The Impact of Technology on Economic Growth

The Impact of Technology on Economic Growth

1. Introduction

In the 1950s and 60s, economists thought that the key to economic growth was capital. They believed that through increased investment today, the production possibility frontier would shift outward, allowing for more goods and services to be produced tomorrow. With the advent of advanced technology in all types of productive processes, be it the manufacture of computer software or gene splicing, economists have seen the potential for technology to be more than a mere shifting force. It is now believed that technology is the primary force propelling our growth in the world economy. This comes down to the rather abstract term of ‘Total Factor Productivity’. Turning point theory by Abramovitz explains TFP as that which lies residual to that output of known factors of production, labor, and capital. TFP is the output attributed to a factor which is not determined in an individual market. This is a result of technology having spillover effects in which the research and development by one firm can benefit the whole industry, society, or even the world, with the learning becoming public knowledge. As TFP is not observable and is a direct correlation of economic growth, it is hard to quantify the exact impact technology is having on our growth. But it is generally accepted that any technological advance is a means to increased efficiency and a way to do things in a better way. So given that growth is an increase in the quantity of goods and services produced, and knowing that technology has the potential to uncover new methods of production and produce new and better products, we can see the fundamental link between technology and our growth in today’s world economy.

Growth is an increase in the goods and services produced by an economy over a given period. Economic growth occurs when a society acquires a greater quantity of resources. An increase in resources could be a result of population growth, an inward migration of people, or an increase in the capital available to a society (e.g. factory buildings, tools, and machinery). Economic growth even occurs when resources are better allocated. Growth can occur when a society learns to avoid the misallocation of resources, learning to use efficient methods, saving time and energy. So when we refer to the processes driving growth in the world economy, we are referring to the complex ways in which a society acquires these resources or learns to better allocate them.

Technology: we now live in a world in which it is almost impossible to go about daily tasks without the aid of technology. Whether it is at work, home, or at the gym, technology has increased the intensity of productivity, efficiency, and has increased the standard of living for most individuals. Technology has had the greatest impact by enabling the new economy. The new economy is based on information. The access to great amounts of information has enabled knowledge on an extensive level to be brought to the far reaches of the globe. The end result of information traveling in an efficient manner is the increased velocity of knowledge in the economic world. This is the key to economic growth. Economists have been trying to uncover the mysterious processes driving growth in the world economy since the beginning of time. Now it seems that it all comes down to technology and information.

2. Technological Advancements and Economic Growth

The process of improving technology is an economic process which is very dynamic and nonlinear. Basically, the essence of this process is a learning process. There are at least three methods that exist to achieve technological learning. First is learning by doing. It’s a method in which a firm learns a new thing by training the workers to use a new method and technology based on their own experience. This method is still considered the most effective way compared to the other two methods. The second method is learning by using. This is the simplest way to learn a new thing. And the third is learning by searching. This is the most complex and rather expensive because this method requires a firm to conduct basic research in order to discover a new method and technology. This will be an expensive method because research always involves uncertainty. On the other side, the uncertainty of research is often followed by a valuable discovery in the long term.

Technological advancements are considered to be the key factor which leads to economic growth. The fact is supported by recent studies which show that R&D (research and development) and the technological learning process play a significant role in productivity improvement in developed countries and also in other classes of countries. It is also found that many developing countries have succeeded in improving their economic condition through the improvement in productivity in various sectors by allocating a major portion of their national income or borrowing technology from other countries.

3. Productivity and Efficiency Gains

A number of theories have postulated that in the absence of substantial improvements in information technology, we should have seen a significant slowdown in productivity growth. However, the high rate of investment in IT is a recent phenomenon, and if one is to look at the growth rate of productivity before and after the computer revolution, there is no evidence to suggest that there has been a step up in the growth rate of productivity (Jorgenson, 2001). Productivity growth varies across different industries, and this, in part, is due to the fact that the efficiency gains associated with IT are unable to be generated at the same rate across different sectors. For example, productivity increases in service industries have historically been lower than those in the manufacturing sector due to the fact that it is easier to measure productivity in the manufacturing sector because of the tangible nature of the products. Step and Hicks have stated that the only way to improve the data on productivity is to measure the productivity of a unit in terms of the service it provides, not the amount of money spent on producing the unit. With the increased use of modern information technology, it is more likely a measure will be created, and therefore the improvements in efficiency can be properly quantified.

4. Job Creation and Labor Market Dynamics

The productivity effect of technological change has a significant bearing on the quantity of labor demanded. The Solow Paradox has shown that increased investment in IT does not necessarily lead to increased productivity. The neoclassical model would suggest that technological change raises the marginal product of labor, leading to an increase in labor demand and a higher level of employment. However, if technological change is labor-saving and automated, this will result in a reduction of the demand for certain types of labor. Empirical investigation of the relationship between IT investment and employment has taken various approaches, yielding mixed results. Using panel data, it was found that aggregate IT capital stock, more than investment, influenced the demand for labor. A shift from an emphasis on computer hardware and software to less IT capital-intensive activities has been a significant factor in undertaking and employment growth.

Researchers and policymakers are interested in the implications of technological change for employment. The potential number of job displacements is high. The underlying principles that make certain jobs amenable to technological replacement are a persistent of the market economy. The job-specific technological change paradigm sees labor-saving innovations concentrated in specific sectors. This generates a skill and wage bias and implies that aggregate employment effects of technological change may be negligible. Modeling the effects of technological change using dual labor market theory has yielded differing predictions depending on the nature of technological change. Neoclassically induced technological change is predicted to widen the wage differential between primary and secondary labor, constrict the primary labor market, and lead to an increase in secondary labor market activity.

5. Potential Challenges and Future Implications

The diminishing role of national economies is an issue that will present an even greater challenge. Currently, technological development is often used as the pretext for globalization and an increase in international trade. As IT makes the transmission of information more cheap and easy, it also increases the speed and ease of trade of goods and services. This will lead to increased substitutability of goods from different countries and thus increased competition. For the consumer, this is a positive outcome in that it will mean higher quality products and goods more suited to the consumer’s wants and needs. However, there will be turbulence in getting to this point. Increased competition means lower profit margins for firms, and in the case of elastic or inelastic demand for a good, lower profit margins will often translate to layoffs. Globalization and increased trade also have the tendency of removing barriers to factor mobility. While this has been the objective of European countries with respect to the EU, to achieve greater efficiency, it can also mean the replacement of workers in countries which have higher costs of living by workers in countries with lower costs of living. A continuation of the same example would be the replacement of a German IT worker by an equally skilled worker in India. This may be more efficient in a global sense, but it will have undesirable effects in the high-cost living country. The end result of all this is an environment where national governments have less control over economic issues and less ability to achieve national objectives. When considering the importance of national economies as a major influence on the level and distribution of wealth, the shift to a global economy could be cause for concern.

As discussed in the second section, the shifting of resources into the technology sector will hinder economic growth in other areas of the economy. This stands as a future prediction, but there is evidence to suggest that it is already occurring. The embrace of a new technology usually involves allocating R&D funds and other resources (such as labor) away from existing technologies. Additionally, the more complex a technology, the greater the skill level required to develop and maintain it. This leads to a higher opportunity cost in skilled labor – as IT sectors often offer wages higher than those of other sectors. All this will result in an increase in the comparative advantage of IT-related goods and services, and a decrease everywhere else. This is supported by data showing the steady decline of the US manufacturing sector and other non-IT industries.

Currently, the rate of technological and social change is so rapid that it can be difficult for society to keep up. While the scientific community continues to marvel at the pace of technological development, what is often overlooked is the long-term effect this will all have on society. In regards to economic development, there are a number of potential issues that will surface in the future.

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