Chapter 4. The role of technological innovation
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1The theoretical framework presented so far was meant to provide evidence that the creation of wealth as stock and as flow has depended on urbanization processes in a manner very different from what happened in societies before the twentieth century. All in all, many goods related to activities that generate annual wealth – that is, wealth as flow – have become something very different from a stock of capital able to reproduce wealth, and are the context for these and other economic activities to develop. Part of that capital stock, materialized in the cities as roads, highways, streets, houses, offices and other facilities, may or may not generate new wealth by way of incomes, products or services. The problem is that only a part of this new product is determined by the market and, as has been said, the total dynamics of the economy is not the same over fast urbanization periods as over subsequent periods. And the GDP that is generated along the process is not made up of similar goods and services. Another portion of this product is, or may be, determined by the State, in the form, for instance, of maintenance services, sustainable urban and infrastructure renewal, services to improve the standard of living of the citizens, budget for activities meant to improve human capital, including research and development, and other economic activities.
2But precisely this other part of capital stock depends on the magnitude of the new wealth as flow. The latter form of wealth is dependent on several factors, such as the individuals’ willingness to pay taxes, the quality of public institutions that have to allocate resources with efficiency and equity criteria, the level to which public budgets are subject to domestic and foreign financial restrictions and the amount of wealth generated by the private sector. This last factor depends, in turn, on technological innovation, among other things, the more so once traditional markets – many of them related to the urbanization stage – decline out of saturation or structural overcapacity. And it is also necessary to consider that innovation exists also in activities related to basic industries, construction, steel, infrastructure building, etc.
3Another important aspect of this question is that it is precisely in the cities that human capital is formed. Then in those cities with a longer-standing tradition of knowing how to do certain things (such as the production of some type of food or drink, or of sophisticated equipment for medical uses or for the aerospace industry), innovation has better chances to take place. And this is so particularly when the goods and services designed and produced are diverse in nature, and even when these two stages – design and production – may have been taking place separately over the last forty years, as has been pointed out in Figure 4, Chapter 2. Vast recent literature shows the evolution of a wide range of positions regarding the links between innovation, economic growth and its spatial distribution (Cooke, Asheim, Boschma, Martin, Swchartz, & Tödling, 2011).
4On the contrary, where annual wealth created by the industries was hand in hand with the urbanization stage, the human capital thus formed may not be competent enough to participate in innovative activities, which besides developed earlier in other nations and their urban systems. There, human capital received the contribution of long traditions of knowledge, access to diverse equipment and innovation.
5But besides, in a world dominated by huge corporations leading innovation and global markets, the magnitude of domestic markets may be an additional limitation to achieve competitiveness. In these societies it is more difficult to find new things to do, even when they might have more unfulfilled needs. For cities as we now know them – particularly since the post-War period – have provided a vast field of activities, or things to do, in the form of intermediate and final goods, capital and consumer goods, or a variety of objects and devices that people have got used to possessing and needing.
6Many would say that this is the result of capitalist accumulation and of this peculiar historical form of production. Yet, from this point of view, there would be no significant differences with European societies that have gone through communist or socialist experiences, or with China’s present development. What should be clear here is that this is not about who made the decisions, whether it was the market or the bureaucratic or technocratic bodies subject to the decisions of the central committees of a party, but about what things are done, how, with which technology and prior capital stock. To sum up, material lifestyles are not very different from one another for they are imposed by the culture, the modernizing paradigm, and this is global in spite of all the differences in levels of average wealth and traditions. This is why there is a so-called global middle class nowadays. Ultimately, the difference lies more in the size of these middle classes – and their relative impact with respect to the people not belonging to them – than in their difference in wealth across rich and poor countries.
7It is interesting to point out in this respect that, though relating the percentage of R&D spending with GDP – and trying to correlate it with levels of wealth per capita – has become customary, a very basic concept is usually overlooked: that the mass of R&D resources does not depend so much on the percentage of the product devoted to innovation but on previously generated wealth (cf. Figure 32). Indeed, the enormous differences in R&D spending – expressed as an absolute value – with respect to the level of annual wealth generated in the countries illustrate this. Even in China the total R&D budget amounts to 54% that of the United States, whereas the Swedish budget is only 3% that of America. That is, the mass of resources devoted to technological innovation mostly results from the overall wealth that a nation can generate; it is not only a cause of it.
8This last statement does not mean that innovation has no impact on the product or annual wealth created per capita, but it does remark a very important aspect: the possibilities to reach critical levels to generate wealth are very different across countries. Convergence is, then, also difficult to reach, whether across nations or within them. This aspect deserves attention, for it reveals that, though countries might make real efforts to innovate by devoting an important part of their resources to this, the possibilities of success do not depend only on those efforts but on a variety of factors, among which are prior experiences in general related to the international division of labor, and this is in turn the result of the historical context, of the available technology and natural resources, of the size of the population (which is the potential consumer and labor force market).
Figure 32. Research and Development (R&D) spending and Annual Wealth (GDP) by countries. 2012, in billions of current dollars

Source: Kozulj, 2015.
Note: Estimated on the basis of UNDP data (File: hdr14_satisticaltables). GDP values on right axis; R&D spending in absolute values on left axis.
9However, if these R&D efforts are compared to the levels of wealth per capita, the result differs from the above (Cf. Figure 33).
10It is interesting to observe that the annual flow of wealth creation per capita in some emblematic countries results from several factors: the level of R&D spending; the availability of low cost labor force and large markets – irrespective of R&D spending; the availability of natural resources; or even a combination of some or all of these. This is certainly not new, but it does reveal the difficulty to achieve convergence by means of innovation across countries precisely leading it. That is, there is not an infinite number of “niches” for innovation, nor are those actually existing free from barriers – natural or not – to the entrance of new competitors.
11On the other hand, it cannot be ignored that most of the innovative countries have participated in large-scale wars, and have gone through the geopolitical tensions of the “cold war” and the new tensions resulting from the China effect.
Figure 33. Research and Development spending and Annual Wealth per capita by countries. 2012 data, in current dollars per capita

Note: Estimated on the bases of UNDP data (File: hdr14_satisticaltables2012). The left axis shows GDP/capita. in 2012. The right axis shows R&D dollars per capita (2012) in absolute values of total GDP, the percentage of R&D in GDP and the population in the countries inferred out of the quotient between GDP and GDP per capita.
12Though China shows the second largest R&D budget, it holds position 31 regarding R&D spending per capita, and 66 in GDP per capita, whereas, for instance, countries such as Israel or South Korea, with R&D spending per capita that places them in positions 7 and 12 respectively, are in positions 25 and 27 with respect to GDP per capita. Countries that typically have an intermediate level of GDP per capita, such as Chile, Mexico and Brazil (positions 43, 52 and 57 respectively), hold positions 51, 57 and 33 in R&D spending per capita. Particularly in the case of Brazil and Mexico, the sources of wealth and R&D efforts differ widely1, and this is because their insertion in the global market influences their “autonomous” policies. And of course the cases of Saudi Arabia or Kuwait are paradigmatic to illustrate that measuring wealth by means of the indicator of GDP per capita is really of very little use.
13The above can be better understood when the data for R&D spending per capita are ordered with respect to GDP per capita in percentages, that is, to reflect the relative innovation effort as compared to the level of wealth created per capita.
Figure 34. Research and Development spending and Annual Wealth per capita by countries in 2012 (in thousands of current dollars)

Source: Kozulj, 2015.
Note: Estimated on the basis of UNDP data (File: hdr14_satisticaltables). Percentage of R&D spending per capita with respect to GDP per capita in each country on left axis. R&D in dollars per capita on right axis.
14This Figure shows how different the incidence of R&D spending is with respect to the same spending expressed in terms of annual creation of wealth as flow per capita. So as to sustain the standard of living of a nation, such flow should never decrease.
15It is then clear that innovation is a key factor in the creation of wealth at a global level and helps to stop the fall in GDP that would be produced without it. However, it may not be enough to make up for the loss of dynamics in the economies of many countries once the markets related to the construction of cities get saturated. At some point in history, this urbanization process could have been the consequence of the income generated by the exploitation of natural resources or some other competitive advantage (such as the availability of educated, trained and low cost labor force).
16Thus, the internal composition of wealth as flow and as stock varies along the different stages of urbanization, and the dynamics of activities more closely linked to the construction and expansion of cities declines as the urbanization process tends to its saturation in each particular geographical space. In turn, new things to do appear in the context of urban life marked by changes, innovations, trends, habits, traditions in which technology plays a key role.
17Yet the possibilities of creating new wealth to generate purchasing power in the market are dissimilar, and will surely always be so unless the global problem is approached differently. Such global problem is more complex as from the numerous interrelations across markets that have turned up along the last decades and whose number will continue to increase.
18From the theoretical point of view, it is well known that in Schumpeter’s approach – and in that of the so called neo-Schumpeterian economics – technological innovation plays a central role to explain the continuity of capitalism as an evolutionary system, and the active and creative role of business people. It can also be said that this debate has rendered the role of labor as the only source of value relative, in Marxist and post-Marxist debates (Grossberg, 2012).
19It was shown in previous work (Kozulj, 2003, 2011) that innovation, understood as including both technological change and diversification of products, precisely helped to sustain a certain dynamics in the economy along stages in which markets linked to urbanization – seen as the construction of all the physical infrastructure – lost (or at least gradually did so) their role as main drivers of economic growth. It has also been pointed out that if certain innovations do not increase capital productivity, a shorter life cycle of the products could imply a change in the pattern of income distribution in favor of the capital sector in the formation of the supply prices of those gods.
20Thus if all the activities dependent on shorter life cycles played a gradually increasing role in the product (flow of annual wealth, or GDP), a faster capital recovery (at any rate of profit) might leave a smaller portion of GDP devoted to other productive factors, such as labor or even taxpaying. This aspect, among others, is dealt with below.
Types of product, life cycles and their relative dependence with respect to the different stages of the urbanization process
21Creative destruction as an essential feature of capitalism has been praised as one of Schumpeter’s most original contributions to the economic sciences. James A. Robinson and Daron Acemoğlu (2012) consider this creative destruction typical of successful societies and use the argument in order to explain the cause of the wealth of nations and the fact that in those societies the dominant groups and forms of government are not extractive. By far a simplification, in view of what has been said so far in this book.
22As is well known, Schumpeter first developed his theory of cycles based on innovation, on the role of entrepreneurs, on the mass emergence of people with an enterprising talent, of products and industries in his 1912 book, and later in his 1939 and 1942 publications. Likewise, the link between innovations and long-term business cycles introduced the concept of the so-called Kondratiev waves (Table 4).
23The creative destruction approach is, ultimately, that of competition, of the struggle for the survival of the fittest and of adaptation of the companies to the market. It is a struggle of the new versus the old in the context of a clearly evolutionary concept where sometimes the old disappears in favor of the new, where both realities sometimes coexist, develop at different paces, merge into new realities, which are partly elusive, but which materialize as a “collage” at each point in history. In fact, urban systems and the cities might be seen as a scene of such a collage and as the result of accumulated and present production at a certain point in time.
Table 4. Main landmarks in technological development and their links with economic and urban growth
Year | 1800 | 1900 | 1950 | 2000 | 2050 |
World GDP proxy | 711 | 1657 | 2114 | 6073 | ¿? |
Millions of residents in large cities | 0.374 | 12.325 | 189.2 | 2438.1 | |
Kondratiev Cycles | Second Kondratiev wave | Third Kondratiev wave | Fourth Kondratiev wave | Fifth Kondratiev wave | Sixth Kondratiev wave |
Period | 1830-1880 | 1880-1930 | 1930-1970 | 1970-2010 | 2010-2050 |
Main technologies driving activity | Railroad, Steel | Electrification, Chemicals | Automotive Industry, Commercial Aviation, Petrochemical Industry & Household Appliances | Information and Communications Technologies | New fuels, Robotics, Biotechnology, Electric cars, Remote control vehicles, Health care, Geo-sciences, other innovations |
Primary fuels and others | Coal | Coal | Oil, Gas, Coal, Hydro Plants | Oil, Gas, Nuclear Power, Large Hydro Plants | Oil, Gas, Nuclear Power, Large Hydro Plants, Wind, Solar Power, Lithium-ion Batteries, Artificial Photosynthesis, others. |
24It is said that Schumpeter saw business cycles as the heart beats of the economic system, crises, as a stage of adaptation to new conditions, and capitalism, as an evolutionary process with economic mutations, and admitted that his theory was inspired on authors such as Marx and Darwin. Following this model, he saw innovations as “important variations and not as infinitesimal steps of variations on the margin” in the economic system. That is, “historical and irreversible changes in the way of doing things” manifested in some or several of the following sectors: methods of production and transportation, industrial organization, the production of a new article, the opening of new markets or the use of new materials2.
25Only small parts of a big theory can be empirically refuted, and this is normally why, above all in the social and human sciences, paradigms are not as easily destroyed as the readers of Thomas Kuhn’s theory about the way in which science progresses might imagine. That is, rather than dying, theories survive whether their hypotheses prove false or not, and despite factual evidence that might counter false hypotheses. This is what some people call “controversy spaces” (Nudler, 2011), and I prefer to call the field of “the ecology of the ideas”.
26The neo-Schumpeterian approach (Freeman, 1982, 1998; Nelson & Winter, 1982 and many others following this line of thought3) has focused on the central issue of technological innovation and its close link to economic growth. Thus, Schumpeter says in Development (1932):
Novelty is the true center of all that must be accepted as indeterminate in the deepest sense, and there is always the coexistence of a wide range of, in principle, determinate circumstances and processes.
27But what this school of thought proposes is different from the new viewpoint suggested in this book of the link between urbanization and technological change. We introduce here the possible saturation of a set of important markets whose innovation is not completely likely, and whose products cannot be easily sold on the market unless there is a well defined and – at this stage in history – global policy.
28Table 5 means to illustrate this by typifying the differences between capital goods (linked to the development of infrastructure, creation of productive capacity and the arms industry) and industries linked to daily mass consumption and of durable and semi durable goods. There is also a brief description of the main impacts on the economy by means of the interactive dynamics between growth and product composition, so that these aspects can then be related to urbanization stages. All this should clarify our line of argument.
Table 5. Differences between capital goods and infrastructure industries, and mass consumer goods. Impact on life cycles
Complex Projects and Infrastructure | Simple Projects – Mass Production | |
Product | ||
Capital goods and infrastructure | Wide range of consumer goods | |
High cost per unit | Relatively lower, or low cost per unit | |
Product cycles (decades) | Short – and increasingly shorter – product cycles | |
Custom-made non-standard components | Standard components | |
Complex interfaces | Less complex or very simple interfaces | |
Less flexible reconversion of products and markets | Variable flexibility for reconversion depending on the products and markets | |
Hierarchical/systemic organization | Simpler organization systems | |
Productive capacity growth very linked to the construction of the urban lifestyle or to the Military-Industrial Complex (MIC) | More stable demand whose growth depends on the growth of population and its income. | |
Production | ||
Individual or small-scale projects | High or mass production volume | |
Design decided by buyer | Design prior to production | |
On-the-spot variations in the design | Affected by tastes and trends | |
Characteristics according to development stage | ||
Continuous development along the expansion of the urbanization process. | Continuous development along the expansion of the urbanization process. | |
Highly dependent on public budget. | Dependent on consumers’ income. | |
Enters overcapacity crisis alongside the decline in the dynamics of the urbanization process. | Their markets decline in dynamics alongside the saturation of the urbanization process but are more stable. | |
Adequate government decisions required for their subsistence. | Market saturation is counteracted by the addition of new products and designs. | |
They evolve into hyper complex technological forms (with shorter cycles in MIC). | The innovation process shortens life cycles. | |
Impacts on the economy | ||
The volume of projects affects investment rate. | Shorter life cycles may structurally affect income distribution. | |
The Government needs higher budget to sustain industry; difficult investment recovery through market mechanisms. | Consumers want higher income to have access to new technological goods and services, and demand tax reductions. | |
Amortized infrastructure leads to excess income and competitiveness under unfair conditions, it affects rate of return across sectors; access barriers. | Possibility of attracting technological income by short terms. Volatile rate of return and other more stable ones. | |
Projects with guaranteed return but not in their regular continuity. | Regular continuity of markets but in very competitive contexts. | |
Savings-investment inequality. Strengthening of the financial sector. | Part of excess savings finances consumption. Strengthening of the financial system. | |
Overvalued assets (use of amortized infrastructure, projections for unfulfilled demand.) | Overvalued assets subject to fluctuations by technological risk, shorter life cycles, market risks. |
Note: Designed using data from Davis (2003).
29What we intend to point out is very easy to understand by means of equations finding equivalence and defining Gross Domestic Product (GDP) and Value Added (VA). As is well known, expressions at the aggregate level are:
- GDP= C + I + X - M
where
C = consumption; I= investments; X= exports; M= imports; and - GDPtn= GDPt0+ ΔGDPtn
That is, inter annual variations (or those by longer periods) can be defined as the sum of the initial product in a certain year and the variation produced in the following period, which can be positive or negative.
In turn, ΔGDPtn may correspond to variations of components C, I, X in tn. - VA = RC + RFF
where
VA= value added; RC= capital remuneration4 and RFF= return on the rest of the factors, where by definition, GDP = VA.
30Now, equation (1) becomes (4) below if it is disaggregated so as to separate investment linked to infrastructure (Iƒt), to the creation of productive capacity for traditional goods (ICtrt) and to the creation of new technology-intensive products characterized by fast innovation (INpt), and if, in turn, consumption is subdivided into that dependent on income from salaries (CMst) and that related to sectors owning productive units or sectors with higher incomes as a consequence of high specialization or of their privileged share in society for whatever reason (CNpt). Thus:
- GDPt = [(CMst + CNpt) + (Iƒt + ICtrt + INpt) + X - M]
Considering Iƒt, ICtrt, ∫ (Urbt), then ΔIft and ΔICtrt will depend on ΔUrbt, where Urbt is urban population at a specific point in time.
31While the decline in urban population growth rate is predictable in the long term, this will lead to a slowdown in the investment process as a consequence of the urbanization process. It should be considered that initial infrastructure is always built to last long and productive capacity is meant to produce output with longer life cycles. As is well known, a decline in the rate of investment, whatever its cause, leads to recession and business cycles. Traditional counter cyclical measures may not be effective in a context of overcapacity occurring in a sector that, because of its very nature, is also incapable of liquidating its output simply because the products in question are not mass produced and likely to be stocked. Therefore, a recession caused by this type of fall in the investment rate will produce a decline in the total level of activity. It will be an L-shaped recession, in which the activity decline is longer and generates a lower threshold than a U-shaped one5, which is characterized by soon recovery and the possibility of returning to a growth path again.
32On the other hand, as the proportion of Iƒt and of ICtrt within total investment declines, and the proportion of INpt -type investment increases, RFF will necessarily share a smaller proportion, as will be explained below, within VA. This in turn will impact on CMst, thus deepening a structural crisis that will give rise to the dual society.
33The above is the consequence of the fact that productive sectors linked to CMst, Iƒt and ICtrt, which sustained the “Fordist” model, and that of the “glorious thirty” or the Golden Age can no longer go by the old rules of the game. These implied salary and productivity increases, guaranteeing stable employment and the basic conditions that gave rise to the Welfare State and the old counter cyclical Keynesian policies.
34However, the accession of China to the WTO and its becoming the factory of the world have partly reedited those glorious years in many countries, though in the context of a highly fragmented world, specializing in the things that are done. There is serious doubt – as has been seen – that the decline in the increment of new urban population will be able to sustain, along the coming decades, the impact that urbanization had over the past two ones. In such a context, if investments are influenced by the urbanization process, when their dynamics declines alongside such process, GDP will grow only if total consumption, or exports, or both increase.
35At the global level, export and import totals are equal though there may be multiplying effects due to larger volumes of exchange (e.g., infrastructure for ports, roads, airports, government, etc.). Then foreign trade cannot contribute to global economic dynamics if only the same products are imported or exported. As has been said, consumption depends, to a large extent, on the return on the rest of the factors. If the decline in investments associated to urbanization as a comprehensive process (infrastructure and creation of productive capacity) is replaced with the creation of new goods and this implies fast technological change linked to shorter life cycles, the proportion of the product devoted to remunerating the rest of the factors will be smaller, and this in turn will be a serious obstacle to consumption increase. This will be dealt with below. But before it is necessary to remark that the internal breakup of the productive system is what leads to the emergence of the dual society, to a dynamics in which some people have access to an ever growing range of diverse goods and services, and some others cannot even fulfill their basic needs.
36In a previous article, and on the basis of similar arguments, I pointed out:
“Foreign trade may boost growth in some countries, but by definition, it cannot do so on a global scale, except for the fact that the urbanization process is still not complete, and then it works as an incentive to modernization. It is the case of Asia, particularly China and India today, but it will no longer work the same once these have completed the process”. (Kozulj, 2004)
37In retrospect, such forecast seems not to have been wrong.
38It is particularly evident that the emphasis on technological innovation is a way of making up for that “quantum” of product, for “new things to do”. Then, it would be practically unnecessary to refer to it, except for the fact that such an adaptive strategy mediated by innovation may have deep implications regarding several aspects. In the first place, the possibility of improving income distribution and that development lead to convergence by reducing inequalities in the generation and distribution of wealth. Secondly, the patterns of social organization, changes in values and the cultural production of the “society of knowledge”. Next, the link to the military-industrial complex and its growing importance as an instrument of counter cyclical policies meant to achieve the dream of a stationary or growing economy. Finally, what in economics has been called the dematerialization process, which means both a reduction in the quantity of materials required per unit of product, and a growing proportion of services within the total economy.
39Each of these issues will be analyzed below. Now it is necessary to refer to the question of the planned obsolescence of products in order to prevent the saturation of markets and to keep the productive system working. This is so because the capital invested must be recovered in a shorter term than in the past, but in turn, each substitution may suppose larger pre-established markets.
40As is well known, when the cost-effectiveness of a project is analyzed by means of evaluation techniques, hypotheses are assumed regarding the following factors: the size of the market; expected sale prices; investment costs and total operating costs, including labor force, taxes, inputs, etc. The basic criteria for acceptance or rejection are still basically the net present value – which must be positive at a certain discount rate -, and the internal rate of return (IRR). The latter is defined as what renders the net present value null and is the rate at which investment will be recovered annually if the provisions of the economic feasibility study prove true. So that such internal rate of return is met once the investment has been decided and the project implemented, the behavior of sales and costs must be the same as in the study. Therefore, the starting hypotheses influence the formation of supply prices.
41Now, in a very simplified manner, unit supply prices basically include two components: on the one hand, the capital recovery factor (CRF) or RC, and on the other, the rest of the costs – or other costs (OC) or RRF. That is, they include what was called RC and RRF in relation to how total value added is subdivided, which, in turn, is by definition identical to the output if the expression is used at an aggregate level of an economy or of all of them.
42So that the expected internal rate of return (IRR) is met, the discount rate used in the expression of the capital recovery factor must be the same. An interesting property of such factor is that it depends on the assumed recovery term in a non-linear manner. Therefore, for gradually shorter periods of investment recovery, the capital recovery factor also shares an ever growing proportion of the product supply price.
43This analysis starts from an aggregate function of supply price formation made up of the factors already defined, that is, capital recovery (CF) and return on the rest of the productive factors (RRF).
44We will now represent in a simplified manner a distribution function of the part of the social output corresponding to factors other than capital (basically salaries and taxes), as from an expression simultaneously considering the capital/output ratio and the capital recovery factor:
- α=λC – C [i/1-(1+i)^-n]
Or, similarly, - α= GDP – C [i/1-(1+i)^-n]
since λC= GDP
where:
α is the part of the social output that is returned on factors other than capital (RRF)
λ is the value of the capital/output ratio
C is the value of capital
GDP is the gross domestic product identical to value added
and the expression [i/1-(1+i)^-n] is the capital recovery factor (CRF),
where i is the discount rate and n is the capital recovery term.
45Thus, the value of α increases when the capital/output ratio grows (capital intensity decreases), which is trivial, but it declines with decreasing values of n in a non-linear way.
46Indeed, if α is derived with respect to n, the following expression results:
- δα/δn = C * i * ln (1+i) / {[(1+i)^n/2]-[(1+i)^-n/2]}^2
which shows the positive sign of the derivative (α increases when n does, or it decreases when n does). This behavior corresponds to a quasi-hyperbolic function, which points to the peculiar sensitivity of the function regarding the range of n values, particularly when variations occur with n values lower than fifteen years.
47Figure 35 below illustrates the behavior of the partial derivative of the function with respect to n.
Figure 35. Behavior of the partial derivative of the simplified global function of value added distribution in relation to the life cycle of the output for cycles at least 3 years long

Note: Values of partial derivative of the return on the rest of the productive factors (RRF) with respect to value n of the capital life cycle for values n>3 years.
48So that α does not decrease as a consequence of a shorter life cycle – or capital recovery term as a consequence of continuous and fast technological change – there should be important increases in productivity (decreases in capital/output ratio). Yet, though the empirical evidence is incomplete, the data outlaid in Figure 23 (Chapter 3) regarding the trend in investment rate at the global level and in the incremental capital/output ratio (or inverse of capital/output) for the period 1970-2011 seem to show that such a phenomenon was actually not recorded. On the contrary, it is known that, due to several concomitant reasons, the trend has been towards a smaller share of wages in GDP and also towards serious difficulties to raise the taxation rate. This is precisely one of Piketty’s central issues in his 2013 book, Capital in the Twenty-first Century, and he strives to show it, focusing all his arguments on the distribution aspect. Yet, he does not make any reference to the constant mutation of the goods that make up the flows of annual wealth and the consequence this has on employment and income distribution (both within each nation and across countries).
49The function above actually derives, as has been said, from the most basic and aggregate one of global supply price formation. This comprises the capital recovery factor (CRF) and the return on factors other than capital (RRF), with the latter including the total cost of the rest of factors other than capital (basically salaries and taxes).
50Likewise, if the rate of i used for estimating CRF is the expected or foreseen internal rate of return (IRR) and n is the life span of the project, (or the basis used a priori to estimate the IRR in the assessment of the projects), then supply prices formed with that CRF guarantee that the theoretical IRR for each product will be materialized. Therefore, the analysis of the effect of the decrease in value of n on income distribution is totally compatible with the theoretical notion that the IRR represents capital remuneration, or the rate at which the capital invested is paid back. And this, in turn, is the basis for extended reproduction of the economic system as has been known over the last two centuries or so.
51What we mean to emphasize here is that, since there are different capital recovery terms shortened by planned technical obsolescence – in turn accelerated as a consequence of innovation – a bias is introduced in the distribution of value added in favor of capital and against the rest of the factors. But this does not yet imply larger capital remuneration, since it is the same internal rate of return (IRR). This occurs in practice through the process of supply price formation, which normally determines market prices in a modern economy.
52This reasoning may go against common sense, partly because it is static and does not introduce the question of the demand. Nor does it refer to the fact that excess savings may create incentives for investment (as when interest rates decrease), or that they can create conditions for financing the ever growing mass of potential consumers, thus contributing to sustaining or even increasing aggregate demand. In passing, this is the favorite argument of those arguing for tax reduction as a way of reactivating the economy by promoting private consumption. But the fact is, precisely, that this new approach means to look at this question from a different perspective: innovation, though more than ever necessary to sustain and increase aggregate demand so as not to decrease the flow of wealth to be created, may also bring about several problems, such as the macroeconomic and global impact of the shorter life cycle of products in the absence of larger capital productivity, as was explained above.
53Although there is still not an adequate empirical basis to delve into the problems associated to continual and fast technical change, the theoretical element presented here is difficult to evade. Figure 22 above showed some evidence that the quotient between the increase in annual investment and in annual output has been growing over the last forty years, which would indicate that capital productivity could have decreased. That is, most likely, innovation as a phenomenon as a whole, has not brought about higher levels of productivity, understood as average wealth per unit of investment. In turn, some empirical and theoretical evidence suggests a negative correlation between faster obsolescence and unemployment growth (Tronti & Tanda, 1998). Contrarily, though, the capital/output ratio could also grow in the context of a global dynamics unable to absorb excess labor force. And this is, precisely, what those in favor of promoting consumption by reducing taxes seem to overlook, or else not to care about. In this case, what generates the higher capital productivity is generally not innovation. It is the typical scenario in which increases in productivity at the microeconomic level may occur alongside long periods of poor macroeconomic behavior from the point of view of the full employment of the labor force.
54On the other hand, certain research contributes evidence of the behavior of product life cycles, and about a spread of new models and products. In the case of the automotive industry, for instance, it has been estimated that:
“… across all manufacturers, since the 1970s, the product life cycles have decreased steadily from 7.5 years to 5 years, and it is predicted that the average age of production for the European volume manufacturers will decrease from 4.2 years in 1994 to 3.1 years by 2005” (Holweg & Greenwood, 2000).
55A similar trend has been pointed out by Dušan Sabadka (2013), who estimates that the life cycle was reduced from an eight-year average to only four over the last decade, which means that developing new prototypes has also been taking almost half the time. The author remarks, then, that capital must be recovered over a shorter term, and this requires careful planning of production at smaller scales per platform to face an ever diversifying demand which cannot be handled by inventories or product stock. This also requires new financial, market and auto-part management architectures. The trend to produce luxury vehicles is also remarked, which goes hand in hand with affordability coming from a better distribution of wealth.
56Other researchers, such as Barry L. Bayus (1994, 1998), question the generalization of the statement that firms are trying to shorten product life cycles by introducing new models and withdrawing old ones. This author analyzes the case of the computer industry, and concludes:
“The statistical results across manufacturers are consistent with the popular press reports that personal computer lifetimes have declined over time. However, this empirical observation is not due to an underlying acceleration in product technology or product model lifetimes, nor is it due to individual firms systematically reducing the life-cycles of products within their lines. Instead, the first products of firms that have entered this industry in the more recent years tend to be based on previously existing technology, and, not surprisingly, these products have life-cycles that are shorter than those of established firms”.
57The author then suggests that, for the case under analysis, it is not that there is more R&D investment but that there are new lines of products, as a consequence of the sales opportunity windows already open by the introduction of products on the basis of prior R&D efforts, and of balancing investment and return costs, which has to do with the strategies implemented by each firm. However, he also states that these conclusions are not to be extrapolated to other industries and that, in general, there is not enough serious research into this issue. I consider that this argument refers to whether the capital/output ratio increases or decreases; it is not a denial of the fact that product life cycles are shorter. In any case, what is stated is that the incremental R&D investment might not necessarily be higher.
58Other approaches take it for granted that product life cycles are shorter, and deal with environmental or recycling issues, quality control difficulties, planning of R&D and marketing activities, critique of consumerism. Such is the case of Preston G. Smith & Donald G. Reinstein (1992); William Qualls, Richard W. Olshavsky & Ronald E.Michaels (1981); Jos van Iwaarden & Ton van der Wiele (2012), and Lydie Tollemer (2014).
59All of this needs to be studied in greater depth. Yet, I suggest that it would be worth seriously wondering about this mutation in the internal composition of GDP, about whether its causes – a combination of the deceleration in incremental urbanization and growing planned obsolescence – are not structural factors explanatory of the characteristics of capitalism over the last forty years. These are factors that authors such as Thomas Piketty consider from a different perspective.
60The answer to such questioning cannot be conclusive, but it is totally plausible as from theory and facts. Particularly because the link between wealth as stock and as annual flow is radically modified in a way that seems not to have been comprehensibly perceived by the economic science.
61Besides, the structural limits imposed on the improvement of income distribution by the impact of the shorter life cycle of products affect both salaries and the part devoted to financing public spending. It seems appropriate to remember here that it was precisely towards the mid nineteen-seventies that the turning point in distribution patterns and demands to decrease public spending and tax pressure became more noticeable. Both limit aggregate demand and this turns clearly evident in the stages of this evolutionary process in which growth is not so much driven by extensive urbanization, as was the case before the impact of “the China effect” – and as could probably happen again in coming decades. On the other hand, it is also in this context that active redistribution policies lead to the phenomenon (unknown between 1950 and 1970) of stagnation with inflation.
62Yet, paradoxically enough, once the urban life style becomes the norm for large masses of people, more public spending and income redistribution are needed, among others, because of the reasons William Hack Baumol6 (1967, pp. 415-426) put forward in his pioneering work on this topic, which many economists should re-read over and over again. Medical care, education, security, infrastructure maintenance and other services are increasingly needed in urban societies because they are directly associated to the life style in those contexts. And unlike the case of industries, no technological progress could surely change the fact that these activities are labor intensive. Baumol’s model assumes two sectors: a progressive one, related to the industry, where technological innovation can replace labor without affecting the quality of the end product (or even its price), and another non progressive one, related to certain urban services.
63The explanation suggested in this Chapter regarding the impact of planned obsolescence on the formation of supply prices – and its links to income distribution – has to do mainly with the progressive sector, in Baumol’s terms. The problem pointed out by the author is still more complex, for what is left for salaries and taxes in the labor expulsive sectors – that is, in the most productive of the economy – is much less than it was in the Golden Years.
64Baumol’s emphasis (1967) on trying to explain the phenomenon in the non progressive sectors deserves a quote:
“One of the major economic problems of our times is the crisis of the larger cities. Together with their suburban periphery the cities are attracting ever greater segments of our population. Yet at least the core of the metropolis is plagued by a variety of ills including spreading blight as entire neighborhoods deteriorate, increasing pollution of its atmosphere, worsening traffic, critical educational problems, and, above all, mounting fiscal pressures. The financial troubles are perhaps central to the entire issue because without adequate funds one cannot hope to mount an effective attack on the other difficulties. More than one reform mayor has taken office determined to undertake a radical program to deal with the city’s difficulties and found himself baffled and stymied by the monstrous deficit which he discovered to be hanging over him, a deficit whose source appeared to have no reasonable explanation. There seems in these cases to be no way to account for the growth in the city’s financial needs for the fact that a municipal budget far above that which was roughly adequate a decade earlier threatens to disrupt seriously the city’s most vital services today. Where the political process is involved it is easy to blame growing costs on inefficiency and corruption but when they take office, reform administrations seem consistently puzzled by their inability to wring out the funds they require through the elimination of these abuses. A critical element in the explanation becomes clear when we recognize how large a proportion of the services provided by the city are activities falling in the relatively nonprogressive sector of the economy. The bulk of our municipal expenditures is devoted to education which, as we have already seen, offers very limited scope for cumulative increases in productivity. The same is true of police, of hospitals, of social services, and of a variety of inspection services. Despite the use of the computer in medicine and in traffic planning, despite the use of closed circuit television and a variety of other devices, there is no substitute for the personal attention of a physician or the presence of a police patrol in a crime-ridden neighborhood. The bulk of municipal services is, in fact, of this general stamp and our model tells us clearly what can be expected as a result. Since there is no reason to anticipate a cessation of capital accumulation or innovation in the progressive sectors of the economy, the upward trend in the real costs of municipal services cannot be expected to halt; inexorably and cumulatively, whether or not there is inflation, administrative mismanagement or malfeasance, municipal budgets will almost certainly continue to mount in the future, just as they have been doing in the past. This is a trend for which no man and no group should be blamed, for there is nothing that can be done to stop it”. (p. 423)
65Increase in productivity in certain sectors – banking, finance –, or in supermarket or Internet sales, cannot be replicated in other service sectors such as those mentioned above. In spite of this – and the question would deserve a chapter of its own – these increases in productivity have not only displaced labor force towards less productive services – or even towards unemployment – but they have also increased consumers’ non remunerated tasks (e.g., personal time devoted to all types of self-services, whether in banks, supermarkets, telephony, etc.)7. At the same time, the huge size of the global market, particularly that of the so-called “global middle class”, opens the door so that services with very low unit cost per consumer yield enormous profits.
66Let us consider telecommunications. Here, the cost of data transportation is determined by that of the necessary infrastructure and its maintenance and operation (laying optical fiber cables, mounting antennas, providing satellite transmission, etc.). In turn, use of these technologies yields profits from the difference between paying for the use of such infrastructure (telephony and Internet), the cost of generating contents to be transported (web page design, publicity, TV programs, etc.) and the sale price of those contents (e.g., Netflix, publicity in pages such as Google, YouTube, and the like). Innovations of this type are characterized by their economic opacity, and they generate income not likely to be regulated in practice. Indeed, the magnitude and origin of such income may not render it likely to be used on new investments leading to the generation of enough employment. And this is so because nothing regulates the allocation of such global income to the development of cultural industries in each country, or because the possibility of competition in those markets is very low for countries with less relative development.
67Which incentives, then, for larger competition on this market could reduce and capture income? The super rich that Piketty talks about also emerge out of these new technologies, and not only as a consequence of inheritance. It is a kind of merit award, but probably too exaggerated. However, let us consider this example: suppose a business in this sector bills some 120 dollars per user/year, captures a thousand million users and has a value added coefficient of 70% the value of its sales. Such business would be contributing only 0.12% of the world GDP. That is, about thirteen businesses this size would be needed to sustain an additional growth rate of 1.5% a year – and every year. This means that, in order to reach 2.5% yearly rates the rest of the markets should grow at least 1% a year. In turn, the personal fortunes of those undertaking such businesses are so large that, assuming that returns are 15% on sales, profits would total 18 thousand million dollars a year.
68When Baumol wrote the book we quoted above, the Golden Age had certainly not come to its real end. Yet its main value lies in the fact that it revealed certain phenomena that would later be the backbone of all macroeconomic policies: public spending, its auditability, its addressees, the quality of the services rendered, the likelihood of their deterioration, the transformation of some of these public services into private ones, so that those citizens with higher incomes might access top quality services – whatever the kind – on the market instead of depending on the State.
69The opposite trend, that is, that most of the output be devoted to the high-quality provision of such services as a universal right, has become a political promise and an ideological dispute. Indeed, as society has been promising egalitarian access to these services, the topic has also acquired a wider dimension. And at the same time, inequality has become more marked, mainly as a consequence of structural unemployment caused by the saturation of some markets and of some other reasons. The willingness to pay for everyone’s access competes with a host of other individual and collective demands.
70The illusion that it is possible to solve this without a clear anatomy of the real dynamics of the economy is dangerous. It is not a question of building such anatomy, but of rebuilding it on sound bases. If the dimensions of sustainable development are to converge, it is unthinkable that they do so out of the creation of zero- or too-low-wealth to absorb the available labor force. It is also unthinkable that, under the growth trends described, environmental and equity dimensions be ever reached.
71One can consider what has been said about the likely impact of shorter product life cycles on income distribution (which, in any case, occurs in the progressive sector, in Baumol’s terms, if his hypothesis is correct). In such case, the conclusion is that, nowadays, the problem is not only a redistribution of income, as many suggest – among them Piketty as a main advocate – but how to transform supply and direct it towards global sustainability. That is, how to create wealth enabling the inclusion of the labor force displaced from declining activities into others whose progress does not depend on the market. Nor can the problem be solved by the State without a new social contract based on a clear insight into the problems that have been described here. Of course, this is easier said than done.
72Technological innovation as the provider of such a surplus of annual wealth needed to improve the quality of life and wealth of societies in turn brings about a large number of related issues as created annual wealth embodied in the urbanization process decreases. One of these issues is, no doubt, the destruction of human capital or the great challenges implied in avoiding it, as would be the evolutionary reconversion of such human capital by means of educational or labor training processes, or the creation of new things to do suitable for those who know how to do what they can do but whom the market does not require.
73The questions of tax pressure and the use of public spending are again at stake here, as well as that of redirecting supply. These issues are certainly not compatible with consumers’ totally free choices. Even less so when certain issues hinder the social acceptance of greater tax pressure, as could be the belief in one’s own merits – associated to individual effort and success – and in the individual as the center of society.
74Nowadays, then, this would lead to the debate on the distortionary cost of taxation, which would render the economy less efficient. Intellectual efforts to show a decline in well-being within neoclassical frameworks, general equilibrium models, etc. have been commonplace (cf. Ballard, Shoven & Whalley, 1982; 1985, pp. 128-138). Yet no empirical data show any correlation between GDP per capita, percentage of public spending or its growth, or the progression of taxes.
75Research using UNDP data on the Human Development Index (HDI) is really conclusive in this respect. Countries such as Sierra Leone, Eritrea or Malawi have a 500 to 1600 dollar GDP per capita, with rates of public spending ranging from 40% for the first country mentioned and 10-15% for the others. Conversely, GDP in Singapore, Australia, Austria and the United States is over 40 thousand dollars a year, with rates of public spending with respect to it ranging between 18 and 24%. In fact, the correlation between this indicator and even growth of public spending along the previous five years does not outstrip a 3% R2 within a group of over 170 countries. In turn, two variables such as the percentage of public spending on GDP for R&D and the level of indebtedness of the countries reveal better results.
76It is curious that no one has ever considered the destruction of human capital deriving from the urbanization process a serious negative externality associated to economic growth, whereas it is assumed that adapting to changes in the context or even having migrated from the countryside to the city is an individual responsibility. This issue has also been simplified by mainstream economic theory, as has been discussed here. The systemic question is easy to reject, for reality is not completely attainable somehow, and also because in real life there certainly are individuals who are more enterprising, better educated, and others who are not. Remote causes, in turn, are not credible and it is therefore necessary to bring them to the fore.
77However, even in the case of admitting that such destruction of human capital is a negative externality, it would be relevant to consider the concept developed by Arthur C. Pigou in his work on the economics of welfare (1920). In that case, just as that concept has lately been related to environmental issues, so the problem could be conceptually framed, for extreme poverty and urban marginality have to do with the standards of living of the whole population.
78It has been suggested that, in order to survive, “capitalism must constantly stimulate tendencies to insatiability and activate different forms of desire for accumulation” (Boltanski & Chiapello, 1999). This is the basis on which creativity and innovation operate. But the question still is: can innovation create such an amount of annual wealth as was created in the past by means of urbanization, understood in turn as the activities that created part of that annual wealth? If the answer is affirmative, then there are no internal limits to growth; if it is not, there are. The problem is that economic evolution so far has actually showed that an important part of the society is benefited in this competition, and another part is certainly not. As time goes by, the losers may grow in number, yet still remaining the minority with respect to the winners. The Marxist approach ultimately supposes that a new society will emerge out of this tension of the “class conflict” (whatever the way in which the original concept might be used today). Others, following the same approach, suppose that these capitalist crises may end up in serious armed conflicts. It is not necessary to argue for one or the other, for the system may simply evolve slowly towards different standards of living, which is what has actually been happening so far. This is why it is still important to propose new ideas.
79In fact the difference between the American and the European ways of solving the questions related to public spending, residents’ well-being and tax pressure is just a superficial expression of what is being suggested here. For instance, reforms on the American health care system were strongly questioned by the most conservative sectors. In turn, the Spanish, Greek or Portuguese cases – just to mention the most widespread – are emblematic with respect to the sustainability of public spending in contexts in which, as in the European Union, it is necessary to have strong monetary policies which in turn operate as cages where cats that would rather be tigers must compete with lions.
80But before going into these problems, it is necessary to explore other issues related to the central topic in this chapter.
Technological innovation and economic aspects
81When considering the empirical evidence on the leadership that certain urban centers exercise on technological innovation – as was done in Chapter 2, Figure 4, where we compared the population trend in the hundred cities considered best positioned in technological innovation –, it is easy to see that almost all of them belong to countries that were strongly involved in armed conflicts sometime in their twentieth century history. It is not necessary to go too deep into the links between industry, and research and technological development activities, particularly in the developed world. In fact, much of the research coming from the defense sector finally gave rise to technological developments of civil use, which we have grown so much used to in our urban contexts: computer networks and systems, remote sensing, cameras, mobile phones, civil aviation, automotive industry, use of new materials in clothing, production of new drugs, appliances, chemical products, and so many others.
82For some authors, even historical materialism – with its well known emphasis on the development of the productive forces and its contradiction with social relations of production – overlooked the true revolution that was produced with the advent of firearms, which is why military power is a crucial factor prior to the development of capitalism. Just before the First World War, Werner Sombart dealt with this question in detail in his book War and Capitalism (1913).
83Anyway, what needs to be considered is that another variable embodied in wealth creation is military spending, which in turn is closely linked to the installed capacities of R&D centers (cf. Figure 36). The correlation between military spending and total R&D spending is very high. It cannot be inferred from this, however, whether there is a separate accounting of both variables, which could either overlap or not at different levels in each particular case.
Figure 36. Comparison of R&D and military spending. In billions of dollars for 2012

Note: Estimated on the basis of UNDP data for R&D spending (in absolute value, 2012), and of SIPRI, military expenditure by country, in constant 2011 US$ m., 1988-2013).
84Interestingly, the results of comparing both data series – cross-sectional data for 93 countries – suggest that there is 77% of correlation when considering logarithms, and 88% when considering absolute values.
85Military powers like the United States, Russia, China seem to spend more on defense than on R&D (in relative terms), if the data are regarded as not included in each other. Other countries, such as Saudi Arabia, are a case in themselves, for they need to safeguard with their military power their oil wealth, their role within the rest of the developed countries and their position in the always chaotic Middle East – even more so since 1946 –, and they do not require much spending on R&D.
Figure 37. Real military spending as compared with the result of the correlation model

Note: Estimated on the basis of UNDP data for R&D spending (in absolute value, 2012), and of SIPRI, military expenditure by country, in constant 2011 US$ m., 1988-2013). The values in the series are converted into natural logarithms. The regression equation is of the Y= (C1)+(C2)*X type, where Y = R&D spending Log; C1 = -0,236977; C2 = 1,025384 and X= military expenditure Log.
86If this equation is applied on the values in natural logarithms for military expenditure, an estimate of R&D spending results, which is compared with real R&D spending, according to the data under consideration.
87The data in Figures 36 and 37 reveal several issues requiring consideration. On the one hand, Sweden, South Korea, Austria and a few other countries spend more on R&D than on defense, or are along the line of what the model predicts. Contrarily, countries such as the United States, China, Russia and Saudi Arabia show the opposite behavior, which is explained by historical, economic and geopolitical reasons. But even many other poorer countries, such as Algeria, Sri Lanka, Panama, Chile and Colombia, are also far from the prediction, which is the consequence of the purchase of equipment rather than of R&D spending in the defense area.
88Additionally, Figure 38 shows the result of comparing total R&D spending of the main countries with that of transnational corporations (TNC) with headquarters in them.
Figure 38. Total R&D spending compared with R&D of transnational corporations by country of origin or countries where headquarters are located (2012 data in billions of Euros)

Note: Estimated on the basis of data from the European Union (2013), UNDP for total R&D by country estimated on the basis of GDP values, percentages of R&D spending on GDP and conversion into Euros. The left axis shows data in absolute values related to Research and Development spending in billions of Euros; the right axis shows the quotient of such investments carried out by transnational firms with respect to total R&D spending for each country.
89Following the same line of reasoning, R&D spending of TNC in the United States accounts for 48% of the total R&D estimated at a national level. In China the percentage is even higher for its TNC are still not that large, but in countries such as Switzerland or The Netherlands, TNCs spend over 100% of total R&D, which most likely means that these corporations carry out R&D activities outside their territories, or that statistics do not capture such spending as belonging to the nation in question.
90However, the most important observation is that the gaps revealed by the total volume of both types of spending – R&D and defense – between the great economic powers and the rest of the countries are huge. That is, unequal opportunities to create new wealth in most of the countries do not seem to lead to any type of convergence in the absence of a world order of socioeconomic development.
91That is, whether because of military or technological supremacy, the international division of labor in a globalized world is still determined by already existing capacities to generate wealth, which are also quite well defined geographically speaking. Urbanization in developing countries and the phenomenon of China as the factory of the world explain a growth in global economy over the last and a half decade because the markets for many activities have expanded, and not only because of the innovation and diversification of products as the leading force. The subsequent capacity to create wealth in each nation is not at all clear in the absence of a global agenda aiming to suggest something different from the natural result of the forces competing on the market.
92More specific data on R&D spending by the main 1500 transnational corporations reveal that they are located in only fifteen countries which account for 95% of the total R&D investment. 35% of them are in the United States, 28.3% in European Union countries (more than half of which are in Germany and France), 22% in Japan and the remaining 14.9% in countries such as Australia, China, Taiwan, Switzerland, South Korea and a few others.
93The trends in investment areas are shown in Table 6 below, which reveals that R&D spending in the United States outstrips that of Europe in the case of industries implying high investments in technology (biotechnology, medical supplies, aerospace and defense, information and telecommunications technologies). Europe, in turn, invests more in relative and absolute terms in industries requiring low and intermediate investment in R&D (automotive, chemical, pharmaceutical industries, plants and machinery for industry installation, etc.).
94These data apply to R&D spending by the main TNCs. Yet, it is important to remark that the amounts represent very different proportions from the total R&D spending inferred from data by the United Nations Development Program (UNDP) estimated as a percentage of R&D spending with respect to GDP. Likewise, the density of R&D spending with respect to sales data permit to infer differences in technological intensity in different types of activities.
Table 6. Contrastive data of sales and investments in R&D between the United States and the European Union
Industrial Sector | Production (billions of Euros) (1) | R&D (billions of Euros) (2) | R&D Intensity(3)=(2)/(1) | Share in sales (% of Column (1) |
High Technology Manufactures | 537.3 | 88 | 16,4% | 3% |
Pharmaceutical and Biotechnology | 130.7 | 29.5 | 22.6% | 1% |
ICTs | 202.9 | 29.2 | 14.4% | 1% |
Medical, optical and other precision instruments | 94.2 | 17 | 18.0% | 1% |
Aerospace and defense | 109.5 | 12.4 | 11.3% | 1% |
Intermediate-High Technology Manufactures | 1057.1 | 30.7 | 2.9% | 6% |
Low Technology Manufactures | 1082.8 | 5.2 | 0.5% | 6% |
Intermediate-Low Manufactures | 1285.2 | 7 | 0.5% | 8% |
Services | 12738.8 | 55.5 | 0.4% | 76% |
United States Total | 16701.2 | 186.4 | 1.1% | 100% |
High Technology Manufactures | 561 | 47.1 | 8.4% | 3% |
Pharmaceutical and Biotechnology | 155 | 16.8 | 10.8% | 1% |
ICTs | 177.4 | 14.8 | 8.3% | 1% |
Medical, optical and other precision instruments | 119.8 | 6.5 | 5.4% | 1% |
Aerospace and defense | 108.8 | 9 | 8.3% | 1% |
Intermediate-High Technology Manufactures | 1769.7 | 43 | 2.4% | 11% |
Low Technology Manufactures | 1461.6 | 7.3 | 0.5% | 9% |
Intermediate-Low Manufactures | 1497.4 | 4.3 | 0.3% | 9% |
Services | 11036.5 | 19.5 | 0.2% | 68% |
European Union Total | 16326.2 | 121.2 | 0.7% | 100% |
High Technology Manufactures | 1098.3 | 135.1 | 12.3% | 3% |
Pharmaceutical and Biotechnology | 285.7 | 46.3 | 16.2% | 1% |
ICTs | 380.3 | 44 | 11.6% | 1% |
Medical, optical and other precision instruments | 214 | 23.5 | 11.0% | 1% |
Aerospace and defense | 218.3 | 21.4 | 9.8% | 1% |
Intermediate-High Technology Manufactures | 2826.8 | 73.7 | 2.6% | 9% |
Low Technology Manufactures | 2544.4 | 12.5 | 0.5% | 8% |
Intermediate-Low Manufactures | 2782.6 | 11.3 | 0.4% | 8% |
Services | 23775.3 | 75 | 0.3% | 72% |
United States and European Union Total | 33027.4 | 307.6 | 0.9% | 100% |
Note: Estimated on the basis of European Union data (2013).
95The data presented above clearly illustrate in general terms the competitive disadvantages that developing countries have in order to reach, by means of R&D policies, the development of new products to substitute for those whose markets get saturated. These issues have been amply studied in specific literature on innovation and growth, revealing important divergences in viewpoints in this respect (cf. Cooke, Asheim, Boschma, Martin, Swchartz & Tödling, 2011). Yet that research reveals, explicitly or implicitly, what has been stated here.
96Another aspect related to innovation suggests that it should be, to an important extent, correlated to secondary school levels of the population. But, contrary to common sense, this is not so much so. Indeed, Figure 38 shows that, though schooling is high in countries leading in R&D spending, it is not enough for the countries to increase such spending.
97As has been said, the level of this spending depends, to a large extent, on the level of wealth already reached, or on the potential size of the domestic markets, as is the case in the United States as compared with China, India, Brazil, Russia. Likewise, it can be seen that most of the Eastern European countries show very high percentages of population with some degree of secondary schooling and very low level of R&D spending, which differentiates them from countries such as Germany, Norway, Finland, Sweden and France. This point could favor the argument that extractive societies do not promote creativity or the creative destruction processes typical of successful societies, such as those of the most developed western countries. But even if this proved true, it is no evidence of the cause of the poverty of nations, for it cannot be overlooked that military power and geopolitics have always been very powerful reasons to explain their wealth, the dependence on other nations, or the limited ways of participating in the world system by many developing countries.
98In any case, the complexity of the data and arguments presented in this book regarding the different drivers of growth and their distinctive role across the stages of urbanization cannot be overlooked. Neither can it be ignored that military spending, in being a part of the flow of annual wealth – as expressed by the way in which it is measured – reinforces both the output level and the political power of the wealthier nations.
99In fact, the correlation between GDP values and military spending by country reveals excellent results from the statistical point of view in 87% of cases. In the United States military spending was 4.2% of its GDP in 2012, and in many countries producing military technology, it was over 2.3%. Countries such as Israel devote 6.5% of their GDP to military spending, but a part of it is also output, that is, a variable embodied in its measurement. What is more, the total market of products related to military spending is not easy to estimate, but the sum of this market in all the countries, assuming a relation of two-thirds devoted to the purchase of equipment with respect to total spending, would reach a percentage close to 4.5% of the GDP of the main producers of such equipment8.
Figure 39. R&D spending per capita in dollars of 2011 and percentage of schooling levels

Source: Kozulj, 2015.
Note:Estimated on the basis of UNDP data for R&D spending in absolute value (2012) and for percentage of population over 25 with some level of secondary schooling (2005-2012) for the different countries. The left axis shows R&D spending per capita; the right axis shows the percentage of population with some level of schooling.
100Technological innovation and the fast changes it implies also contribute to the fact that an ever growing proportion of abilities and specializations of the labor force become outdated and no longer needed in the market if there are no prompt answers by the educational system. Higher levels of schooling make it possible, to some extent, for the labor force to deal with the new technologies and abilities required, whether or not that brings about better results in terms of R&D, or contributes to wealth creation. That is, in the worst case, people with higher levels of education are better prepared to avoid poverty.
101As Cooke et al (2011) point out, most countries want to receive funds to develop R&D activities in biotechnology, nanotechnology, aerospace or other cutting-edge technological areas. But this is not enough to achieve industrialization levels.
102Going back to the question of productivity in the education or health service sectors, as proposed by Baumol, in order to improve the student-teacher ratio, it is a necessary though not sufficient condition to have an adequate public budget. This is very difficult if nations are not already rich or find it hard to sustain growing flows of wealth creation.
103But even this sort of mechanical extrapolation that fewer students per teacher will lead to better learning may be a dangerous trap. The contents and types of training, the legacy of past generations, political and cultural factors end up forming very different people regarding the potential of their abilities, even more so when the belief in a universal type of education ignores its correspondence with the productive system and its structure. The world in which development meant the possibility for each country to industrialize in a relatively autonomous manner has become one with growing levels of specialization and global interdependences. Yet, paradoxically enough, it is still assumed that a desirable type of education must be qualitatively universal as a way of reaching convergence across nations and social groups. No doubt, a level of universal education must be sustained, but this will not be enough. My belief is that, without policies focusing on solving the most pressing problems in each society, and admitting different starting points, there will be no equaling of opportunities but rather an ever deeper inequality. That is to say, in order to create truly equal opportunities, it is necessary to devote larger budgets to education, but also to implement a wider variety of labor and technical training. This would be meant to level basic knowledge which is historically different and unequal across social classes, just as the peculiar conditions under which they have originated are also different.
104Figure 40 below shows that, in the case of northern European countries, there are no available data to estimate the student-teacher ratio, and the assumption is that it is particularly low, whereas in the case of very poor, scarcely urbanized countries, such as the African ones, this ratio is of up to 60-80 students per teacher. However, in most countries this ratio is 20-30 students per teacher, or 10-20 in the most advanced ones, with very few countries showing ratios lower than 10 students per teacher.
105Although the correlation with the position in the HDI ranking is high, it is far from perfect, and most rich countries have a better indicator of the student-teacher ratio than poorer countries. In turn, values of GDP percentage devoted to education may be very high and yet show inadequate student-teacher ratios. Obviously, if the creation of flows of wealth is low, so will be the amount devoted to education. And if this is so, the conditions for convergence can only worsen in the long term. If in order to finance such investment in education, the countries must get into debt and this debt is then paid by the society, it is very likely that, at some point, both the educational and productive systems will collapse. That is, if rich countries do not agree on a world agenda based on social sustainability, we will never go beyond the limits of the current hypocritical discourse.
106Also, people’s capacities depend on their rural or urban origin, and on their generation lines deriving from recent rural-urban migration processes. Again, rural newcomers to cities and their first descendants living in urban contexts have fewer chances of remaining in the educational system. This is even more so when innovation requires relatively sound expertise if its developments are to be put to a productive use.
Figure 40. Countries by HDI, education spending as a percentage of GDP and student-teacher ratio

Note: Estimated on the basis of UNDP data. The left axis shows the position in the HDI ranking for 185 countries (line) and student-teacher ratio (dots). The right axis shows the percentage of education spending in relation to GDP (bars).
107Technological change has always been of such crucial importance in the structural transformation of the economy that it is estimated that a third of global trade is made up of goods that did not exist at the end of the Second World War. In turn, this technological pattern has modified the content of the international division of labor in quite a radical way. Specialization and comparative advantages increasingly depend on the ability to innovate, adapt, adopt, imitate or improve technology, or at least to be able to use it, which in many cases requires that the countries have access to sophisticated and costly equipment. Although the capacities of a country’s science and technology are an integral part of their development policies and a structural component of their productive systems, the link between both is neither spontaneous nor reachable in the short or mid term. And the benefits deriving from them are not accessible by an important sector of the world population either. All this is the consequence of what has been said about the link between urbanization and economic growth in relation to the ways of generating employment, hiring employees, creating and being able to sustain annual flows of wealth at the different stages of the urbanization process.
Figure 41. Composite Innovation Index and employment generation in European countries (data for 2012)

Note: Estimated on the basis of European Union data (2015). The left axis shows the percentage of employment in R&D-intensive activities with respect to total industrial employment. The right axis shows the innovation index by countries.
108Of course all the above does not mean that the efforts carried out by nations in order to innovate improve their educational systems and ways of participating in world trade and the like are futile. But they will not be enough.
109Another equally important issue is the generation of employment that innovations bring about. Available data for the European Union show a moderate incidence of the composite innovation indexes – estimated on the basis of human resources, innovation systems, level of investment by the firms, financial support, intellectual capital and other indicators – with respect to employment generation (cf. Figure 41). Indeed, the incidence of better innovation indexes on employment shows that, in general, these account for only 10 to 15%, with extreme points ranging between 5% and 25% of total employment according to the countries in question.
110Higher R&D investment may mean better sales and profitability, which extend on the global market by means of corporations. But this is a difficult path for most developing countries.
111Though many might think considerations of this kind are pessimistic – which would ultimately paralyze all courses of action –, they may actually lead, in turn, to a challenge and an interesting opportunity on a global scale. Indeed, if the reasoning, arguments and data presented so far are consistent enough, it means that the loss of wealth creation capacity in an important number of countries around the world will also decrease the size of the markets on a global scale and enormously complicate the possibility of maintaining the creation of flows of wealth that developed countries (and those like China, India, Brazil, Russia) have reached. Political, economic and ideological rivalries are a natural part of human history. But the standard of living that an important part of the world population has reached today cannot sharply fall without huge costs that would hardly be restricted within precise borders.
112An example of this is the present European crises, where there are those who advocate for adjustments on public expenditure as a way of putting the economy back on sound footing, and those who suppose they can avoid so called orthodox fiscal, monetary and exchange policies at no cost. Both positions are trapped within a controversial space – in the sense of opposing paradigms –, which is certainly not productive at this stage of the global economic development. Unless, of course, this is related to a clear agenda of new things to do, in turn compatible with what people can do today and for which they have no market, but also with a learning pace that can reach successful fulfillment so that technological progress will lead to greater welfare on a global scale.
Notes de bas de page
1 In Mexico, R&D efforts are not so much related to the industrialization process, for they only do the assembly of components there, and R&D is carried out in the U.S. In Brazil, on the contrary, there is a lot of R&D going on, which responds to its autonomous development policy. The cases of Petrobras and Electobras illustrate this, for though partially private-run, they responded to projects meant to transform the country into an industrial power within South America. The same happens with nuclear power, digital TV and the aero-space industry.
2 Out of convenience, some concepts summarized in this paragraph were partially taken from Rodríguez Vargas, (2005).
3 Cf. Aghion & Howitt (1992); Swedberg (2007).
4 In the sense of internal rate of return.
5 An L-shaped recession is one in which the GDP indicator reveals a trend following the shape of the letter L, that is, there is no short- or mid-term recovery and the level of the product falls; it is then, a prolonged crisis. A U-shaped recession, in turn, is one in which decline is followed by recovery in the short term.
6 William Jack Baumol was born in 1922. He is an economist, professor at New York University, Professor Emeritus at Princeton University, and a prolific author of books and articles. His best-known work has to do with labor economics, but he has also made important contributions to the history of economic thought. He also studied the theory of industrial organization and regulation, and was one of the proponents of the theory of contestable markets. Several generations have been influenced by his writings on macroeconomics, economic dynamics and many others.
7 Time-use research dates back to 1960 and 1970 (Szalai, 1972). Yet recently, countries such as Colombia, Peru and others have introduced time-use in their statistics, which was not considered in the Systems of National Accounts. This permits access to data on time devoted to outside-the-market and non remunerated jobs.
8 The estimate takes into account the United States, Russia, France, Australia, Israel, the United Kingdom, Italy and Norway, and it may be imprecise.

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