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Technology refers to the underlying production methodology through which inputs or resources are converted into output (goods and services). At a point in time there is one best way to produce a good or service. In other words, there is a well-defined production technology at a point in time. Over time, the technology can change as better, more efficient, and cheaper means of production are invented. Such changes might be due to deliberate attempts by businesses and governments (called “endogenous technical change”) or they may be accidental (due to serendipity). In the long term, new technologies build upon previous technologies to yield better, more refined products and process. In that context, it is widely argued that perhaps man’s greatest innovation was the wheel.
Sometimes technology is treated as another input in the production process, like labor or capital, and in other instances it is viewed as a catalyst that makes existing inputs more productive. Two unique features that set technology apart from other factors are that it has the potential to yield disproportionate returns for inventors, and there is uncertainty associated with the invention and use of new technology. Inventors are able to earn disproportionate returns when they have a unique product that confers a monopoly upon them. The uncertainty associated with technology might be related to the race to invent first, or it might be with respect to research resources necessary for innovation success, or with the potential audience (who will use the new technology and how fast?).
Some technologies improve the product processes (by making them more efficient and, consequently, cheaper), whereas others introduce entirely new products. The Internet has enabled process improvements in a number of instances (e.g., via online brokerages or online travel agencies), whereas a new pharmaceutical drug for an illness previously without a cure may be viewed as a product innovation. More fundamentally, process technologies affect production costs, whereas product innovations have the ability to create new markets.
The ingredients to new technology are the research and development (R&D) resources. These include scientists and engineers and related physical resources (research laboratories and so on). The output of R&D is generally measured in the number of patents granted. The number of patents, however, is an imperfect measure because it does not account for inventions that are not patented, and it treats patents of varying importance qualitatively the same.
The development of new technology can be seen as a process involving three distinct stages—invention, development, and diffusion. Invention involves the conception of a new idea about a new product or a new process.
Development refers to the building of a prototype and testing its usability, possible side effects, and longevity. Diffusion is the marketing stage, when the new technology is dispersed to the potential audience or users. Cooperation among private firms or between the public and private sectors can occur at one or all of these stages.
Some technologies are more flexible than others. Flexible technologies enable substitution among inputs; for example, grocery stores can employ a large number of checkout clerks and have relatively few (or no) automated checkout machines, or they can have few clerks and more automated machines. Inflexible technologies, on the other hand, do not permit substitution among inputs; for example, a cab company should have at least one driver for each cab to deliver viable service—two (or more) drivers and no cars are as useless as two (or more) cars and no drivers. Over time, however, improvements in technologies can alter the substitutability among inputs—think about what will happen to the car-driver substitutability as “smart” highways become a reality. Furthermore, there might be differences in the nature of technologies as production expands. In some cases there might be an equal bang for the buck as inputs are increased—that is, doubling of all inputs doubles output (technically called “constant returns to scale”); in other cases there might be less than (or more than) proportionate returns—that is, doubling of all inputs less than doubles output—decreasing returns to scale.
As the importance of technologies has come to the forefront, so has the attention of researchers on the process of technological change. One interesting aspect in this regard is the premature technological obsolescence. Joseph Schumpeter foresaw this many decades ago when he referred to this as the “gale of creative destruction” (Schumpeter 1950). In industries susceptible to rapid technological progress (e.g., the electronics industry), successful technologies might become prematurely obsolete as they are overtaken (or “leapfrogged”) by newer technologies before full benefits have been realized. While this is somewhat of a concern, governments generally have tried to let the markets work by not blocking or delaying premature obsolescence.
Market competition can play a crucial role in the production and use of technologies. The Schumpeterian hypothesis posits that monopolies, due to their reserves from past profits, are perhaps better equipped than their competitive counterparts to deal with the uncertainties of research and innovation. However, competitive pressures might induce firms to seek out better production methods and new products, either through their own research or via licensing the technology of others. Some software companies choose to develop their own software, whereas others license some software from others. The empirical evidence regarding the role of competition and firm size is rather mixed. Many large competitive firms have been quite innovative (e.g., Canon, 3M), whereas small inventors have also contributed useful technologies. The classic example in this instance is the development of the Apple computer in a garage. Firms might cooperate in the development of technologies among themselves, or there might be cooperation between the public and private sectors. Some governments such as the U.S. government have relaxed laws to check anticompetitive practices to allow cooperation in research. These moves have led to the emergence of consortia to jointly engage in research in pursuit of new technologies.
A number of new technologies can have implications for workers as they tend to be capital-using and labor-saving. Examples of such technologies include online banking, which might affect the jobs of bank tellers, and online travel agencies, which threaten the jobs of travel agents.
Full benefits of technologies are realized when they are optimally diffused. The diffusion of technologies occurs over time, because in some instances users have to incur monetary and learning costs (consider a new type of software that requires the user to spend time to learn what the software can do). Governments sometimes subsidize these learning costs directly (e.g., with cash grants for adopting energy-saving building technologies) or indirectly (e.g., with free user-education clinics by agriculture extension services). The transfer of technologies might occur via legal or illegal means. Legal means include research joint ventures among firms pursuing new technologies or licensing agreements where firms authorize others to use their technologies for a fee. Sometimes, however, these licensing arrangements can have harmful effects when firms refuse to license complementary technologies. In such instances, the pace of technological change is somewhat slowed. Internationally, developing nations generally seek to adopt technologies from developed countries by inviting foreign investments. But developed nations often are reluctant to offer the latest technologies because the existence and enforcement of intellectual-property protection laws is typically lax in developing nations. In recent years international treaties have tried to bring various nations onto a somewhat equal footing in regards to the protection of intellectual property. Illegal transfer of technologies occurs when rival firms are able to copy or use technologies without approval. Such spillovers of technologies are partly driven by the nature of technology (some technologies are easier to copy than others). Common means of technology spillovers include industrial espionage, reverse engineering (unraveling a product or process to learn about its construction), and hiring scientists and engineers from the inventor firm. Governmental ability to check technology spillovers is limited by the nature of technologies and by jurisdictional constraints. Government-sponsored technologies sometimes overcome these issues by making certain new technologies freely available in the public domain.
Often, choosing between alternate technologies can have long-term implications that can render some choices inefficient and very costly to alter over time. In other words, technological choice can have inertia when production processes are locked into specific technological streams. Two glaring examples of this are the keyboard settings of typewriters (and now computers) and the width of railroad tracks. The QWERTY settings of the manual typewriters were historically chosen so that the keys would be least likely to lock up, hence the choice, given the state of the technology at the time, was efficient. However, over time, the manual typewriters evolved into electric, then electronic, typewriters, and finally into computers. These iterations did not face the problem of keys locking, but the QWERTY format for keys has almost universally persisted, in spite of some alternate formulations that have been shown to be more efficient. In the other example, the choice of the width of rail tracks has implications for how far the rail network can ply and is very costly to change over time. Even today, a number of countries continue to have tracks of more than one width, creating networking problems within the country (these issues are even more pronounced in an intercountry setting). It seems, however, that governments have learned from past mistakes, and in some cases international standardization bodies (such as the one to manage the spread of the Internet) are being formed in early stages of technologies to avoid bottlenecks in the future.
Government involvement in the production, marketing (or diffusion), monitoring, and protection of technologies varies a great deal. Governments might need to monitor certain technologies for their effects. For example, in the United States new drugs have to undergo extensive testing for possible side effects and have to be approved by the Federal Drug Administration (FDA) before being made available publicly. Other technologies have to be tested for their effects on the environment. A key aspect of government technology policy deals with ensuring adequate returns to inventors (to preserve incentives for undertaking the risks of technology development) and creating conditions for long-term technological growth. Governments generally have policies to deal with intellectual-property protection and with subsidies to research. Patents that grant monopolies to inventors for a specific time period (currently twenty years for most patents in the United States) have proven quite popular despite their shortcomings. Patent applicants have to prove their own and the invention’s credentials (i.e., uniqueness of their invention and their priority of discovery). The underlying rationale behind patents is that they balance the costs of monopoly grants against the long-term benefits that are realized when the secret patent formulae become public knowledge at the time of patent expiry, spurring future innovations. In practice, there is an interesting difference between U.S. patent policy and how patents are granted in (most of) the rest of the world. The United States grants a patent to the first person (or institution) to invent a new product or process; this person might not be the first to file the patent application. Most other countries, however, award a patent to the first to file, who might not be the original inventor. Both systems have merits and shortcomings. The U.S. system follows the essence of how patents should be granted, but leads to costly and socially wasteful litigation, especially in instances where the social value of patents is rather small. The rest of the world system avoids costly litigation, but can result in grave injustices when original inventors are slow to file the paperwork.
In recent years, the Internet, or more generally, “soft” technologies, have generated an interesting set of issues both for market participants and for governments trying to regulate technologies. Unlike “hard” or physical technologies (e.g., a tractor or an airplane), soft technologies are difficult to monitor (protect) and easy to transfer. Which aspects of a new software are like a language (and thus cannot be protected), and which aspects are like commercial products (and thus can be protected)? Transmission of soft technologies also makes convenient the separation of production and marketing over large geographical areas and eliminates the use of middlemen or substantial transactions costs. For example, soft technologies such as computer software, music, and e-books can be produced in one corner of the world and marketed in another via the Internet without the need of a middleman. Governments in such instances are somewhat powerless to monitor (and tax) these transactions. In effect, innovations in instruments of regulation have failed to keep pace with the speed of technological change.
The United States has been the world leader in technology since the end of World War II (1939-1945). Many important inventions and discoveries originated in the United States, and a number of these were byproducts of the U.S. defense and space programs. In the early 1980s, however, there were some concerns about the United States’ declining technological leadership. It became evident that although many inventions were still originating in the United States, other countries were taking the lead in perfecting these technologies by making them more user-friendly. (For example, although the microwave oven was invented in the United States, there are hardly any domestic manufacturers of these ovens left.) These concerns prompted the U.S. government to strengthen intellectual-property protection in some cases and to stress better commercialization strategies for new technologies.
Two noteworthy developments in this regard were the provision of patents to semiconductor chips and the introduction of legislation that makes it easier for federally sponsored innovations to be commercialized. Universities in the United States are also now able to hold patents and benefit from commercialization of the technologies invented by their staff. It remains to be seen, however, how the world’s technological leadership will evolve, especially with the advent of soft technologies that are difficult to control and not geographically constrained. Another key issue concerns the extent and speed of technological “trickle down” from developed nations to developing nations.
- Goel, Rajeev K. 1999. Economic Models of Technological Change. Westport, CT: Quorum Books.
- Kamien, Morton I., and Nancy L. Schwartz. 1982. Market Structure and Innovation. Cambridge, U.K.: Cambridge University Press.
- Reinganum, Jennifer F. 1989. The Timing of Innovation: Research, Development, and Diffusion. In Handbook of Industrial Organization, eds. Richard Schmalensee and Robert Willig, 849–908. New York: Elsevier Science.
- Schumpeter, Joseph. 1950. Capitalism, Socialism, and Democracy. 3rd ed. New York: Harper and Row.
- Von Hippel, Eric. 1987. The Sources of Innovation. Oxford: Oxford University Press.
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