Last updated on May 24, 2015
My office on the Saint Paul campus of the University of Minnesota, Twin Cities is in a building called Ruttan Hall. Our building, which until recently bore the awful name of Classroom Office building, was given a new name in 2010 to commemorate Vernon W. Ruttan‘s (1924-2008) contribution to agricultural and applied economics as well as to our department, of which he was head from 1965 to 1970.
I unfortunately never got a chance to meet Vern Ruttan, but I had heard of him long before I joined the department. Among other things, he became well known for his work on the induced innovation hypothesis. The induced innovation hypothesis goes something like this: When the price of a factor of production increases sharply relative to the price of other factors of production, making that factor more costly to use in production, ceteris paribus, society will innovate by developing technologies that economize on that factor of production–in other words, the change in the price of that factor has induced innovation.
For example, imagine that that a plague wipes out half of the population in an agrarian economy. By making labor more scarce relative to other inputs, the plague has made labor more expensive. There is thus an incentive to develop labor-saving technologies to produce agricultural output, and so we should expect to see the development of technologies that make agricultural production more capital-intensive.
Now, Vern did not come up with that idea (which originated with Sir John Hicks in his 1932 book The Theory of Wages), but he and Yujiro Hayami worked together to show that that was by and large how the world had managed to feed itself all this time. Given that the induced innovation hypothesis is near and dear to the hearts of most of us in the Department of Applied Economics, most of whom are standing on the shoulders of Vern Ruttan, I was thrilled to see that the latest issue of Econometrica had an article by W. Walker Hanlon, an assistant professor at UCLA doing really cool work, showing that the hypothesis holds in practice:
This study provides causal evidence that a shock to the relative supply of inputs to production can (1) affect the direction of technological progress and (2) lead to a rebound in the relative price of the input that became relatively more abundant (the strong induced-bias hypothesis). I exploit the impact of the U.S. Civil War on the British cotton textile industry, which reduced supplies of cotton from the Southern United States, forcing British producers to shift to lower-quality Indian cotton. Using detailed new data, I show that this shift induced the development of new technologies that augmented Indian cotton. As these new technologies became available, I show that the relative price of Indian/U.S. cotton rebounded to its pre-war level, despite the increased relative supply of Indian cotton. This is the first paper to establish both of these patterns empirically, lending support to the two key predictions of leading directed technical change theories.
In related news, research on the induced innovation hypothesis is alive and well. Our department was on the market for an environmental economist this year, and UC Santa Barbara’s PhD candidate Steve Miller has recently accepted an offer to join our department in the fall–and Steve’s job-market paper looks at “how environmental regulation may induce innovation by unregulated firms via general equilibrium effects and knowledge spillovers” (and, if I recall correctly, when we interviewed Steve at ASSA and asked him to tell us about his research, he began with “I don’t think I need to tell you guys what the induced innovation hypothesis is…”)