Economic Growth 9 - The Cutting Edge of Technology

Question 1

What’s the first problem that emerges when attempting to conduct a growth accounting exercise for an early period?

Answer 1

The available data are quite sparse. There are no data at all on the accumulation of physical and human capital, whereas data about population and income per capita are only imprecise estimates. Thus, we must consider any results we obtain as rough approximations.

Question 2

What’s the second problem that emerges when attempting to conduct a growth accounting exercise for an early period?

Answer 2

The second issue relates to the important role that land played as an input in preindustrial economies. Ignoring the role of land, as we did in our growth accounting exercise in Chapter 7, would not be appropriate in studying a time period when most people worked as farmers and most wealth was held in the form of land.

Question 3

What are some milestones in technological progress ()?

Answer 3

• Food production 8500 B.C.
• Wheel 3400 B.C.
• Writing 3000 B.C.
• Padded horse collar 250 B.C.
• Mechanical clock 1275
• Movable type 1453
• Steam engine 1768
• Textile manufacture 18th century
• Network electricity last quarter of 19th century
• Mass production of automobiles 1908
• Transistor 1947
• ARPANET 1969 (Pre-Internet)
• Polymerase chain reaction (1985) (Genetic engineering)

Question 4

Taking into account the problems of growth accounting for earlier periods, what’ the new production function in which the only factors of production are labor (L) and land (X)?

Answer 4

Y = AXβ L1−β,

where the exponent β will be equal to the fraction of national income that is paid to owners of land.

Question 5

Taking into account the problems of growth accounting for earlier periods, what’ the new PER WORKER production function in which the only factors of production are labor (L) and land (X)?

Answer 5

y = A (X/L)^β

Question 6

Taking into account the problems of growth accounting for earlier periods, what’ the new PER WORKER production GROWTH RATE function in which the only factors of production are labor (L) and land (X)?

Answer 6

y^ = A^ + βX^ - BL^ = A^ - BL^

Where X^=0 because we are considering a geographical area of constant size, the quantity of land does not change

Question 7

Taking into account the problems of growth accounting for earlier periods, what’ the new function for PRODUCTIVITY GROWTH RATE in which the only factors of production are labor (L) and land (X)?

Answer 7

A^ = y^ + BL^

Question 8

What data do we need to calculate the growth rate of productivity?

Answer 8

We need data on the growth rates of income per capita (y) and the size of the population (L). The final piece of our calculation is a measure of the parameter β, the exponent on land in the production function. We use a value of β = ⅓, based on evidence that in preindustrial economies, the share of national income paid to land owners was around one-third.

Question 9

Innovations in which 3 industries are of central importance to the industrial revolution?

Answer 9

• Textiles: Innovations in the manufacture of textiles, particularly cotton textiles, were the centerpiece of the Industrial Revolution. A wave of new inventions revolutionized the processes of spinning, weaving, and printing fabric.
• Energy: The steam engine, in which burning fuel produced steam to drive a piston, represented a revolutionary break with the past.
• Metallurgy: The widespread replacement of wood with coal as a source of fuel in iron smelting, as well as several important technical innovations, dramatically drove down the cost of iron production.

Question 10

Economic historians identify a “Second Industrial Revolution,” dated roughly 1860–1900, innovations in which industries mark the second industrial revolution?

Answer 10

• Chemicals
• Electricity
• Steel.

Question 11

Growth during the Industrial Revolution was not particularly fast and growth did not slow down when the Industrial Revolution ended—what was really so revolutionary about the period? There are two answers.

Answer 11

First, the technologies introduced during the Industrial Revolution were indeed revolutionary, but their immediate impact on economic growth was small because they were initially confined to a few industries. More significantly, the Industrial Revolution was a beginning. Rapid technological change, the replacement of old production processes with new ones, the continuous introduction of new goods; all of these processes that we take for granted today got their start during the Industrial Revolution.

Question 12

One striking feature of Figure 9.3 is the period of high growth of total factor productivity lasting from 1890 to 1971. During this remarkable period—roughly the length of one human lifetime—daily life in the most developed countries was transformed more dramatically than ever before. Among the most important changes were (9)?

Answer 12

• Electric lights
• Refrigeration
• Air conditioning
• The telephone
• The automobile
• Air travel
• Radio
• Television
• Indoor plumbing.

Many of these technologies were invented previously in the 19th century, but they took several decades to spread to the economy as a whole—a process that is known as diffusion.

Question 13

Which function is helpful in understanding tehcnological advance? technology production function This is a function in which the output is new technologies and the inputs are the things we use to create these new technologies. In a modern economy, the inputs to the technology production function are the labor and human capital of researchers, along with the capital (laboratories, computers, and so on) that they use.

Answer 13

The technology production function.

Question 14

What is a technology production function?

Answer 14

A function in which the output is new technologies and the inputs are the things we use to create these new technologies.

Question 15

In a modern economy, what are the inputs to the technology production function?

Answer 15

The labor and human capital of researchers, along with the capital (laboratories, computers, and so on) that they use.

Question 16

A first step in thinking about a technology production function is to measure the inputs and outputs themselves. We focus on the years since World War II because this is the only period for which good data are available. What is such data?

Answer 16

The number of researchers.

Question 17

Using the data on the number of researchers to compare inputs into and outputs of the technology production function, which startling fact emerges?

Answer 17

The input to technological progress has grown substantially over time, whereas the growth rate of technology has not.

Question 18

How does technological progress proceed? In an even flow or in waves?

Answer 18

Economists have focused on the latter view: that there are certain momentous technological innovations, called general-purpose technologies, that change the entire nature of the economy.

Question 19

What are the 2 important characteristics of general-purpose technologies (technological innovations that change the entire nature of the economy)?

Answer 19

• They change the mode of production in many different sectors of the economy
• They trigger a chain reaction of complementary inventions that take advantage of the new technological paradigm.

Because of the trail of complementary inventions that follow in its wake, the period of growth resulting from a single general-purpose technology can go on for several decades.

Question 20

What is the computer paradox?

Answer 20

The failure of ever more powerful computers to produce faster productivity growth.

Question 21

How is scientific knowledge cumulative?

Answer 21

Researchers today begin their investigations where those who came before them left off. The same incremental nature is true for the productive technologies that interest economists.

Question 22

The cumulative nature of technological progress has both positive and negative effects on the ease of doing R&D. What are they? (3)

Answer 22

• On the one hand, researchers today have a larger base of knowledge on which to build and a larger set of tools than did those who came before them. Thus, we would expect researchers today to be more productive than researchers in the past.
• On the other hand, researchers today might have more difficulty making discoveries or thinking of new technologies than their predecessors simply because the easiest discoveries have already been made.
• Further, because more is known today than in the past, it takes more effort for a researcher to learn everything required to work at the cutting edge.

Question 23

What is the fishing out effect?

Answer 23

The negative effect of past discoveries on the ease of making discoveries today (a body of water is said to be “fished out” when all the good fish have been caught).

Question 24

Which subtle but important assumption about the issue of technological growth does the equation
A^ = L_A/u
make?

Answer 24

It assumes that the growth rate of technology depends only on the amount of resources devoted to R&D, not on the level of technology itself. In other words, the benefits of having better tools to work with exactly cancel out the negative effects of havingalready made the easier discoveries.

Question 25

Were it not for the negative effect of past research on current R&D productivity, how would the production of technological progress be altered?

Answer 25

Greater input into R&D would result in faster technological progress.

Question 26

What is another way to see how much past technological progress has limited the productivity of present research?

Answer 26

By looking at the effort required to achieve some technological milestones, we see that many of the key breakthroughs of the 18th and 19th centuries resulted from the labors of lone scientists or inventors, often working in their spare time. By contrast, by the late 20th century, almost all advances were made by large and well-funded research teams.

Question 27

What are the 2 important ways in which advances in science have resulted from technological improvements.?

Answer 27

• Technology has posed many puzzles that scientists have then striven to solve.
• Technological improvements have led to scientific advance by giving scientists tools to conduct better experiments and observations.

Question 28

How did scientists began to repay their debt to technology during the first half of the 19th century?

Answer 28

The technologies of the Industrial Revolution (1760–1830) had not depended on scientific discoveries. But the technologies of the Second Industrial Revolution (1860–1900), including innovations in steel, chemicals, and electricity, could not have been developed without new scientific understandings.

Question 29

For the technology production function, the assumption of constant returns to scale is not appropriate. Instead, this function is characterized by decreasing returns to scale. What do these decreasing returns to scale arise from?

Answer 29

Once a piece of knowledge has been created, it can be costlessly shared among any number of people. This quality of nonrivalry means that if several people (or groups of people) are all trying to create the same piece of knowledge, then the efforts of most of them will ultimately be wasted. After the first person has created the knowledge and shared it (or patented it), the efforts of all of the others who were trying to create that piece of knowledge will have been in vain.

Question 30

Relating to decreased returns to scale, when R&D is conducted on parallel tracks, the researchers often create parallel solutions to the same problem and develop parallel standards. What can be learned from this?

Answer 30

The more effort that is devoted to R&D, the more likely is this duplication of effort. Therefore, devoting more effort to R&D will not generate a proportional increase in the pace of technological progress.

Question 31

How can we summarize the two modifications to our technology production function? (2)

Answer 31

First, as the level of technology rises, finding new discoveries becomes ever harder.
Second, as the effort devoted to R&D increases, the effectiveness of each new researcher falls. Both of these modifications imply that ever-increasing input into R&D will be required to maintain the current speed of technological progress.

Question 32

Is a continued increase possible, or will technological progress inevitably slow down? To answer this question, we must look at 3 possible sources of growth in the amount of labor devoted to R&D. What are they?

Answer 32

• The overall labour force could grow.
• The fraction of the labor force engaged in research could grow.
• New members could be added to the set of countries doing cutting-edge research.

Question 33

Relating to continued increase in technological progress, how likely is it that the overall labour force could grow?

Answer 33

Most of the world’s richest countries, which are also those at the cutting edge of technology, are not expected to experience significant growth in population over the next several decades—and will probably never again experience the kind of rapid population growth that they did in the 19th and 20th centuries. Thus, population growth in these countries is unlikely to add much to the labor devoted to R&D. Similarly, growth in the labor force resulting from increased participation of women in the United States is bound to slow down because the labor force participation rate for women is almost as high as that for men

Question 34

Relating to continued increase in technological progress, how likely is it that the fraction of the labor force engaged in research could grow?

Answer 34

It’s impossible for the fraction of the labor force doing R&D to rise above 100%. However, given the relatively small share of the labor force engaged in R&D today, the limit of 100% will not be binding for a long time. More realistically, however, if we accept that not all members of the labor force are capable of doing scientific research, the relevant limit may be much lower than 100%.

Question 35

Relating to continued increase in technological progress, how likely is it that new members could be added to the set of countries doing cutting-edge research?

Answer 35

The addition of new members to the group of cutting-edge countries has expanded the labor pool from which researchers can be drawn. Even today, the countries at the cutting edge of technology account for only 14% of world population, so there is good reason to expect that this flow of newcomers will continue.

Question 36

What is a good measure of inventive activity and why?

Answer 36

Because patents are one means that inventors use to profit from their intellectual property, the number of patents, relative to a country’s population, should be a good measure of inventive activity.

Question 37

Why are patents an imperfect measure of technological activity?

Answer 37

Industries vary in how likely inventions are to be patented as opposed to being protected by other means, ie secrecy.

Question 38

Why is the upshot from this analysis (about decreasing returns and their causes) is potentially hopeful, as long as we do not take too long run of a perspective?

Answer 38

Even though continued technological progress requires devoting an increasing number of workers to R&D, no immediate constraint will prevent such an expansion. Given that only a small fraction of the labor force in the developed countries currently works in R&D, and that only a small fraction of the world lives in countries that are technological leaders, there is plenty of room to expand the number of researchers.

Question 39

Why are the very-long-run prospects of continued technological progress not very good?

Answer 39

Assuming that the world’s population eventually stabilizes, there will have to come a time when the amount of labor devoted to R&D will stop rising. At that point, the growth rate of technology will slow down.

Question 40

In our analysis of technological progress, we have treated technology as a single measure that raises productivity in the economy as a whole. But simple observation shows that the pace of technological progress is radically different in various sectors of the economy. How are these differential changes in productive technology reflected?

Answer 40

They are reflected in changes in the relative prices of goods. Goods where there has been a lot of productivity growth have become cheap relative to goods where technological advance has been slow.

Question 41

What do these differential rates of technological progress imply for economic growth? (2)

Answer 41

• Technological progress is more important when it occurs in a larger sector.
• The average rate of technological progress for the economy as a whole will be a weighted average of the rates of progress in the different sectors of the economy, with the weights of the different sectors proportional to the fraction of total output produced in that sector.

Question 42

What happens to the fraction of the economy made up by a given sector when that sector experiences technological progress? Answering this question turns out to be quite complicated. But we can establish good intuition through 2 simple examples. What are they?

Answer 42

• Bread and cheese

- Butter and margarine

Question 43

Bread and cheese
Imagine an economy in which only two goods are produced: bread and cheese. We will assume that these two goods are perfect complements, and thus consumed in a fixed ratio; one slice of bread is always eaten with one slice of cheese. Because no one will buy bread if there is no cheese to match, and vice versa, the production of bread will always equal the production of cheese. Now suppose that there are different rates of technological progress in the two industries. Productivity in the bread industry rises at a rate of 2% per year, whereas productivity in the cheese industry does not rise at all. If the resources devoted to production of each good do not change, then bread production rises by 2% per year, whereas cheese production remains constant. Clearly this will not happen because it would result in the production of more bread than cheese. Continues this line of reasoning.

Answer 43

Instead, resources (capital and labor) are moved from bread production into cheese production. This movement of factors from the high-productivity industry (bread) to the low-productivity industry (cheese) slows productivity growth and partially offsets the technological progress taking place in the bread industry. To see the long-run effect of this differential productivity growth, we can think about what this economy will look like far in the future, when technological progress in the bread industry has continued for a long time. At this point, bread production will be so technologically advanced that the economy will devote negligible resources to this industry. Rather, almost all of the economy’s capital and labor will be devoted to producing cheese. Every year some of the capital and labor used to produce bread will be shifted over to the cheese industry, but the bread industry will use so few resources to begin with that these additions to the cheese industry will have only a minuscule effect on cheese production. The growth of output in the economy as a whole will therefore be almost zero—that is, almost the rate of productivity growth in the cheese industry.

Question 44

Butter and Margarine.
In this case, the two goods, butter and margarine, are perfect substitutes for each other, so consumers will want to consume only the cheaper of the two. Suppose once again that there are different rates of technological progress. In the margarine industry, technology improves at a rate of 2% per year, whereas butter production technology does not improve at all. Further, suppose that in the year when we begin our analysis, butter is cheaper than margarine. Continues this line of reasoning.

Answer 44

Initially, because butter is cheaper than margarine, consumers buy only butter. The economywide rate of technological progress is the same as the rate of progress in the butter industry—that is, zero. However, as margarine technology improves, the price of margarine falls relative to that of butter. At some point, margarine becomes cheaper than butter, and the economy switches from producing only butter to producing only margarine. At this point, the rate of growth of the economy as a whole increases because now the technological progress that is relevant is technological progress in the margarine industry. The result in this example is exactly the opposite of what we saw in Example 1. In that case, technological progress eventually ground to a halt; in this case, the growth rate of technology for the economy as a whole speeds up over time.

Question 45

What is the key difference between the examples of bread and cheese vs butter and margerine?

Answer 45

The key difference is in what happens to the share of spending devoted to the sector with rapid technological progress. In Example 1 this share falls over time, so the economywide rate of technological progress falls as well. In Example 2 the share rises over time, so the economywide rate of technological progress rises as well.

Question 46

Although both examples (B&C vs B&M) are extreme, how does this general lesson carriy over whenever we consider differential technological progress?

Answer 46

If the fraction of income spent on the sectors with rapid technological growth rises over time, the overall growth rate of technology will also rise. If the share spent on these sectors falls, the overall rate of growth of technology will fall.

Question 47

What is the most notable real-world case of this sort of differential technological progress?

Answer 47

The most notable real-world case of this sort of differential technological progress is the production of goods versus services.
Production methods for goods (i.e., manufacturing) have been one of the most technologically dynamic areas in the economy.
By contrast, the production processes for many of the services we consume have changed little over the last century. As a result of this differential productivity growth, a change has occurred in the relative prices of goods and services.

Question 48

To see whether this differential productivity growth (goods vs. services) will have a positive or negative impact on overall growth, we need to look beyond prices to the total amount of spending in these two areas. Here the news is bad. Why?

Answer 48

In the United States, the fraction of total consumption devoted to services rose from 40% in 1950 to 67% in 2010. Thus, economic activity is shifting into the sector with lower productivity growth.

Question 49

What did economist William Baumol call the cost disease and why?

Answer 49

The shifting of expenditures into services, where productivity growth is slow because relative costs rise in the sector with slow productivity growth.

Question 50

What is one notable service sector with slow productivity growth and thus rising costs?

Answer 50

Education

Question 51

What is the big problem with forecasting progress in technology?

Answer 51

The only way we can know now that something will be possible to do in the future is to know how it will be done—but if we know how it will be done, it has already been invented.