Technological change refers to the process by which new products and processes are generated. When new technologies involve a new way of making existing products, the technological change is called process innovation. When they include entirely new products, the change is referred to as product innovation. The invention of assembly-line automobile production by the Ford Motor Company is a widely cited example of the former, while automated teller machines (ATMs) and facsimile machines can be seen as product innovations.
Broadly speaking, technological change spurs economic growth and general well-being by enabling better utilization of existing resources and by bringing about new and better products. Besides benefits to suppliers or inventors of new technologies via disproportionate profits, new technologies have benefits for consumers (e.g., innovations in health care) and for the society (e.g., better oil-drilling techniques enabling less wastage and a more effective utilization of the oil in the ground). Current technologies also make the development of future technologies easier by generating new ideas and possibilities.
Changing technologies, however, can have negative consequences for certain sectors or constituencies. Examples of negative aspects include pollution (including environmental, noise, and light pollution) associated with production processes, increased unemployment from labor-saving new technologies, and so forth. This suggests that society must consider the relative costs and benefits of new technologies.
The process of technological change can be seen to have three stages: invention, development, and diffusion. The invention stage involves the conception of a new idea. The idea might be about a new product or about a better technique for making existing products. The invention might be due to a latent demand (e.g., the cure for an existing illness); such inventions are referred to as demand-pull inventions. Inventions can alternately be supply driven, when they are by-products of the pursuit of other inventions. For instance, a number of products, such as the microwave oven, were by-products of the U.S. space program. Yet another possibility is that a new product or process might emerge as an unplanned by-product of the pursuit of another technology (serendipitous invention). In the development stage, the prototype of the invention or the idea is further developed and tested for possible side effects (as with pharmaceutical drugs) and reliability (as with vehicles and airplanes). The invention is also made user-friendly in this stage.
The final stage of the innovation process involves making it accessible to most users through market penetration. The benefits of an innovation, both to inventors and to society, are maximized only when the innovation is efficiently diffused. Some innovations are easy to adopt while others involve effort on the part of adopters. For instance, one must learn how to use a computer, a new type of software, or a new type of airplane. Thus, the diffusion of technologies takes time. A useful concept in this regard was provided by Zvi Griliches (1930-1999). Griliches examined the time path of diffusion for hybrid corn seeds. He found that the technology diffused like an S-curve over time, implying that initially diffusion occurred at an accelerated rate, then at a declining rate, and eventually the rate of diffusion tapered off. Various studies have examined the diffusion of other technologies (new airplanes, ATM machines, etc.), and generally the evidence seems to bear out the prevalence of the S-curve of diffusion.
There are different avenues of cooperation between the private and public sector in the three stages of innovation. For example, all three stages might take place in the same sector, or there might be cooperation in only some stages (e.g., government agriculture extension services subsidize the diffusion of many farming technologies).
Austrian economist Joseph Schumpeter (1883-1950) made significant contributions to the economics of technological change around the middle of the twentieth century. His best-known concept is referred to as the Schumpeterian hypothesis. According to this hypothesis, which linked market structure and innovation, monopolies (due to their large reserves) are perhaps better suited than competitive firms at bringing about new products and processes. This concept called into question the then widely held view that competitive markets were superior in all respects, and provided a redeeming feature of monopolies. Since its inception, the Schumpeterian hypothesis has been a matter of much debate and analysis in the economics literature.
The nature of technological change can vary across sector and products and over time. Broadly speaking, economists tend to classify technological change as Hicks-neutral, Harrod-neutral, or labor-saving (see, for example, Sato and Beckmann 1968). Under Hicks-neutral technological change, the rate of substitution of one input for another at the margin (think of substituting capital for one worker) remains unchanged if the factor proportions (i.e., capital-labor ratio) are constant. Harrod-neutral technological change refers to a constant capital-output ratio when the interest rate is unchanged. Finally, labor-saving technological change favors the capital input over labor. Numerous technologies involving increased computerization in recent years are examples of labor-saving technological change. Over time, researchers have conducted studies to test the nature of technological change for various sectors and countries.
A number of theories of technological change have been proposed by economists. Some of these theories have evolved over time by refinements of earlier theories, while others have benefited from new revelations. Adam Smith (1723-1790) recognized the role of changing technologies. According to him, improvements in production technology would emerge as a by-product of the division of labor, including the emergence of a profession of schedulers or organizers akin to modern-day engineers. A specialized worker doing the same job repetitively would tend to look for ways to save time and effort. In Smith’s world, productivity could also increase indirectly via capital accumulation.
Karl Marx’s (1818-1883) notion of the tendency of the rate of profit to fall stems from a recognition of technological change (process innovation) leading to more efficient production, and the replacement of labor with capital or machinery. Labor-saving innovation or mechanization occurs when Marx’s capitalists are unable to further lengthen the working day and therefore are unable to extract further surplus value in absolute form from labor.
Kenneth Arrow introduced the notion that production processes may be refined over time as workers gain greater knowledge from repeat action. Thus, new process technologies might emerge; such change is formally described as emerging from learning-by-doing. The degree of appropriability of research benefits was considered by Arrow to be a strong incentive for firms to engage in research and development. Nathan Rosenberg postulated that the degree of innovation opportunities dictates the research effort that firms put forth. For instance, innovation opportunities expand with new developments in basic science. Richard Nelson and Sidney Winter proposed an alternative theory of technological change. This theory, referred to as the evolutionary theory, argues that technological change evolves over time as newer generations (or improvements) of existing technologies are developed. In other words, the evolutionary theory considers technological change to be less drastic.
The process of technological change is uncertain in that there is no guarantee of whether, when, and at what scale the innovation will occur. Four types of uncertainties are generally associated with the process of technological change. One, there is market uncertainty resulting from the lack of information about the winner of the innovation race. For example, of the many pharmaceutical firms pursuing a cure for an illness, none is certain about who will succeed, or when. This uncertainty sometimes results in excessive resources being devoted to the pursuit of a particular innovation as firms try to improve their odds of beating others. Two, there is technological uncertainty regarding a lack of knowledge about research resources sufficient to guarantee success. Will a doubling of the number of scientists employed by a drug company double its odds of inventing a successful cure? Third, there is diffusion uncertainty regarding the eventual users and market acceptance of the innovation. Finally, there is uncertainty about possible government regulatory action that the new product or process might face. These regulations might deal with safety, reliability, or the environment.
The pace of technological change can vary across industries, firms, and countries, depending upon the resources devoted to research and the nature of products or processes pursued. For instance, the electronics industry, by its nature, has more room for technological improvement than, say, the paper industry. Governments try to increase the rate of technological change by various means. These measures include directly engaging in research, providing research subsidies or tax breaks, inviting foreign investment (and consequently technology) in specific industries, and strengthening the laws for protecting intellectual property. Sometimes, however, governments have to monitor the introduction of new products and processes to ensure societal well-being. Examples of such cases include drug-testing regulation and testing for the environmental impacts of new technologies before they are introduced in the market.
In closing, our understanding of the process of technological change has improved over time. Technological change is an important input to a country’s economic growth, and we owe a large part of our improving living standards to changing technologies. Some technologies, however, can have undesirable side effects. Another issue is that technological progress across nations is uneven, and the rapid diffusion of new technologies from developed nations to developing nations remains a challenge.
SEE ALSO Growth Accounting; Physical Capital; Production; Schumpeter, Joseph; Solow Residual, The; Technology; Technology, Transfer of
Dasgupta, Partha, and Paul Stoneman, eds. 1987. Economic Policy and Technological Performance Cambridge, U.K.: Cambridge University Press.
Goel, Rajeev K. 1999. Economic Models of Technological Change. Westport, CT: Quorum.
Kamien, Morton I., and Nancy L. Schwartz. 1982. Market Structure and Innovation. Cambridge, U.K.: Cambridge University Press.
Nelson, Richard R., and Sidney G. Winter. 1982. An Evolutionary Theory of Economic Change. Cambridge, MA: Belknap.
Reinganum, Jennifer F. 1989. The Timing of Innovation: Research, Development, and Diffusion. In Handbook of Industrial Organization, ed. Richard Schmalensee and Robert Willig, 849-908. New York: Elsevier.
Sato, Ryuzo, and M. J. Beckmann. 1968. Neutral Inventions and Production Functions. Review of Economic Studies 35 (1): 57-66.
Schumpeter, Joseph. 1950. Capitalism, Socialism, and Democracy. 3rd ed. New York: Harper.
Rajeev K. Goel
The Spirit of Technology. In the mid nineteenth century the United States witnessed dynamic technological changes that were brought on by the growth of business and industry. European countries, linked in a competitive capitalistic market with Americans, also experienced technological advances. In 1851 the first modern world’s fair, the London Crystal Palace Exhibition, was held to display new discoveries and inventions. American products, while representing a small proportion of the exhibits at the fair, made a strong impression on European visitors. Cyrus McCormick’s reaper, Samuel Colt’s revolver, Gail Borden’s dehydrated “meat biscuit,” and Charles Goodyear’s vulcanized rubber were some of the most popular American attractions. So successful was the London exhibition that in 1853 the United States hosted its own world’s fair in New York City to display the revolutionary pace of American technological progress to visiting Europeans as well as to the American public. Americans and Europeans alike celebrated technology, viewing it, like much else in their changing world, with optimism.
Technology and Agriculture. American innovations in agriculture had a profound impact on the lives of farmers, especially in the new agricultural lands that were opening in the West. The chilled-iron plow, patented in
1868 by James Oliver, helped farmers break up the dry, hard prairie soil, while the gang plow, which had wheels, allowed the operator to ride on the machine. During the 1860s and 1870s harrows, which broke up and smoothed the soil, and grain drills, which scattered grain, were improved. By the 1870s the straddle-row cultivator had become popular; riding on the cultivator and operating the attached shovels with his feet, the farmer could cover twice as much acreage as was possible with the one-horse plow. The most important labor-saving device was the agricultural binder. The reaper, invented by Cyrus McCormick in 1834, had mechanized the cutting of wheat, but manual labor was still required to collect and bind the cut product; the binder, introduced by John E. Heath in 1850 and later improved by John F. Appleby and other inventors, mechanized these processes as well, resulting in a significant expansion in American wheat production.
Transportation. Between 1850 and 1860 railroad mileage more than tripled in the United States, and by 1860 it surpassed that of any other country in the world. In 1852 the Mississippi River was crossed by a railroad for the first time, and a year later Congress approved funds for an army expedition to select the best route for a transcontinental rail line. Sectional tensions prevented the building of the line until the 1860s, and in 1869 the first railroad extending from one coast to the other was completed when the east-to-west and west-to-east sections met at Promontory Point, Utah. Coal-burning locomotives began to replace wood-burning ones in the 1850s, and the introduction of the Pullman Luxury Car in 1858 and the Pullman Hotel Car in 1867 made train travel more appealing to Americans. Safety increased with the advent of the air brake, invented in 1868 by George Westinghouse, and the adoption of automatic signal systems to avoid accidents between trains using the same tracks. Finally, iron and steel bridges began to replace wooden ones, further increasing safety as well as holding down costs. The first all-iron railroad bridge was built in 1845, and in 1851 the engineer John A. Roebling designed the Niagara Suspension Bridge. Construction of the Brooklyn Bridge, which accommodated both road and train traffic, began in 1869 and was completed in 1883.
Technology and the City. Technology helped foster the growth of American cities between 1850 and 1877. The first streetcar began operation in New York City in 1852; in 1873 the first cable car appeared in San Francisco; in 1864 an engineer, Hugh B. Wilson, proposed the construction of a subway in New York (the first subway system, however, would open in the 1890s in Boston). Elisha Graves Otis invented the passenger elevator in 1852; following further improvements, the elevator would become a central component of the skyscrapers that would be built in the 1880s and 1890s. Even in the 1860s and 1870s, however, engineers were using steel to build stronger and taller buildings. The Bessemer process, developed in the 1850s as a cheap and efficient means of making steel from iron, led to a large increase in steel production and helped foster this change.
Telegraph and Telephone. In 1844 Samuel F. B. Morse revolutionized American communications with the perfection of the telegraph. In the 1850s Morse and other inventors, especially Cyrus W. Field, promoted the development of a cable that would allow telegraph signals to be transmitted across the Atlantic Ocean. When the transatlantic cable was completed in August 1858, Queen Victoria cabled President James Buchanan of her hope that “the electric cable which now connects Great Britain with the United States will prove an additional link of friendship between the nations.” Within a few weeks, however, the cable had lost its ability to transmit signals, and the outbreak of the Civil War delayed repairs. After 1865 new cables were laid, connecting the United States, Britain, and France; for the next fifty years ocean cables served as the quickest means of overseas communications. In 1873Alexander Graham Bell arrived in Boston from Scotland and began looking for a way to transmit sounds through a telegraph wire. Bell and his assistant, Thomas A. Watson, conducted many experiments with pairs of telegraph instruments, and on 2 June 1875 Bell heard the vibrations of Watson’s finger through the wire. Finally, on 10 March 1876 Bell communicated the first vocal message over an electric wire: “Watson, come here, I want you.” By that time Bell had already received a patent for his invention: the telephone.
Electrical Innovations. In the 1860s and 1870s European and American inventors began to explore the field of electric lighting. Electric dynamos, which had been created in the 1830s and 1840s by Joseph Henry, Thomas Davenport, and Charles G. Page, provided the energy for these experiments. Before 1880 at least nineteen electric lamps had been perfected by Europeans and Americans
including the arc lamp, which was used in street lighting. The most profound impact on the lighting industry, however, was made by Thomas Alva Edison, a prolific inventor who before 1877 had created an electric voting machine; the mimeograph; and the “quadraplex,” by means of which four telegraph messages could be sent through a single wire. In 1876 Edison established what he called a “scientific” factory at Menlo Park, New Jersey, where, with fifteen assistants, he tried to create “a minor invention every ten days and a big thing every six months or so.” In 1878 Edison would transform his factory into the Edison Electric Light Company, and in 1879 he would perfect the incandescent lightbulb.
Technology and Science. Most Americans of the mid nineteenth century viewed technology as the practical outcome of modern science. The proliferation of technological innovations during the period contributed to this perception, as did the public declarations of some American scientists. Although the president of Rensselaer Polytechnical Institute in Troy, New York, proclaimed in 1855 that “science has cast its illuminating rays on every process of Industrial Art,” most technologists depended less on scientific theory than on trial-and-error experimentation and intuition. This divergence was, however, less marked in some areas than others. Developments in the field of electricity were based on scientific theories dating back to the discovery of electromagnetism and the work of such scientists as Joseph Henry and Michael Faraday. Moreover, technology became increasingly linked to science in the middle of the century as scientific education became more advanced and the number of technical schools increased. In the 1840s and 1850s Yale, Harvard, and other Ivy League institutions established “scientific schools” that stressed engineering and technology, and the Massachusetts Institute of Technology was founded in 1861. Technology, like medicine, responded to an industrializing society by becoming more scientific and more professional.
Kendall A. Birr, “Science in American Industry,” in Science and Society in the United States, edited by David D. VanTassel and Michael G. Hall (Homewood, III.: Dorsey Press, 1966), pp. 35-80;
Robert V. Bruce, The Launching of Modern American Science, 1846-1876 (New York: Knopf, 1987);
John W. Oliver, History of American Technology (New York: Ronald Press, 1956).