Economics of Technology Policy

A principal economic rationale for government technology policy is the market failure explanation framed by Arrow and Nelson. Unfortunately, this rationale provides little specific guidance in areas where it is not possible or desirable to remedy market failures in the generation or distribution of technology by more extensive assignment or enforcement of property rights. A consequence is that government policy decisions concerning innovation and new technologies are often taken outside of a conventional economic framework. This has had a salutary effect in the evolution of economic theory including a more serious consideration of how technology is endogenous to the operation of economic systems and recognition of the systemic relationships between different institutions of knowledge creation and distribution. Much of the diversity of policy regarding technology can be encompassed within four themes—policies affecting supply of technology, of complementary factors, and demand as well as changes in institutional design. Twelve policy designs derived from these themes are examined in terms of the goals they seek to address, the capabilities they require of sponsors and performers and the mechanisms available for their control and assessment. Two principal findings are that the evolution of new policies has been accompanied by more difficult challenges in their planning and evaluation and that this indicates the need to improve the theoretical frameworks for policy formulation.