I’ve mentioned this paper by the legendary Nate Rosenberg before on this site, but I’ve recently reread it and want to discuss in slightly more depth. The problem is the following: why do firms and inventors choose to invent what they do? A classic argument appearing throughout the 1800s and early 1900s is that firms try to invent labor-saving technology when labor is dear, and likewise when capital is dear. But Samuelson (aka the GOAT), among others, points out that this argument is wrong. In equilibrium, factors are used until the price of the factor equals marginal factor productivity, so there is no sense in which a factor can be “more expensive” than any other factor. Even out of equilibrium, firms increase by profits by lowering costs, full stop, and it does not matter how those costs are lowered.
Problematically, both (wrong) intuition and many, many statements by inventors claim that “high” factor prices induced inventive activity. How can this paradox be resolved? Rosenberg discusses three ways in which day-to-day routine at a firm can focus attention on particular problems, thus resolving a firm’s indifference about where to direct inventive activity. These explanations are compulsion, avoidance of uncertainty/hold-up, and shocks.
By compulsion, we mean that, particularly in manufacturing, there is an “obvious” next invention. That is, high powered rifles in the 1850s were quickly followed by armored shielding on ships, and high-speed steel in cutting tools was quickly followed by beds and slides that could handle such rapid movement. You (not Rosenberg; he is one of the last remnants of the informal narrative in economics) might model this by letting the arrival rate of new inventions increase after similar inventions appear, since the idea is now, in some sense, in the air.
By avoidance of uncertainty, Rosenberg (and, in much of his writing which takes a similar tack, Marx) generally means worried about strikes will induce research on labor-saving technology. There is massive anecdotal evidence to this effect. It’s tough to model this formally for a risk-neutral profit maximizer, however; at least, I don’t see how it can be done. Note that if you have a model that works here, Rosenberg has a footnote discussing application of the idea to a broader class than just labor: for instance, frequent disruptions in water supply in the 19th century may have been important in the introduction of steam powered mills.
Finally, shocks can induce invention when a factor disappears for some external reason; e.g., World War II led to unavailability of SE Asian rubber in the US, and is often said to have led to the development of the synthetic rubber industry there. Again, you need more than a factor price explanation here. Rosenberg is definitely not saying that constraints make invention easier or anything similar; he’s merely claiming that, since firms are agnostic about which factor they should use more efficiently, the external constraint may focus managerial or inventor attention on one particular factor.
I still believe (as I perhaps too often say here) that invention is the most critical part of the economic world of which we still have a poor understanding. Perhaps this article will induce some research of your own?
http://www.jstor.org/pss/1152198 (360 citations, but I can’t find a non-gated version. Our copyright policy is complete nonsense.)