2 Technological change and economic growth
2.1 Industrial revolutions and technological change
In this section I shall look at the way that technological innovations in previous eras, such as the invention of electricity in the early 1900s, radically affected the way society organised production and at how these changes spurred general economic growth. In many instances, the changes were so large that they defined an entire period, just as the rise of information technologies has led some to call the current era the ‘information age’.
The way that technological change can fundamentally alter society is best viewed through the lens of previous industrial revolutions. The term Industrial Revolution usually refers specifically to the series of technological changes that occurred in England between 1760 and 1850 (such as steam power). More generally, the term refers to eras when rapid and significant technological changes fundamentally alter the way that production is carried out in society, affecting not only how people work but also how they live their lives. Consider the impact that electricity in the Second Industrial Revolution had not only on factories but also on the lives of families in their homes. Thus an industrial revolution occurs when new technological inventions and innovations fundamentally transform the production processes of goods and services to such an extent that all society is affected.
For our purposes the words ‘invention’ and ‘innovation’ can be used interchangeably. More specifically, however, the term ‘invention’ refers to the discovery of new products or processes, while ‘innovation’ refers to the commercialisation (bringing to the market) of new products or processes. Furthermore, we can distinguish between product innovations and process innovations. Product innovations result in the production of a new product, such as the change from a three-wheel car to a four-wheel car, or the change from LP records to CDs. Process innovations increase the efficiency of the methods of production of existing products, for example the invention of the assembly-line technique.
The inventions and innovations that form industrial revolutions are those that open new doors and create new ways of doing things, not simply those that fill gaps in existing ways of doing things (Mokyr, 1997). The core of the First Industrial Revolution in the eighteenth century was a succession of technological changes that brought about material advances in three basic areas: (1) the substitution of mechanical devices (such as machines) for human labour; (2) the substitution of inanimate sources of power (such as steam) for animate sources of power (such as horse power); and (3) the substitution of mineral raw materials for vegetable or animal substances, and in general the use of new and more abundant raw materials (Landes, 1972).
These changes in technology and equipment occurred simultaneously with changes in organisational arrangements. For example, at the end of the nineteenth century the rise of electricity and the internal-combustion engine allowed the factory system to emerge, which radically changed the organisation of work. The factory system, used first for the production of cotton but then extended to other industries, created a new, unified system of production which replaced the craft labour carried out in individual workshops. The main innovation of this new system was that it allowed workers to be brought together for the first time under common supervision with strict discipline, and it also introduced the use of a central, usually inanimate, source of power. The factory system enabled production to become more efficient as it allowed the company to spread its costs over a much larger output, a dynamic called ‘economies of scale’.
Economists interested in the pervasive effects of technological change in different industrial revolutions have devised the concept of a general purpose technology (GPT). A GPT is a technology that is general enough to be used in various industries and has a strong impact on their functioning. There are four main characteristics of a GPT (Lipsey et al., 1998). As you read the list, consider how a new technology such as electricity or information technology fulfils each criterion.
It must have a wide scope for improvement and elaboration. This means that the technology does not appear as a complete and final solution, but as a technology that can be improved through the different opportunities for technological change that surround it.
It must be applicable across a broad range of uses. This means that its use is not restricted, for example, to only one industry but open to many different types of industries and consumers.
It must have a potential use in a wide variety of products and processes. This means that the new technology should not result in the creation of only one set of products (such as a computer), but a wide set of products (such as complex new air-traffic control systems or new inventory controls).
It must have strong complementarities with existing or potential new technologies. This means that the technology does not only replace existing methods but also works with them, ensuring an even broader impact on the systems of production and distribution.
Examples of GPTs include different power delivery systems (water-wheel, steam, electricity, internal-combustion engine), transport innovations (railways and motor vehicles), lasers and the internet. The invention of the internal-combustion engine not only made possible personal automobiles, motor transport and air transport, but also created ‘derivative’ inventions such as the suburb, the motorway and the supermarket. Electricity allowed the work day to be extended (allowing for different shifts in a 24-hour period), gave a huge impetus to the entertainment industry, and greatly enhanced manufacturing process technologies. (We shall also see how it created the conditions for ‘mass production’ via the moving assembly line.)
GPTs are important because they spur technological change in different areas (and this effect is behind the first three characteristics of GPTs listed above). In fact, radical technological changes are often cumulative changes: change in one area leads to change in another area. David Landes is an economic historian and his account of the way in which the invention of the steam engine caused changes in many different industries has become well known. He calls this process ‘technological interrelatedness’.
In all this diversity of technological improvement, the unity of movement is apparent: change begat change. For one thing, many technical improvements were feasible only after advances in associated fields. The steam engine is a classic example of this technological interrelatedness: it was impossible to produce an effective condensing engine until better methods of metal working could turn out accurate cylinders. For another, the gains in productivity and output of a given innovation inevitably exerted pressure on related industrial operations. The demand for coal pushed mines deeper until water seepage became a serious hazard; the answer was the creation of a more efficient pump, the atmospheric steam engine. A cheap supply of coal proved a godsend for the iron industry, which was stifling for lack of fuel. In the meantime, the invention and diffusion of machinery in the textile manufacture and other industries created a new demand for energy, hence for coal and steam engines; and these engines, and the machines themselves, had a voracious appetite for iron, which called for further coal and power. Steam also made possible the factory city, which used unheard-of quantities of iron (hence coal) in its many-storied mills and its water and sewage systems. At the same time, the processing of the flow of manufactured commodities required great amounts of chemical substances: alkalis, acids, and dyes, many of them consuming mountains of fuel in the making. And all of these products – iron, textiles, chemicals – depended on large-scale movements of goods on land and on sea, from the sources of the raw materials into the factories and out again to near and distant markets. The opportunity thus created and the possibilities of the new technology combined to produce the railroad and steamship, which of course added to the demand for iron and fuel while expanding the market for factory products. And so on, in ever-widening circles.
(Landes, 1972, pp. 2–3)
Can you think of new industries that have grown out of the PC and the internet?
You may have thought of online shopping, internet banking, digital cameras, information services (such as online recipes) and computer desks. Having reflected on the nature of technological change and its role in defining industrial revolutions, we shall now examine how technological change affects the efficiency of firms and hence general economic growth.