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Introduction to Modern Economic Growth models, process innovations reducing costs of production and quality improvements have identical effects Another important distinction in the technological change literature is between “macro” and “micro” innovations (see Mokyr, 1990) The first refers to radical innovations, perhaps the introduction of general-purpose technologies, such as electricity or the computer, which potentially changed the organization of production in many different product lines In contrast, micro innovations refer to the more common innovations that introduce newer models of existing products, improve the quality of a certain product line, or simply reduce costs Most of the innovations we will be discussing can be viewed as “micro innovations” Moreover, empirically, it appears that micro innovations are responsible for most of the productivity growth in practice (see the evidence and discussion in Freeman (1982), Myers and Marquis (1969) and Abernathy (1980)) We will discuss the implications of macro or general-purpose innovations below 12.1.2 A Production Function for Technology A potentially confusing issue in the study of technological progress is how to conceptualize the menu of technologies available to firms or individuals Since our purpose is to develop models of endogenous technology, firms and/or individuals must have a choice over different types of technologies, with greater effort, research spending and investment leading to better technologies At some level, this implies that there must exist a meta production function (a production function over production functions), which determines how new technologies are generated as a function of inputs We will sometimes refer to the meta production function as the innovation possibilities frontier or as the R&D production function While a meta production function may appear natural to some, there are various economists and social scientists who not find this a compelling approach Their argument against the production function approach to technology is that, by its nature, innovation includes the discovery of the “unknown”; thus how could we put that in the context of a production function where inputs go in and outputs come out in a deterministic fashion? 539