Tag Archive: production

Technological Advance

One of the most famous studies ever conducted in economics was the study done by Edward Denisen. He found that the most important factor accounting for a full 28% of increased productivity, has been technological advance – just as growth theory suggests. And by the way, Denisen’s eighth category (legal-human environment) is a negative number. It estimates the negative impact that legal and regulatory constraints have had on productivity and growth. Which takes us to Ferguson (2012) who states that among the most deadly enemies of the rule of law is bad law (p.77).

  • While some economists and policy makers stress the need to increase capital investment,
  • others advocate measures to stimulate research and development and technological change.
  • Still a third group emphasizes the role of a better educated work force.

The Neoclassical growth model was pioneered by professor Robert Solow of MIT:

  • Major model components in this neoclassical growth model: Capital and technological change.
  • Primary tool: Aggregate Production Function (APF), which relates technology and inputs, like capital and labor, to total potential GDP.
  • Key concept: Capital deepening – the process of increasing the amount of capital per worker, e.g. more farm machinery and irrigation systems in farming, more railroads and highways in transportation, and more computers and communication systems in banking. In each of these industries societies have invested heavily in capital goods. And as a result, the output per worker has grown enormously.

The first major insight of the model is that in the absence of technological change, capital deepening does not lead to a proportional increase in output.

Reason: The law of diminishing returns – the basic idea is that as you add more and more capital to a fixed supply of labor, eventually the marginal product of capital must fall as the law of diminishing returns kicks in.

The second major insight of the neoclassical growth model is that while capital deepening can dramatically increase the productive output of an economy, it will eventually lead to economic stagnation in the absence of technological change.

At this point, the economy enters a steady state in which, without technological change, both capital incomes and wages end up stagnating.
In the long run, equilibrium of the neoclassical growth model makes it clear that if economic growth consists only of accumulating capital through replicating factories with existing methods of production, then people’s standard of living will eventually stop rising. And that’s why we must come to understand the importance of technological change in averting this fate, as modern economies in this century have so obviously done.

This leads to the third major insight of the neoclassical growth model. It is ultimately only through technological change that we can avoid the trap of economic stagnation.

Technological change represents both advances in production processes, and the introduction of new and improved goods and services. It also includes new managerial techniques, as well as new forms of business organisation.

Understanding Technology

There are various meanings that help to analyse technology. In modern common usage, the word ‘technology’ essentially means ‘kit’, which is to say technology as artefact (product). This refers to made objects, and also to what they do (examples in table below). This usage of the word is quite recent. Dictionaries – which tend to lag behind common usage – almost all define technology as a body of knowledge and practice, for example “a particular practical or industrial art” (Oxford English Dictionary). Past definitions have distinguished other categories, namely technology as knowledge and technology as mode of enquiry and action. These meanings are different ways of understanding technology. They can be conceptualised as a dependent series: There can be no artefact without action, no technological action without knowledge, and no knowledge without enquiry. This implies that two sets can create meaningful combinations, such as “application knowledge”, or “product mode of enquiry” (Fowles, 2005).

Artefact Knowledge Mode of enquiry and action
Application Formulation, symptom relief Diagnostic indications Clinic trials
Writing electronically Observing office work Prototyping, software development
Product Bio-active ingredients, systemic effects Molecular structure Systematic search for and analysis of medical plants
Word processor Convert keyboard keys to strings Developing software modules for communication
Production Fermentation and fermenters Drug testing and approval system Process improvement
Compilers, assemblers Software engineering Understanding software development and quality standards

Table 1: Meanings of technology and examples for medicine and IT

Knowledge is not easy to picture: Although knowledge is sometimes written down, very often it resides only in people (Nonaka and Takeuchi, 1995). Let’s consider the assembly line in a car fabric: It implies product knowledge of the design of car bodies – such as the arrangement of parts, the suitability of materials etc. It also implies production knowledge of the organisation of an assembly line and the manner and sequence in which parts are fitted. Some of these were important subjects at certain points in the technology’s life cycle. We can imagine business conditions, such as a high rate of change and degree of complexity, where production knowledge creation, using a “continuous improvement” method such as ‘Kaizen’ (Imai, 1986), would be an essential part of an organisation’s technology strategy as product performance.

The mode of enquiry and action refers to technological method. It is what develops a technology as time passes. R&D is a prime example. More generally, it is a way of doing things that is concerned with observation, problem solving, inventing, improving, management of change, etc. Here are some guidelines on categorisation (Fowles, 2005):

  • Application mode of enquiry and action might be trial and error to see how a technology is best used, sited, etc.
  • Application knowledge would include knowledge of use, siting, maintenance…
  • Application artefacts comprise the framework within which a technology is ultimately used. The framework might include ancillary mechanisms to improve performance, such as guidance for users.
  • Product mode of enquiry and action might be a particular approach to R&D.
  • Product knowledge is about architecture and design, e.g. the arrangement of components in a successful working entity.
  • Product artefacts include the product as delivered and component technologies within it, and the effects they have.
  • The production mode of inquiry and action might be a particular approach to process improvement.
  • Production knowledge is about the systems of operation and control, craft practices etc.
  • Production artefacts are the organisations, structures and tools that enact these systems and practices, and the effects they have.