Technological Progress
Refers to the economic process of innovation in an economy
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.
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.
Understanding Technological Progress
Technological progress plays an important role in capital formation and increasing the marginal product of capital. It can be classified as:
- Embodied change: This 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.
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 patent criterion is that the idea must be lawful, feasible, and useful.
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.
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, which increases awareness, or through face-to-face communication, which 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.
Attributes of innovation
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.
1. 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.
2. 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.
3. 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.
4. Trialability
It refers to the extent to which an innovation can be tested on a limited scale. Trials reduce the risk associated with innovations.
Note
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.
5. 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 to which consumers are comfortable adopting such technology.
The following table summarizes the 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 |
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 augmenting capital or helping capital by increasing marginal capital productivity. The production function given under this assumption is
Y = F (A (t) K,L)
Romer's 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
Where,
- Ā = Number of new ideas produced in an economy at a given point in time
- δ = Marginal 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
Understanding λ
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.
Understanding Φ
Φ refers to the extent to which the existing technology stock 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.
Impacts of Technological Progress on Employment
The effects of technological advancement on the labor market are intricate and varied, frequently presenting a combination of opportunities and difficulties. Here's a closer look at these effects:
- Employment Creation: As technology advances, new sectors, and employment prospects arise in industries like biotechnology, renewable energy, and information technology.
- Job Displacement: AI and automation have the potential to eliminate jobs in traditional businesses by automating repetitive tasks.
- Skill Polarisation: As a result of technology, there are less chances for middle-skill workers as occupations at the high- and low-skill ends become more concentrated.
- Upskilling and Reskilling: Employees must receive ongoing training in order to keep up with changing job demands and technology developments.
- Labour Market Polarisation: Employment growth that is biased towards high—and low-paying professions increases income disparity.
- Job Quality and Satisfaction: While technology can improve job quality, it may also lead to job insecurity and erosion of traditional benefits.
future prospects of technological progress
Economically speaking, the prospects for technological advancement are bright but complicated.
Here's a brief synopsis:
1. Economic Growth
Ongoing technology advancements are predicted to propel economic growth by boosting productivity, efficiency, and creativity across a range of industries.
Biotechnology, renewable energy, and artificial intelligence are emerging technologies with the potential to spark fresh waves of economic growth and employment creation.
2. Industry Transformation
As technology develops, industries will continue to change, upending established corporate structures and opening doors for creative and adaptable firms.
Industries like healthcare, banking, manufacturing, and transportation are about to undergo major changes as a result of implementing cutting-edge technology to enhance operations and provide value to customers.
3. Labour Market Dynamics
As technology advances, work responsibilities and skill needs will change due to automation, artificial intelligence, and robotics.
Technological developments may lead to job displacement and necessitate workers to upskill and adjust to shifting working environments, even while they also have the ability to provide new job opportunities.
To mitigate the negative consequences of technology disruption and ensure equitable economic growth, policies that encourage workforce development, lifelong learning, and job transition aid will be crucial
4. Worldwide Competitiveness
Investing in the development, adoption, and research of transformational technologies can help countries become more globally competitive and become leaders in the digital economy.
Effective resource allocation towards education, infrastructure, and digital infrastructure will be imperative for nations to take advantage of the prospects afforded by technological advancements and sustain their economic significance in the global arena.
5. Income Inequality
Despite technological advancements, addressing economic inequality will continue to be a major concern. Technology can increase wealth and raise living standards, but it can also widen the gap by consolidating opportunities and riches in the hands of a small number of people.
Implementing proactive policies like progressive taxation, social safety nets, and inclusive economic policies will be imperative to guarantee that the advantages of technological advancement are distributed fairly throughout society.
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