Knowledge that Transforms

The criterion employed to judge successes and failures has been the acceptance or nonacceptance of Smith's theory by his immediate successors. This judgement has been supplemented with a more personal one of scientific fruitfulness. He had one overwhelming and proper success--the theorem on resource allocation under competition--and several minor successes. He also had one modest success that was improper (i.e., unfortunate)--the distinction between productive and unproductive labor. Smith's most important analytical failure was the hierarchy of employments of capital. Three failures that should have been successes receive special attention: his wage theory, his rent theory, and the analysis of the division of labor. The reasons for the differing fates of these theories are examined.

A mathematical model of applied research is formulated. It views applied research as a search in a given distribution; basic research shifts the distribution searched. The productivity of applied research effort is a function of the gap between technology in practice and basic knowledge. With constant basic and applied research a (stochastic) steady state emerges in which technological change is determined by the rate of progress of basic knowledge, and the technological gap by the level of applied research.