistics.” Could it be that we are better off but that’s just not captured by the standard metrics?

We can also begin to understand our role in creating and disseminating “technology”, which is not as frictionless in the real world as in Romer’s world. What pedagogies are most appropriate when management ideas are not easily applied across contexts? Part of our job is to improve ideas, as well as accelerate their distribution. As Romer says, “Growth springs from better recipes, not just from more cooking.”

Understanding technology and growth also challenges us to think critically about the role of business in society. The Romer model helps us to appreciate the role of universities in shaping policies that contribute to innovation and growth, as well as in creating and disseminating business ideas and insights. I also hope it inspires us to address some of the larger issues related to human rights (e.g., privacy), climate, and health. For example, vaccines are useful to illustrate the difference between a rival good (the actual dosage) and non-rival good (the formula), as well as the potential tradeoffs between innovation and access.

At GBSN we are about educating and empowering people—the ones who create and manage organizations. And if we get it right, that translates into more responsible economic and social development. Our vision is for the developing world to have the management talent it needs for prosperity. Yet, as we have seen, we cannot ignore technology as a fundamental driver of growth and prosperity—and as a threat to both. That’s why this year the theme for GBSN Beyond is the “Transformative Power of Talent and Technology.”

Dan LeClair, CEO

Dan LeClair was named CEO of the Global Business School Network (GBSN) in February of 2019. Prior to GBSN, Dan was an Executive Vice President at AACSB International, an association and accrediting organization that serves some 1,600 business schools in more than 100 countries. His experience at AACSB includes two and half years as Chief Strategy and Innovation Officer, seven years as Chief Operating Officer, and five years as Chief Knowledge Officer. A founding member of the Responsible Research in Business and Management (RRBM) initiative, Dan currently participates on its working board. He also serves in an advisory capacity to several organizations and startups in business and higher education. Before AACSB, Dan was a tenured associate professor and associate dean at The University of Tampa.

Dan played a lead role in creating a think-tank joint venture between the European Foundation for Management Development (EFMD) and AACSB and has been recognized for pioneering efforts in the formation of the UN’s Principles for Responsible Management Education (PRME), where he served on the Steering Committee for many years. Dan has also participated in industry-level task forces for a wide range of organizations, including the Chartered Association of Business Schools, Graduate Management Admission Council, Executive MBA Council, and Aspen Institute’s Business and Society Program.

Widely recognized as a thought leader in management education, Dan is the author of over 80 research reports, articles, and blogs, and has delivered more than 170 presentations in 30 countries. As a lead spokesperson for reform and innovation in management education, Dan has been frequently cited in a wide range of US and international newspapers, magazines, and professional publications, including the Wall Street Journal, Financial Times, New York Times, China Daily, Forbes, Fast Company, and The Economist. Dan earned a PhD from the University of Florida writing on game theory.