Investment specific technological progress
Encyclopedia
Investment-specific technological progress refers to progress that requires investment in new equipment and structures embodying the latest technology in order to realize its benefits.
, think of a box that in one end takes in inputs such as labor (employees) and capital
(equipment, buildings, etc.) and in another end spits out the final good
. With this picture in mind now one can ask, how does technological progress affect production? One way of thinking is that technological progress affects specific inputs (arrows going in) such as equipment and buildings. To realize the benefits of such technological change
for production these inputs must be purchased. So for example, the advent of the microchip
(an important technological improvement in computers) will affect the production of Ford cars only if Ford Motor Co.'s assembly plants (the red box) invest in computers with microchips (instead of computers with punched cards) and use them (they are one of the arrows going in the box) in the production of Mustangs
(the arrow coming out). As the name suggests, this is investment-specific technological progress---it requires investing in new machines or buildings which contain or embody the latest technology. Notice that the term investment can be general: not only must a firm
buy the new technology to reap its benefits, but it also must invest in training its workers and managers
to be able to use this new technology (Greenwood & Jovanovic 2001) .
will determine how someone (should) want his or her tax
dollars to be spent and how he or she may want to invest his or her savings (Gort et al. 1999). If "investment-specific" technological change is the main source of progress, then one would want his or her dollars spent on helping firms buy new equipment and renovate their plants, because these investments will improve production and hence what you consume. Furthermore, one may want to help pay for current employee training in using new technologies (to keep them up to date) or subsidize the education of new employees (who will enter the job market knowing how to use the new technology). So, the type of technological progress will also matter for unemployment and education issues. Finally, if technological progress is "investment-specific" you may want to direct your money towards the research and development (R & D) of new technologies (like quantum computers or alternative energy sources) (Krusell 1998).
More generally, why is any type of technological progress important? Technological change has made our lives easier. Because of technological progress, people can work less, make more money and enjoy more leisure time (Greenwood & Vandenbroucke 2006). Women have been able to break away from the traditional "housewife
" role, join the labor-force in greater numbers (Greenwood et al. 2005) and become less economically dependent on men (Greenwood & Guner 2004). Finally, technological progress has been shown to affect the fall in child labor
starting around 1900 (Greenwood & Seshadri 2005). Figure 1 illustrates this last point: as of 1900 child labor's share of the paid labor force began to fall.
. The idea of the microwave came to be by accident: in 1946 an engineer noticed that a candy bar
in his pocket had melted while working on something completely unrelated to cooking (Gallawa 2005). The development of this good, from melting the candy bar to the home appliance we know today, took time and the investment of resources to make a microwave small and cheap. The first microwave oven cost between 2000 and 3000 dollars and was housed in refrigerator-sized cabinets (Gallawa 2005)! Today, almost any college student can enjoy a 3-minute microwaveable meal in the smallest dorm room. But a microwave's uses do not stop at the dorm room. Many industries have found microwave heating advantageous: it has been used to dry cork, ceramics, paper, leather, and so on (Gallawa 2005). However, for either college students or firms to reap the benefits of quick warming, they must first "invest" in a microwave oven (that "embodies" the technological advance). To realize the benefits of investment-specific technological progress you must first invest in a technology that embodies it.
Figure 2 (the pink line) shows how the price of new producer durables (such as equipment) in the US relative to the price of new consumer nondurables (like clothing) has consistently declined over the past fifty years (Gort et al. 1999). To calculate the relative price of producer durables divide the price that firms pay (for the durable inputs of production) by the price that a regular consumer pays (for things like jeans
). We use relative prices so we can say how many units of equipment can be bought instead (or in terms) of buying one unit of consumer goods. Figure 3 (the pink line) says that over time, firms have been able to buy more and more units of equipment instead of one unit of consumption, especially when we take into account that the quality of equipment being acquired has increased (a computer today is much faster than a computer five years ago and we should take that into account when comparing their prices). When changes in quality are not taken into account (which is wrong) it looks like the price of equipment has not decreased as much (see the black line in Figure 2).
Measuring the price of structures is more complicated than measuring the price of equipment, but economists have again been able to get an idea of how much progress there has been in structures (such as buildings). One approach is that if newer buildings were constructed or designed using newer technologies then they should be worth more than older buildings (because they embody the new technology (Gort et al. 1999). In particular, they should rent for more. As Figure 3 shows, this is true. Renting a square foot in a new building is much more expensive than renting a square foot in a building forty years old. So it must be the case that you are paying for a nicer, more functional and maybe even safer building.
Figures 2 and 3 suggest that investment-specific technological change is operating in the US. The annual rate of technological progress in equipment and structures has been estimated to be about 3.2% and 1%, respectively (Gort et al. 1999) (Greenwood et al. 1997).
Introduction
To model how something is producedProduction theory basics
Production refers to the economic process of converting of inputs into outputs. Production uses resources to create a good or service that is suitable for use, gift-giving in a gift economy, or exchange in a market economy. This can include manufacturing, storing, shipping, and packaging. Some...
, think of a box that in one end takes in inputs such as labor (employees) and capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
(equipment, buildings, etc.) and in another end spits out the final good
Final good
In economics final goods are goods that are ultimately consumed rather than used in the production of another good. For example, a car sold to a consumer is a final good; the components such as tires sold to the car manufacturer are not; they are intermediate goods used to make the final good.When...
. With this picture in mind now one can ask, how does technological progress affect production? One way of thinking is that technological progress affects specific inputs (arrows going in) such as equipment and buildings. To realize the benefits of such technological change
Technological change
Technological change is a term that is used to describe the overall process of invention, innovation and diffusion of technology or processes. The term is synonymous with technological development, technological achievement, and technological progress...
for production these inputs must be purchased. So for example, the advent of the microchip
Integrated circuit
An integrated circuit or monolithic integrated circuit is an electronic circuit manufactured by the patterned diffusion of trace elements into the surface of a thin substrate of semiconductor material...
(an important technological improvement in computers) will affect the production of Ford cars only if Ford Motor Co.'s assembly plants (the red box) invest in computers with microchips (instead of computers with punched cards) and use them (they are one of the arrows going in the box) in the production of Mustangs
Ford Mustang
The Ford Mustang is an automobile manufactured by the Ford Motor Company. It was initially based on the second generation North American Ford Falcon, a compact car. Introduced early on April 17, 1964, as a "1964½" model, the 1965 Mustang was the automaker's most successful launch since the Model A...
(the arrow coming out). As the name suggests, this is investment-specific technological progress---it requires investing in new machines or buildings which contain or embody the latest technology. Notice that the term investment can be general: not only must a firm
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
buy the new technology to reap its benefits, but it also must invest in training its workers and managers
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
to be able to use this new technology (Greenwood & Jovanovic 2001) .
Importance
Identifying investment-specific technological progress is important, because knowing what type of technological progress is operating in an economyEconomy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
will determine how someone (should) want his or her tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
dollars to be spent and how he or she may want to invest his or her savings (Gort et al. 1999). If "investment-specific" technological change is the main source of progress, then one would want his or her dollars spent on helping firms buy new equipment and renovate their plants, because these investments will improve production and hence what you consume. Furthermore, one may want to help pay for current employee training in using new technologies (to keep them up to date) or subsidize the education of new employees (who will enter the job market knowing how to use the new technology). So, the type of technological progress will also matter for unemployment and education issues. Finally, if technological progress is "investment-specific" you may want to direct your money towards the research and development (R & D) of new technologies (like quantum computers or alternative energy sources) (Krusell 1998).
More generally, why is any type of technological progress important? Technological change has made our lives easier. Because of technological progress, people can work less, make more money and enjoy more leisure time (Greenwood & Vandenbroucke 2006). Women have been able to break away from the traditional "housewife
Housewife
Housewife is a term used to describe a married woman with household responsibilities who is not employed outside the home. Merriam Webster describes a housewife as a married woman who is in charge of her household...
" role, join the labor-force in greater numbers (Greenwood et al. 2005) and become less economically dependent on men (Greenwood & Guner 2004). Finally, technological progress has been shown to affect the fall in child labor
Child labor
Child labour refers to the employment of children at regular and sustained labour. This practice is considered exploitative by many international organizations and is illegal in many countries...
starting around 1900 (Greenwood & Seshadri 2005). Figure 1 illustrates this last point: as of 1900 child labor's share of the paid labor force began to fall.
A Simple Example: the microwave oven
An example of investment-specific technological progress is the microwave ovenMicrowave oven
A microwave oven is a kitchen appliance that heats food by dielectric heating, using microwave radiation to heat polarized molecules within the food...
. The idea of the microwave came to be by accident: in 1946 an engineer noticed that a candy bar
Candy bar
A chocolate bar is a confection in bar form comprising some or all of the following components: cocoa solids, cocoa butter, sugar, milk. The relative presence or absence of these components form the subclasses of dark chocolate, milk chocolate, and white chocolate. In addition to these main...
in his pocket had melted while working on something completely unrelated to cooking (Gallawa 2005). The development of this good, from melting the candy bar to the home appliance we know today, took time and the investment of resources to make a microwave small and cheap. The first microwave oven cost between 2000 and 3000 dollars and was housed in refrigerator-sized cabinets (Gallawa 2005)! Today, almost any college student can enjoy a 3-minute microwaveable meal in the smallest dorm room. But a microwave's uses do not stop at the dorm room. Many industries have found microwave heating advantageous: it has been used to dry cork, ceramics, paper, leather, and so on (Gallawa 2005). However, for either college students or firms to reap the benefits of quick warming, they must first "invest" in a microwave oven (that "embodies" the technological advance). To realize the benefits of investment-specific technological progress you must first invest in a technology that embodies it.
How do you measure investment-specific technological progress?
While measuring technological progress is not easy, economists have found indirect ways of estimating it. If "'investment-specific'" technological progress makes producing goods easier, then the price of the goods affected (relative to the price of other goods) should decrease. In particular, "investment-specific" technological advance has affected the prices of two inputs into the production process: equipment and structures. Think of equipment as machines (like computers) and structures as buildings. If there is technological progress in the production (or creation) of these goods, then one would expect the price of them to fall or the value of them to rise relative to older versions of the same good.Figure 2 (the pink line) shows how the price of new producer durables (such as equipment) in the US relative to the price of new consumer nondurables (like clothing) has consistently declined over the past fifty years (Gort et al. 1999). To calculate the relative price of producer durables divide the price that firms pay (for the durable inputs of production) by the price that a regular consumer pays (for things like jeans
Jeans
Jeans are trousers made from denim. Some of the earliest American blue jeans were made by Jacob Davis, Calvin Rogers, and Levi Strauss in 1873. Starting in the 1950s, jeans, originally designed for cowboys, became popular among teenagers. Historic brands include Levi's, Lee, and Wrangler...
). We use relative prices so we can say how many units of equipment can be bought instead (or in terms) of buying one unit of consumer goods. Figure 3 (the pink line) says that over time, firms have been able to buy more and more units of equipment instead of one unit of consumption, especially when we take into account that the quality of equipment being acquired has increased (a computer today is much faster than a computer five years ago and we should take that into account when comparing their prices). When changes in quality are not taken into account (which is wrong) it looks like the price of equipment has not decreased as much (see the black line in Figure 2).
Measuring the price of structures is more complicated than measuring the price of equipment, but economists have again been able to get an idea of how much progress there has been in structures (such as buildings). One approach is that if newer buildings were constructed or designed using newer technologies then they should be worth more than older buildings (because they embody the new technology (Gort et al. 1999). In particular, they should rent for more. As Figure 3 shows, this is true. Renting a square foot in a new building is much more expensive than renting a square foot in a building forty years old. So it must be the case that you are paying for a nicer, more functional and maybe even safer building.