Technological change and the economy

Tech change and the economy

Malthusian theory and demographic transition

The Malthusian theory of population claims that while resources grow in a linear way, population grows in an exponential way. So, when there is abundance of food the population explodes, growing at a faster rate up to the point of the event called the Malthusian trap, where the living standard of the individuals is low enough to trigger a population decline.

Therefore, the population size swings. However, there are natural positive checks constraints that manage population growth: they are events that shorten the human life span. When population grows more than production capacity, famine starts, leading the way to wars and diseases; preservative checks are elements that can prevent the increase in population, like the delay of marriages and contraception.

There are several famous examples of positive checks: the Black Death slashed Europe’s population, but this led to an increase in real wages. When the number of workers decreases, the marginal productivity of labour increases and thus wages do the same.

Another example is that of Ireland: its population grew from 1.4 to 8.2 million people over 200 years, but the population was dependent on a single variety of potatoes and when a parasite attacking potatoes was brought in Europe from America, the Great Famine reduced Ireland’s population by more than 30%.

The demographic transition is a phenomenon where a country shifts from high birth and death rates to low birth and death rates. In the Malthusian world any income increase was temporary because innovation was slow and resources remained scarce, but this changed during the Industrial Revolution.

Technological progress increased significantly parental income effect income, leading to two effects: an income effect (more resources, more investments in children) and a substitution effect (the opportunity cost of having a child increases). Thus, the need for child labour decreased and the possibilities for parents to invest in children’s education increased.

Together with a drop in death rates thanks to improvement in public health, this led to a less urgent need to have many children and parents substitute having many children with working more and investing more in fewer kids. As a consequence, birth rates drop too, reaching a point of population stability.

Moreover, it is important to note that the progress of technology made skilled labour more important, but this requires education and resources so governments started investing in education too, pushing further in the direction of the demographic transition.

Industrialization, human capital and public education

The Industrial Revolution is seen as the age of progress and changed many aspects of society. It created and required tech innovations like the steam engine, improvements in iron and steel, the telegraph and phonograph. Cities grew in size and the need for capital increased as production moved from small factories to large factories producing large amounts of goods thanks to technology improvements.

Historically, only the elite could be educated thanks to the power they exercised and because normal people needed every component of the family to work in order to survive, but this changed too during the industrial revolution. The invention of the printing machine slashed the price of books, giving the possibility to read to many more people.

Moreover, at the beginning of the revolution, skilled labour was not needed as tasks were repetitive, but this changed over time. An important role was played by patents, given by governments to innovators to reward them, but to get it people had to be literate as innovators had to write manuals to make other people understand their inventions.

Also, companies developed a more urgent need to do the accounting, leading to demand for people capable to understand it. So, over time skilled labour became important. Private investments in education increased only a little though, so the government started to invest, first in primary education abolishing child labour and introducing mandatory schools, then also in higher education, paving the way for private investments too.

Cultural factors of development

Culture can be defined as the shared values shaping societies over time, influencing everything from economics to politics, even though it is not entirely able to shape how people think and act. Culture is made of values, norms and beliefs which are different from biological traits as they can be learned more quickly and that’s why cultures change more rapidly than human biology.

An important moment that shaped culture and its relevance for the economic system is the Protestant Reformation started by Luther. As Max Weber emphasized, Protestants saw wealth and success as signs of God’s favour, while laziness was seen as moral failing.

This mindset called “Protestant ethic” encouraged disciplined work, reinvestment and economic expansion, key elements of the capitalistic system that is seen as originating from here in Western Europe. Also, the Enlightenment pushed people to overcome tradition and started to value reason and scientific progress, improving society through the development of knowledge and technologies.

Despite the importance of change, sometimes people stick to their cultural norms to provide themselves with stability, even though change might bring economic benefits, in a phenomenon known as cultural inertia. An example of this can be observed in Southern Italy, which remained far more undeveloped than the North.

Banfield explained this introducing the concept of “amoral familism”. He claimed that in southern Italy people had very strong ties with their own family that kept them from cooperating with people outside of the family, making it harder for the region to grow.

Putman highlighted that in the Middle Ages cities in the North were independent and this led people to trust each other, instead southern Italy has always had strong, centralized governments that did not encourage trust and cooperation among people.

General purpose technologies

Economies fluctuate over time, they follow a non-linear pattern experiencing phases of expansion and shrinking. Technology is the ultimate driver of economic growth. These two facts have been connected by the theory of long waves, that states that economies experience broad transformation every few decades as a result of the arrival and diffusion of clusters of radical innovations.

In particular, GPTs are a particular subset of radical innovations, they are groundbreaking inventions that change the technological landscape and transform the economic system, boosting productivity and leading to long-term economic growth. The internet is an example of them, it started as a military tool in the US and then became widely used, changing how we communicate and access to information globally.

GPTs enable the creation of new products and processes also leading to “techno-economic paradigm” changes, meaning that they impact almost every aspect of the economy. In economic theory, investments in capital lead to growth, but at a certain point growth stalls at a point of equilibrium known as “steady state” where depreciation equals new investments, halting capital accumulation. The introduction of revolutionary technologies like GPTs revitalizes the growth process.

GPTs share some distinguishing characteristics as highlighted by Jovanovic and Rousseau: pervasiveness, they spread widely affecting even old and established industries; inherent potential for technical improvements, they could be and should improve over time, becoming cheaper and more effective; innovation spawning, they work with other innovation and should make it easier to create new products and processes; they change and evolve.

Moreover, there is usually a considerable delay between when a GPT is first invented and when it starts to be widely available, since they are so revolutionary compared to what came before that it takes time for other inventions to appear in the same area.

There is a dual inducement mechanism between GPTs and their application sectors: an improvement in the level of the GPT makes it convenient to improve the technological level of the applications and technology upgrades in the application sector will induce upgrades in the GPT.

Both the downstream and upstream sectors could not invest and enjoy the benefits of the investment of the other sector, creating a problem of moral hazard. Equilibrium in the AS is reached when marginal returns of innovation equal marginal costs of R&D, the optimal response for the AS to maintain this condition is to increase its equilibrium technology level in response to quality improvement in the GPT input.

For the GPT provider, profits depend on its costs and the technology of the AS, so for the provider it is convenient to increase its technological level to increase its profits. There are two externalities: horizontal, as the downstream and upstream sectors are linked, the more ASs invest the higher the demand for the GPT good, making it convenient for the provider to invest in the GPT, so investments from one AS benefit also other ASs; vertical, to solve market failures, big demanders, like the government, may intervene.

The development of some of these technologies was influenced by major events like the Cold War in the case of the internet, or they arise because there is a significant problem that needs to be solved. Usher stated a theory which breaks down the innovation process in 4 steps:

• Spotting the problem;
• Gathering information, collecting data and learning more about the problem;
• Finding the solution, a moment of insight brings a solution;
• Improving the solution.

The fishbone diagram identifies, systemizes and analyses the sources of GPTs. Where innovation happens can be influenced by several factors: places with high amounts of natural resources and good climate as well as temperate climate can foster innovation and support the concentration of innovative activities, religion can have an impact, a large population increases the number of potential inventors, even wars and their large scale mobilization of scientific, technical and financial resource can support the creation of such technologies, democracy then is important as well as governments policy towards innovation.

Tipi di innovazione e classificazione delle tecnologie

Scholars in the field of the economics of technical change define, explain and measure innovation and classify different types of technical progress. Taxonomy provides the theoretical framework for distinguishing innovation, while classification is the practical process of grouping innovations based on their characteristics.

Theoretical classification consists in developing a theory first and then deriving categories, empirical classification consists in collecting data first and then grouping entities. Archibugi and Simonetti suggest that each technological innovation can be classified considering: its technological nature (what change occurs); producing sector; product group; using organizations (who uses it); human needs the innovation addresses.

Freeman and Soete distinguish between: incremental innovations, the most common, involve making small changes to things that already exist; radical innovations, new ideas that create something completely new, they do not happen very often and are result of R&D activities of companies, universities and governments.

Keirstead in 1948 introduced the idea of “constellations” of innovations, groups of connected innovations linked technically or economically. Sahal argues that technologies can be: structural innovations, different material parts of a system grow at different speeds; system innovations, necessary when the scale of things change; when two or more related technologies are used together to make things simpler.

A new approach in understanding tech change focuses on two main ideas:

• Changes of “techno-economic paradigm” -> Radical innovations that completely change how the economy works, they are called tech revolutions, have a wide range of impacts and even create new industries;
• Taxonomy of interactive technologies -> This proposes a way to classify interactive technologies, suggesting that a technology is a complex system with many connected parts, that is chosen and adapted in a certain environment, society and markets, through two types of selection. Natural selection by market forces, artificial selection by human beings, people choose and modify technologies to meet their needs. Interaction between two or more associated technologies is a reciprocal adaptation between them in a complex system. Interactive technologies can be of four types: symbiosis, have a long run interaction that delivers mutual benefits driving coevolution; mutualism, each technology benefits from the activity of the other; commensalism, one tech benefits from the other without affecting it; parasitism, one tech benefits from the other while the other has a negative side from the interaction. The short run behaviour and evolution of interactive technologies is independent from that of the others in the system. On the contrary, long-run behaviour depends on the evolution of the associated technologies, theorem of not independence of technological innovation.

Out of Africa hypothesis

Around 60,000 to 90,000 years ago, the Homo sapiens began moving out of Africa to other parts of the world looking for resources. The migration didn’t happen at once but step by step. Since only small groups of the population left Africa each time, the portion of the population that migrated had