Microeconomics and Technical Change

This article focuses on microeconomics and technical change. It provides an overview of the connection between technical change, productivity, and economic growth as well as the economic theory and history of technical change. The main processes of technical change, including technical evolution and technical innovation, are described. The main actors involved in promoting technical change are discussed. The issues associated with measuring technical change in the global market are addressed.

Keywords Diffusion; Economic Growth; Firm; Global Economy; Globalization; Innovation; Invention; Microeconomics; Nations; Private Sector; Productivity; Public Sector; Technical Change; Technical Evolution; Technical Innovation

Management> Microeconomics & Technical Change

Overview

The field of economics, and microeconomics in particular, has an established history of studying the relationship between technical change and capitalist economies. Economists argue that technical change drives economic growth, productivity growth, and social change. Understanding the microeconomics of technical change is important in an increasingly global and technological world. Technical change refers to a change in the amount of output produced from the same inputs. Technological change is characterized by a change in a set of existing production plans and procedures. While technical change may occur in any area, including organization, production, or technology, economists generally consider technical changes in the technology field to be the primary engine of economic growth and social change.

Technical change occurs through two different processes: technical innovation or technical evolution.

• Technological innovation (TI) refers to the process by which industry generates new and improved products and production processes. Technical innovation is characterized as a goal-directed activity. A technical change is one that has been chosen from amongst a set of feasible changes. Karl Marx considered technical innovation to be one of the main forces of history.
• Technical evolution is generally conceived of as a process of trial and error or the culmination of small modifications to the production process (Brotherton, 1988). Despite the similarity in names, technical evolution differs from biological evolution. Technical evolution can be directed and managed while biological evolution is a slow, self-generating process (Parayil, 1999). In addition, technical evolution is much more rapid than biological evolution. Human beings, with the capacity for memory, expression, recording, teaching, and communication, may guide technical evolution by changing production techniques and social organization. Technical knowledge is cumulative and builds on what comes before (De Bresson, 1987).

The following section provides an overview of the economic theory and history of technical change. This overview serves as the foundation for later discussion of the process of promoting technical change and the issues associated with measuring technical change in the global market.

Economic Theory & History of Technical Change

Microeconomics vs. Macroeconomics

Economists have studied and debated the economics of technical change since the eighteenth century. The debate about the economics of technical change has tended to divide economists. Economists tend to favor explaining technical change as either a macroeconomic process or a microeconomic process. Microeconomics is a subfield of economics that studies how small economic groups, including households, individuals, and firms, make economic decisions. Microeconomics is concerned with the relationship between price, supply and demand, and small economic group decision-making.

In contrast, the field of macroeconomics is concerned with large-scale economic activity, including inflation, unemployment, and national growth. Macroeconomic studies of technical change or progress tend to be concerned with the rate of technical progress or change in a market or society. In addition, macroeconomic studies tend to equate technical progress and advances in knowledge. Macroeconomic studies of technical change consider "pure" technical progress the single most important determinant of the growth of living standards. In contrast, microeconomic studies of technical change examine the process of technical change in a disaggregated way. For example, microeconomic studies of technical change studies production functions as separate subjects (Kennedy & Thurlwall, 1972).

Development of Technical Economic Growth Theories

Economic study of technical change was lead by Karl Marx in the nineteenth century and Joseph Schumpeter in the twentieth century. Marx's viewpoints characterized the classical economic position on technical change. Marx argued that the forces of production and technology determine social change. Schumpeter, following Marx, saw that technological change was the key factor behind economic development. Modern economists are building on Schumpeter's work to develop new theories of economic growth with technical change at their center. Schumpeter prioritized the importance of innovation process in the technical change process. According to Schumpeter, technological change is lead by entrepreneurs and connected to the business cycle. The destruction of existing modes of production and exchange in the marketplace creates economic evolution and economic growth (Parayil, 1999).

Schumpeter's Trilogy

Schumpeter argued that technological change occurs in three distinct steps or stages: invention, innovation, and diffusion. Invention refers to the "generation of a new idea or new concept that may lead to a new product or process" (Curlee & Goel, 1989, p.5). Innovation, which follows invention, occurs when the "idea from an invention is developed into a new product or process and the new product or process is commercially transferred. Diffusion refers to the process in which the new process or product spreads across firms within and across markets" (Curlee & Goel, 1989, p.5). Schumpeter's theory of technical change, also referred to as the Schumpeter trilogy, argues that technical change occurs most rapidly and successfully in concentrated industries. Concentrated industries refer to industries in which a small number of companies sell a large percentage of an industry's product.

Modern Economics Theories of Technical Change

Modern economic theories of technical change tend to be based on neoclassical economics. Neoclassical economic theory argues that new creation occurs due to the drive to maximum profits. Neoclassical economic theory argues that individual firms and whole industries produce technical innovation in response to two types of market forces, demand-pull and technology-push. The demand-pull market force approach argues that firms employing larger marketing research facilities have an advantage over firms that have smaller marketing research facilities. The technology-push market force approach argues that technical change originates within a firms’ research and design department (Curlee & Goel, 1989).

Applications

Promoting Technical Change

Economists, businesses, and governments recognize that technical change increases economic growth and productivity. As a result, businesses and governments actively promote technical change at the corporate and industry level. Governments actively diffuse new technologies into society and industry in an effort to increase productivity in their nations and increase their level of international competition. Economists encourage the public and private sectors to cooperate and work together to promote technical change. Governments and firms work together to promote the expansion of new technological capabilities in an effort to counteract and address market failures that inhibit the invention, innovation, and diffusion of new technologies (Curlee & Goel, 1989).

Promotion of Technical Change by Firms

Firms and governments promote technical change. Individual firms and whole industries make frequent technological choices. Economists argue that firms engage in ongoing cost-minimizing technical choices. Firms choose from a wide variety of feasible production techniques based on their relative prices of production. Firms are moving toward technical progress characterized by increased optimization. Technical progress requires that firms embrace a technical strategy characterized by technical innovation or technical adoption. Economists argue that firms self-select into one of these two categories. Firms that prioritize technical innovation, such as biotechnology and pharmaceutical firms, tend to focus on discovering new techniques of production or consumption. These firms tend to have large high research and development (R & D) budgets. In contrast, firms that prioritize the adoption of existing techniques of development and consumption, such as agricultural firms, tend to be motivated by their profit objective. Both firms have rates of technical progress. A firm's rate of technical progress refers to the "plant size and equipment decisions together with the relative prices of inputs and outputs under different technical possibilities" (Caputo & Paris, 2005).

Promotion of Technical Change by Government

While firms work from within to promote technical change, governments promote technical change through microeconomic reform and policy reform (Adams & Parmenter, 1994). The United States government's science and technology policy program and infrastructure is composed of the Office of Science and Technology Policy, the National Science and Technology Council, and the President's Council of Advisors on Science and Technology (PCAST). In the United States, the Office of Science and Technology Policy oversees science and technology policy. The Office of Science and Technology Policy was established in 1976 by Congress to advise the president and other policy-makers on the effects that scientific and technological advancements have on domestic and international affairs. The National Science and Technology Policy, Organization, and Priorities Act of 1976 (Public Law 94-282) authorizes Office of Science and Technology Policy to accomplish the following tasks: provide scientific and technological analysis and make decisions regarding the research for the president regarding important policies, plans, and programs of the federal government; “lead an interagency effort to develop and implement sound science and technology policies and budgets; work with the private sector to ensure federal investments in science and technology contribute to economic prosperity, environmental quality, and national security; build strong partnerships among federal, state, and local governments, other countries, and the scientific community; and evaluate the scale, quality, and effectiveness of the Federal effort in science and technology” (Stine, 2009, p.8).

Executive Order 12881

In 1993, Executive Order 12881 established the National Science and Technology Council (NSTC) as the principal agency working with the executive branch to equalize science and technology policies between the various entities that carry out federal research and development efforts. The National Science and Technology Council is composed of the president, the vice president, the directors of various agencies, including the Office of Science and Technology Policy, and the cabinet secretaries. The National Science and Technology Council is organized under five main committees, including the Committee on Environment, Natural Resources, and Sustainability, and the Committee on Homeland and National Security. The National Science and Technology Council's main objective and responsibility is to develop national goals for federal science and technology investments in a wide range of areas representing all the mission areas of the executive branch.

Executive Order 13226

In 2001, Executive Order 13226 established the President’s Council of Advisors on Science and Technology (PCAST) to allow private sector and academic community members to advise the president on technological and scientific matters as well as math and science education efforts. The President's Council of Advisors on Science and Technology includes members from industry, education, and research institutions and other nongovernmental organizations. The council considers issues such as technology and the role of emerging companies, U.S. research and design investment, and energy efficiency. The federal government's approach to science and technology initiatives and policies is based on the belief in the benefits of interagency efforts.

The Public Sector

The public sector is actively involved in promoting technical change as part of its larger effort to create economic strength and stability. There are multiple types of market failure scenarios that the public sector addresses through the diffusion and promotion of technical innovation and change. Examples of market failures include “(l) the lack of competitive markets, the existence of market externalities, and the lack of contingent commodity markets or failures with respect to information and uncertainty” (Curlee & Goel, 1989, p.13). “Lack of competitive markets refers to situations in which some of the producers and consumers of goods and services have market power” (Curlee & Goel, 1989, p.13). “Externalities refer to costs or benefits that result from the production and use of a good or service and which are incurred by individuals or firms that are not directly involved in the economic transaction” (Curlee & Goel, 1989, p.14). Failures of information or confidence occur when producers and consumers do not have perfect information or the opportunity to insure against the market risk.

Public policies that result in the diffusion of new technologies into these market failure scenarios create increased research, development, spending, confidence, and employment. Public policy responses to market failures include indirect policy instruments or direct policy instruments.

• Indirect policy instruments refer to “public sector measures that alter the incentive structure of the private sector with respect to technical change such that the pursuit of invention, innovation, and diffusion is made more attractive” (Curlee & Goel, 1989, p.15).
• Direct policy instruments trigger research and development in the knowledge and technology sectors. The public sector uses direct policy instruments to guide the invention, innovation, and diffusion of new technology.

Market Structure & Technical Change

Ultimately, firms, industries, and governments study the relationship between market structure, innovation, and diffusion activities to gather the information necessary for making technical choices. Market structures refer to the number of firms and the power of those firms in the market place. The relationship between market structure and technological change is nonlinear and complex. The influence of innovation on market structure depends on the type of innovation, type of market, and timing of introduction. Policy issues and technical change are complex. Technology policy must assess the relationship between market structure and technological advances. For example, Schumpeter realized that rapid technical change is most appropriate for and successful in concentrated industries. In addition, monopolies are considered by economists to be better suited to bearing the risks associated with research and advancement and have the resources to take new technologies to market (Curlee & Goel, 1989).

Issue

Measuring Technical Change in Global Markets

In the twentieth century, technical change created economic growth and created the competitive advantage in the global marketplace for firms and national economies. The rate of technical change is an important indicator of current and future economic health. Measuring the rate of technical change is complicated by numerous factors. Technical change is heavily influenced by changes in corporate business practices and the development of global markets. Factors in firms and markets that influence technical change include increases in competition, pace of development, and labor productivity (Ahlstrom, 2004).

• Increased competition: Technical change is influenced by increased competition in the marketplace. Economic growth in the marketplace increases competition between local and foreign firms. Trade agreements, such as the North American Free Trade Area (NAFTA) and the single European market in the early 1990s, created new opportunities and new competitors. The interdependent global economy creates new levels of competition among foreign and multinational corporations. The modern trend of globalization, and resulting shifts from centralized to market economies in much of the world, has created both need and opportunity for economic development in developing countries and regions of the world. Open markets and foreign development aid have created new competitors in business sectors. Corporations around the world are adopting new management practices and building their brands in an effort to compete in global markets.
• Increased pace of development: Technical change is influenced by increased pace of development in industry. The development of global markets has spurred the development of high-tech businesses. Global markets emphasize fast growth facilitated through new business procedures and new technologies such as the Internet and other networking technologies. Increased spending in research and design has yielded a wide range of profitable new products and services. The profits from economic growth provide funds for further technological development and investment. Both public and private sector interests have invested and driven the pace and direction of technological development in global markets. High-tech firms, with fast-paced product development tracks, depend on equity funding by venture capitalists, market investors, stock options, brand-building, and corporate reputation to establish themselves as competitors in global marketplace.
• Increased labor productivity: Technical change is influenced by increased labor productivity in industry. The rate and pace of labor productivity is used by economists as a measure of the economic health of a country. Labor productivity refers to a business' output divided by the number of employees. Increased labor productivity, resulting from expanded global markets and new technologies, increases profits, spending, product development, and the overall economic health of a country.

Firms and governments consider the type and rate of technical change to be a strong economic indicator. Firms, industries, and governments work to estimate a general index of technical change for every given production technology. The general index serves as the basis for analysis of the determinants of technical change (Baltagi & Griffin, 1988). Despite the importance and usefulness of generating data about the rate of technical change, firms, industries, and governments face numerous challenges gathering such data. Ambiguity in economic research on technical change is generally believed to be caused by a lack of data on research and development processes. Measurement issues are related to a lack of research on technical change across businesses and industries.

Conclusion

In the final analysis, economists consider technical change to be one of the main forces driving capitalist economies. The microeconomics of technical change is a lens with which to examine the small scale economic processes that influence technical change. Microeconomic theories of technical change, including demand-pull market force, technology-push market force, technical innovation, and technical evolution, offer explanations about how and why technical change occurs in firms and industries (Freeman, 1994). Technical change affects the pace and growth of firms, national economies, and markets. Technical change drives economic development. Historical examples of technical change that altered business practices include the nineteenth-century railroad and twentieth-century mass production manufacturing technologies. In the 1990s, new information and communication technologies began a business revolution with new products, services, business models, and economic markets. Information and knowledge have become both the means and the product of many businesses around the world. Terms such as the information society became popular descriptors of modern life for Westernized countries. Ultimately, technical change drives the economy and shapes history.

Terms & Concepts

Diffusion: The process in which an innovative idea moves across firms within and across markets.

Economic Growth: The quantitative change or expansion in a country's economy.

Firm: A business owned by stockholders and managed by professional managers.

Global Economy: A model of economy characterized by growth of nations, both in populations and in output and consumption per capita, interdependence of nations, and international management efforts.

Globalization: A process of economic and cultural integration around the world caused by changes in technology, commerce, and politics.

Innovation: The use of a new product, service, or method in business practice immediately subsequent to its discovery.

Invention: The development of a creative new idea or concept that could lead to a new products or processes in the market.

Nations: Large aggregations of people sharing rules of law and an identity based on common racial, linguistic, historical, or cultural heritage; rarely act unilaterally.

Microeconomics: A subfield of economics that studies how small economic groups, including households, individuals, and firms, make economic decisions.

Private Sector: All enterprises that are outside of government control, including micro, small, medium, and large enterprises.

Public Sector: The economic and administrative enterprises of a local, regional, or national government.

Technical Change: A change in the amount of output produced from the same inputs.

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Suggested Reading

Barcenilla-Visús, S., Gómez-Sancho, J., López-Pueyo, C., Mancebón, M., & Sanaú, J. (2013). Technical change, efficiency change and institutions: Empirical Evidence for a sample of OECD countries. Economic Record, 89, 207–227. Retrieved November 26, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=88236038

Intriligator, M. (1992). Productivity and the embodiment of technical progress. Scandinavian Journal of Economics, 94, S75–S87. Retrieved September 16, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=14297195&site=ehost-live

Nemoto, J., & Goto, M. (2005). Productivity, efficiency, scale economies and technical change: A new decomposition analysis of TFP applied to the Japanese prefectures. Journal of the Japanese & International Economies, 19, 617–634. Retrieved September 16, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=19167879&site=ehost-live

Ruttan, V. (1997). Induced innovation, evolutionary theory and path dependence: sources of technical change. Economic Journal, 107, 1520–1529. Retrieved September 16, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=9711133496&site=ehost-live

Tavani, D. (2013). Bargaining over productivity and wages when technical change is induced: Implications for growth, distribution, and employment. Journal of Economics, 109, 207–244. Retrieved November 26, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=88368782