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Technological change refers to the process by which new products and processes are generated. When new technologies involve a new way of making existing products, the technological change is called process innovation. When they include entirely new products, the change is referred to as product innovation. The invention of assembly-line automobile production by the Ford Motor Company is a widely cited example of the former, while automated teller machines (ATMs) and facsimile machines can be seen as product innovations.
Broadly speaking, technological change spurs economic growth and general well-being by enabling better utilization of existing resources and by bringing about new and better products. Besides benefits to suppliers or inventors of new technologies via disproportionate profits, new technologies have benefits for consumers (e.g., innovations in health care) and for the society (e.g., better oil-drilling techniques enabling less wastage and a more effective utilization of the oil in the ground). Current technologies also make the development of future technologies easier by generating new ideas and possibilities.
Changing technologies, however, can have negative consequences for certain sectors or constituencies. Examples of negative aspects include pollution (including environmental, noise, and light pollution) associated with production processes, increased unemployment from labor-saving new technologies, and so forth. This suggests that society must consider the relative costs and benefits of new technologies.
The process of technological change can be seen to have three stages: invention, development, and diffusion. The invention stage involves the conception of a new idea. The idea might be about a new product or about a better technique for making existing products. The invention might be due to a latent demand (e.g., the cure for an existing illness); such inventions are referred to as demand-pull inventions. Inventions can alternately be supply driven, when they are by-products of the pursuit of other inventions. For instance, a number of products, such as the microwave oven, were by-products of the U.S. space program. Yet another possibility is that a new product or process might emerge as an unplanned by-product of the pursuit of another technology (serendipitous invention). In the development stage, the prototype of the invention or the idea is further developed and tested for possible side effects (as with pharmaceutical drugs) and reliability (as with vehicles and airplanes). The invention is also made user-friendly in this stage.
The final stage of the innovation process involves making it accessible to most users through market penetration. The benefits of an innovation, both to inventors and to society, are maximized only when the innovation is efficiently diffused. Some innovations are easy to adopt while others involve effort on the part of adopters. For instance, one must learn how to use a computer, a new type of software, or a new type of airplane. Thus, the diffusion of technologies takes time. A useful concept in this regard was provided by Zvi Griliches (1930–1999). Griliches examined the time path of diffusion for hybrid corn seeds. He found that the technology diffused like an S-curve over time, implying that initially diffusion occurred at an accelerated rate, then at a declining rate, and eventually the rate of diffusion tapered off. Various studies have examined the diffusion of other technologies (new airplanes, ATM machines, etc.), and generally the evidence seems to bear out the prevalence of the S-curve of diffusion.
There are different avenues of cooperation between the private and public sector in the three stages of innovation. For example, all three stages might take place in the same sector, or there might be cooperation in only some stages (e.g., government agriculture extension services subsidize the diffusion of many farming technologies).
Austrian economist Joseph Schumpeter (1883–1950) made significant contributions to the economics of technological change around the middle of the twentieth century. His best-known concept is referred to as the Schumpeterian hypothesis. According to this hypothesis, which linked market structure and innovation, monopolies (due to their large reserves) are perhaps better suited than competitive firms at bringing about new products and processes. This concept called into question the then widely held view that competitive markets were superior in all respects, and provided a redeeming feature of monopolies. Since its inception, the Schumpeterian hypothesis has been a matter of much debate and analysis in the economics literature.
The nature of technological change can vary across sector and products and over time. Broadly speaking, economists tend to classify technological change as Hicksneutral, Harrod-neutral, or labor-saving (see, for example, Sato and Beckmann 1968). Under Hicks-neutral technological change, the rate of substitution of one input for another at the margin (think of substituting capital for one worker) remains unchanged if the factor proportions (i.e., capital-labor ratio) are constant. Harrod-neutral technological change refers to a constant capital-output ratio when the interest rate is unchanged. Finally, laborsaving technological change favors the capital input over labor. Numerous technologies involving increased computerization in recent years are examples of labor-saving technological change. Over time, researchers have conducted studies to test the nature of technological change for various sectors and countries.
A number of theories of technological change have been proposed by economists. Some of these theories have evolved over time by refinements of earlier theories, while others have benefited from new revelations. Adam Smith (1723–1790) recognized the role of changing technologies. According to him, improvements in production technology would emerge as a by-product of the division of labor, including the emergence of a profession of schedulers or organizers akin to modern-day engineers. A specialized worker doing the same job repetitively would tend to look for ways to save time and effort. In Smith’s world, productivity could also increase indirectly via capital accumulation.
Karl Marx’s (1818–1883) notion of the tendency of the rate of profit to fall stems from a recognition of technological change (process innovation) leading to more efficient production, and the replacement of labor with capital or machinery. Labor-saving innovation or mechanization occurs when Marx’s capitalists are unable to further lengthen the working day and therefore are unable to extract further surplus value in absolute form from labor.
Kenneth Arrow introduced the notion that production processes may be refined over time as workers gain greater knowledge from repeat action. Thus, new process technologies might emerge; such change is formally described as emerging from learning-by-doing. The degree of appropriability of research benefits was considered by Arrow to be a strong incentive for firms to engage in research and development. Nathan Rosenberg postulated that the degree of innovation opportunities dictates the research effort that firms put forth. For instance, innovation opportunities expand with new developments in basic science. Richard Nelson and Sidney Winter proposed an alternative theory of technological change. This theory, referred to as the evolutionary theory, argues that technological change evolves over time as newer generations (or improvements) of existing technologies are developed. In other words, the evolutionary theory considers technological change to be less drastic.
The process of technological change is uncertain in that there is no guarantee of whether, when, and at what scale the innovation will occur. Four types of uncertainties are generally associated with the process of technological change. One, there is market uncertainty resulting from the lack of information about the winner of the innovation race. For example, of the many pharmaceutical firms pursuing a cure for an illness, none is certain about who will succeed, or when. This uncertainty sometimes results in excessive resources being devoted to the pursuit of a particular innovation as firms try to improve their odds of beating others. Two, there is technological uncertainty regarding a lack of knowledge about research resources sufficient to guarantee success. Will a doubling of the number of scientists employed by a drug company double its odds of inventing a successful cure? Third, there is diffusion uncertainty regarding the eventual users and market acceptance of the innovation. Finally, there is uncertainty about possible government regulatory action that the new product or process might face. These regulations might deal with safety, reliability, or the environment.
The pace of technological change can vary across industries, firms, and countries, depending upon the resources devoted to research and the nature of products or processes pursued. For instance, the electronics industry, by its nature, has more room for technological improvement than, say, the paper industry. Governments try to increase the rate of technological change by various means. These measures include directly engaging in research, providing research subsidies or tax breaks, inviting foreign investment (and consequently technology) in specific industries, and strengthening the laws for protecting intellectual property. Sometimes, however, governments have to monitor the introduction of new products and processes to ensure societal well-being. Examples of such cases include drug-testing regulation and testing for the environmental impacts of new technologies before they are introduced in the market.
In closing, our understanding of the process of technological change has improved over time. Technological change is an important input to a country’s economic growth, and we owe a large part of our improving living standards to changing technologies. Some technologies, however, can have undesirable side effects. Another issue is that technological progress across nations is uneven, and the rapid diffusion of new technologies from developed nations to developing nations remains a challenge.
- Dasgupta, Partha, and Paul Stoneman, eds. 1987. Economic Policy and Technological Performance Cambridge, U.K.: Cambridge University Press.
- Goel, Rajeev K. 1999. Economic Models of Technological Change. Westport, CT: Quorum.
- Kamien, Morton I., and Nancy L. Schwartz. 1982. Market Structure and Innovation. Cambridge, U.K.: Cambridge University Press.
- Nelson, Richard R., and Sidney G. Winter. 1982. An Evolutionary Theory of Economic Change. Cambridge, MA: Belknap.
- Reinganum, Jennifer F. 1989. The Timing of Innovation: Research, Development, and Diffusion. In Handbook of Industrial Organization, ed. Richard Schmalensee and Robert Willig, 849–908. New York: Elsevier.
- Sato, Ryuzo, and M. J. Beckmann. 1968. Neutral Inventions and Production Functions. Review of Economic Studies 35 (1): 57–66.
- Schumpeter, Joseph. 1950. Capitalism, Socialism, and Democracy. 3rd ed. New York: Harper.
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