The definition of technology matters for tech policy and for growth

Dan Wang has a new post titled “How Technology Grows (a restatement of definite optimism)” and it is characteristically good. For tech policy wonks and policymakers, put it in your queue. The essay clocks in at 7500 words, but there’s a lot to glean from the piece. Indeed, he puts into words a number of ideas I’ve been wanting to write about. To set the stage, he begins first by defining what we mean by technology:

Technology should be understood in three distinct forms: as processes embedded into tools (like pots, pans, and stoves); explicit instructions (like recipes); and as process knowledge, or what we can also refer to as tacit knowledge, know-how, and technical experience. Process knowledge is the kind of knowledge that’s hard to write down as an instruction. You can give someone a well-equipped kitchen and an extraordinarily detailed recipe, but unless he already has some cooking experience, we shouldn’t expect him to prepare a great dish.

As he rightly points out, the United States has, for various reasons, set aside the focus on process knowledge. Where this is especially evident comes in our manufacturing base:

When firms and factories go away, the accumulated process knowledge disappears as well. Industrial experience, scaling expertise, and all the things that come with learning-by-doing will decay. I visited Germany earlier this year to talk to people in industry. One point Germans kept bringing up was that the US has de-industrialized itself and scattered its production networks. While Germany responded to globalization by moving up the value chain, the US manufacturing base mostly responded by abandoning production.

The US is an outlier among rich countries when it comes to manufacturing exports. It needs improvement.

Two comments on this.

First off, I couldn’t agree more with Dan’s emphasis on the localization of knowledge. Local knowledge networks made Silicon Valley what it is. By far the best dive into this topic is still Annalee Saxenian’s “Regional Advantage,” which charts the computer industry’s genesis in both Silicon Valley and along Boston’s Route 128. As she details throughout the book, the culture of work and the resulting firm structures in Silicon Valley differed significantly from those in Boston, giving it critical advantages to become the preeminent region of technology development.

When I read it a couple of years back, I highlighted the importance of regional knowledge hubs:

As a side comment, Saxenian mentions that many Silicon Valley workers far more rooted in the region than others. While the company man of the 1950s might move among the various arms of the firm to gain experience, which could be in different states, in the Valley, you would just move down the street. To me, that speaks volumes to the importance of regional knowledge hubs.

Without them, an industry can lose dominance.

Green tech is best and most recent example. Some have lamented that the US isn’t in the lead in producing photovoltaic tech, that we import too much of the stuff from China. Yet, China doesn’t have a labor or productivity advantage here. It comes down to scale and supply-chain management, according to research:

We find that the historical price advantage of a China-based factory relative to a U.S.-based factory is not driven by country-specific advantages, but instead by scale and supply-chain development. Looking forward, we calculate that technology innovations may result in effectively equivalent minimum sustainable manufacturing prices for the two locations. In this long-run scenario, the relative share of module shipping costs, as well as other factors, may promote regionalization of module-manufacturing operations to cost-effectively address local market demand. Our findings highlight the role of innovation, importance of manufacturing scale, and opportunity for global collaboration to increase the installed capacity of PV worldwide.

Second, Dan looks towards Germany as a model of high tech manufacturing, but there are some caveats. Most of Germany’s manufacturing prowess comes from small to medium sized firms called Mittelstand. And the reason that Mittelstand dominate seems to come from the cozy relationship German manufacturing has with the Fraunhofer Society for the Advancement of Applied Research, often just called the Fraunhofer Institutes. Sixty nine of these research institutes are scattered throughout Germany and work on applied optics, chemicals, high-speed dynamics, materials, and wind energy, just to name a few.

I haven’t done a deep dive yet into Dan’s writings to see if he has looked at this important link between research and output, but I hope he does. There is a lot to be learned from the German model and I am still hopeful that the lessons could be applied to US policy.