Technological progress

Technology refers to the application of scientific knowledge for practical purposes, such as the development of machinery and equipment that is used to design, manufacture and distribute products.

Technology clearly has a significant role in most aspects of economic life and does not just involve production. How consumers chose, select and order products revolves around technology in one shape or form - from apps to make online purchases, to AI which can track trends and set prices, to payment systems to complete purchases.

Technological progress refers to the improvements that are made to the production and consumption process.

Invention and innovation

Most technological progress falls into one of two categories:

  1. Invention - which means the creation and development of a completely original product or process. New ideas can be patented, which provides some protection from copying.
  2. Innovation - which refers to improvements to existing goods or services, or to processes. The main driver for innovation is to either improve the quality of a good, service or process, or to reduce its costs.

Reduced product life cycles

The more frequently goods and services are subject to technological improvements, the shorter is the product's life cycle. For example, it took Apple over 3 years to move from Apple-II to Apple-III (1977 to 1980) but less than a year to move from iPhone12 to 13. While this, of course, makes sense from a sales, revenue and profit perspective, it is technological progress that has sped up the process of developing, launching and marketing new products and models/versions.

Dynamic efficiency

The application of new technology to lower costs is called dynamic efficiency.

Graphically, technological improvements result in lower average production costs. This enables producers to derive increased profits.

Creative destruction

In a wider sense, technological progress has considerable benefits to an economy. This was first highlighted by Austrian economist, Joseph Schumpeter who introduced the notion 'creative destruction'. By this he meant that technological progress both destroys and creates in a dynamic cycle of improvement.

Existing firms may become large, less agile, and less willing or able to apply new technology quickly. This creates opportunities for new firms. New firms are likely to be smaller, less constrained by existing technology, and more likely to take risks by using the latest technology.

Over time, the 'older' firms becomes less competitive, and may even leave the market, while the 'newer' firms develop and prosper, until, in the future, an even newer firm enter the market, and challenge the existing firms.

This is one reason why some economists from the Austrian school suggest that monopolies do not need to be heavily regulated because they will be subject to creative destruction, and will either reject obsolete technology and embrace new technology or leave the market. This assumes, of course, that there are no major barriers to entry preventing new firms entering the market.


Dynamic efficiency

Here we can see that average production costs using new technology are lower at all outputs than for older technology. For example, at output Q, average costs using old technology are at K, which is higher than at L, using new technology.

Impact of technological progress

Technological progress can have a considerable impact on an economy, including the following possible effects:

  1. More dynamic markets
  2. Possible constraint on monopoly power
  3. Market becoming more contestable
  4. Lower prices
  5. Higher quality goods
  6. More efficient distribution
  7. Requirement for a more skilled workforce
  8. Impact on education system, such as promoting computer literacy
  9. Creation of new jobs
  10. Improvements in labour productivity
  11. Destruction of old jobs - 'technological/structural unemployment'
  12. Higher wages for some
  13. A more dynamic supply-side of the macro economy
  14. Increased international competitiveness
  15. Extension of private goods - technology can allow public goods to become more like private goods - such as road pricing schemes, which allow 'roadspace' to be priced through smart technology