Technological Progress

Refers to the economic process of innovation in an economy

Author: Adin Lykken
Adin Lykken
Adin Lykken
Consulting | Private Equity

Currently, Adin is an associate at Berkshire Partners, an $16B middle-market private equity fund. Prior to joining Berkshire Partners, Adin worked for just over three years at The Boston Consulting Group as an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate.

Adin graduated from Yale University, Magna Cum Claude, with a Bachelor of Arts Degree in Economics.

Reviewed By: Manu Lakshmanan
Manu Lakshmanan
Manu Lakshmanan
Management Consulting | Strategy & Operations

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with McKinsey & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy, M&A, and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

Last Updated:October 29, 2023

What is Technological Progress?

Technological Progress is the economic process of innovation in an economy. In simpler words, it refers to the discovery and invention of new technology for improved production methods.

It includes the discovery and invention of new equipment. It could also involve the discovery of new methods of production with the existing technology.

It is also referred to as an industry or sector's economic measure of innovation.

Technology includes all processes concerned with the transformation of inputs into outputs.

As technology improves, the productivity of labor and capital inputs increases, leading to a rise in output producers per unit of input.

It improves the level of economic activities in an economy and contributes positively to economic growth. Thus, technological change or development is the most crucial factor in economic growth.

It plays an important role in capital formation and increasing the marginal product of capital. It can be classified as:

  • Embodied change refers to the discovery and invention of new equipment and machinery that improves output and requires new investment.
  • Disembodied change: This refers to new techniques that improve the productivity of existing inputs of labor and capital. 

For example, investment in training or new ways of organizing the labor force that increases productivity and output does not require new equipment.

The discovery and invention of new ideas and technology require the possibility of earning profits from them.

Researchers are only determined to innovate when they expect their inventions to reap a return referred to as the private rate of return. This can be assured in the form of patents and copyrights.

This rate of return on their efforts provides incentives to researchers and determines the rate of technological change in an economy.

The primary reason governments encourage the research and development sector is that inventions lead to a benefit for society, referred to as the social rate of return.

In a free market system, where researchers can maximize profits, they tend to ignore unprofitable innovations even though they may have a social cost involved.

For example, technology that benefits society, like sustainable energy, evolves slower than technology that reaps private benefits like software and machinery.

Key Takeaways

  • Invention and innovation of technologies and other advancements.
  • The commercialization of such technology as an open source through research and development. This is referred to as the production of emerging technologies.
  • The continuous improvement of such technology is to decrease the cost of usage.
  • The distribution or diffusion of such technology throughout an industry or sector.

Phases of technological progress

The 3 phases of technological development are as follows:

1. Invention

This refers to the discovery of an idea or 'a breakthrough' that relies on the efforts of researchers. It is included in the process of product development.

Conventionally, researchers patent new inventions. The criterion of the patent is that the idea must be lawful, feasible, and have utility.

2. Innovation

It refers to the application of the invention for the very first time. According to the American Sociologist Everett M Rogers, it implies an idea, behavior, or product that appears new to its potential adopter.

In his theory of diffusion of innovations, Rogers stated that five main attributes determine the acceptance of innovation in society. He called these attributes ACCTO, which stands for Advantage, Compatibility, Complexity, Trialability, and Observability.

a) Advantage

This refers to an innovation's relative advantage over prior innovations that fulfill the same needs. It can be economical or non-economic.

It is directly related to acceptance. If the innovation is superior to its prior alternatives, it has a higher advantage; it is more likely to be accepted by people.

b) Compatibility

It is the degree to which an innovation is consistent with its potential adopter's lifestyle, values, experiences, and habits. It is positively related to acceptance as higher compatibility implies higher acceptance.

c) Complexity

It refers to the extent to which an innovation is difficult to use and understand. It is negatively related to acceptance as higher complexity imposes a challenge on the mainstream adoption of an idea.

d) Trialability

It refers to the extent to which an innovation can be tested on a limited scale. Trials reduce the risk associated with innovations.

Usually, extensive testing is involved before implementing new technology to mitigate all possible risks. Such trials accelerate acceptance as people are more confident in such technologies. Thus, it is positively related to acceptance.

e) Observability

It refers to the degree to which the results of an innovation are visible and can be demonstrated. It involves seeing the use of innovative technologies in action to increase consumer confidence.

It is positively related to acceptance as visible results increase the extent consumers are comfortable adopting such technology.

The following table summarizes the effects of the above attributes on the acceptance of technology-

Effects of the above attributes on the acceptance of technology
Attribute Relation to acceptance
Advantage Positively related
Compatibility Positively related
Complexity Negatively related
Trialability Positively related
Observability Positively related


3. Diffusion

It refers to the availability and distribution of innovation throughout an industry or sector and the degree to which the market accepts it.

According to Everett's diffusion theory, innovative technology is communicated through certain channels to members of a social system, who adopt it over a while.

The ideas are communicated mainly through mass media that increase awareness or face-to-face communication that helps increase consumer confidence.

The social system in which innovation is introduced affects diffusion. This refers to the social norms, government regulations, culture, and consequences of innovation in a given system.

For example, innovation at the cost of environmental pollution is discouraged in modern society, according to social norms.

On the other hand, time refers to the speed at which innovation is adopted. Innovation with low acceptance rates takes longer to diffuse throughout an industry.

Modeling technological Progress

It refers to the measurement of technological change over time. Several economists gave different models to measure technological change and its impact on productivity and output.

According to different growth models, technological change can be classified as:

1. Hicks-neutral if technology does not increase the marginal productivity of inputs. The production function given under this assumption is

Y = A (t) F (K,L)

2. Harrod-neutral, if technology is labor augmenting or helps labor by increasing marginal productivity of labor. The production function given under this assumption is

Y = F (K, A (t) L)

3. Solow-neutral, if technology is capital augmenting or helps capital by increasing marginal capital productivity. The production function given under this assumption is

Y = F (A (t) K,L)

Romer model

American economist Paul Romer was the first to formalize the relationship between the economics of ideas and economic growth.

In his growth theory, Romer states technological change is a dependent variable in the function of the production of ideas by researchers looking to earn a profit.

The production function of ideas is,

Ā = δ Lλ A Φ


  • ĀNumber of new ideas produced in an economy at a given point in time
  • δMarginal productivity of researchers or the rate at which researchers discover new ideas 
  • L = Share of researchers in the total labor force
  • A =  Stock of existing ideas

λ  is a parameter between 0 and 1 that reflects the externality associated with duplication of efforts.

A single researcher may produce δ ideas. However, when taken as a whole, some ideas created by an individual may not be new to the economy.

  • λ= 0  reflects complete duplication of efforts. This is also known as the stepping-on-toes effect.
  • λ= 1 reflects no duplication of effort.
  • Φ refers to the extent to which the already existing stock of technology affects future innovation efforts.

Romer states that the existing technology stock creates spillovers or externalities that could positively or negatively affect the productivity of future researchers.

  • Φ > 0 implies that the existing technology stock benefits researchers and helps discover new ideas. They create a positive externality commonly known as the standing-on-shoulders effect.

The term was coined by Sir Isaac Newton in his famous statement, 

"If I have seen farther than others, it is because I was standing on the shoulders of giants.

 He credited his achievements to the theories of previous scientists such as Kepler.

  • Φ < 0  implies that the existing stock of ideas creates a negative externality that reduces the rate at which new ideas are invented. This is called the fishing out effect.

The term was coined on the idea that the most obvious ideas are discovered first like fish becoming harder to catch over time.

  • Φ = 0  implies that the existing stock of ideas does not create any externalities and cannot affect future innovation efforts.

Romer stated that the long-run economic growth of the economy is given by the parameters of the production function of ideas. 

An important conclusion of the Romer model is that the economy can sustain long-run growth in the presence of a constant research effort.

Researched and authored by Manya Bhardwaj | LinkedIn

Reviewed and Edited by Parul Gupta | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: