13.4: Technology and growth in per capita output

Advances in knowledge based on research and development and experience are the key to sustained rates of productivity growth and improvements in standards of living.

Technical knowledge

Every society has some level of technical knowledge about production practices. Part of this knowledge is recorded in technical documents, books, and plans. But it develops and is often captured in current working practices based on experience. This technical knowledge grows through invention that uncovers new understanding and knowledge. What usually follows is innovation that applies new knowledge to actual production techniques.

Invention: the discovery of new knowledge.

Innovation: the application of new knowledge into production techniques.

Industrial and economic history is often written in terms of the sequence of major inventions and innovations. Improvements in transportation from the wheel, to steam engines, internal combustion engines and aircraft transformed the size of the market and the degree of specialization and trade. The generation and transmission of electricity provided a new, more efficient and flexible source of light and power leading to improved communications and data management.

Historically, the agriculture 'revolution' was based on the application of science and technology to products and production processes. That evolution continues: New organization and techniques increased productivity; new machinery further increased labour productivity and yielded economies of scale; and new science provided better seed, fertilizer and fuels to power new mechanical equipment. Increases in agriculture productivity based on these and other advances reduced the labour and land required to supply food to the population. At the same time, increased industrialization increased the demand for labour. Economies became more sector specialized with identifiable primary, manufacturing and service sectors that worked together to improve productivity and standards of living.

Additions to human capital were as important as increases in physical capital in this growth process. Human capital is knowledge and experience with production processes. Experience improves workers' efficiency. Higher levels of education and training lets workers use more complex production equipment and techniques and contribute to cost improvements in the organization of production. In short, productivity is enhanced by the complementarity and synergy between human and physical capital.

The role of research and development

The invention and innovation that lies behind productivity improvements has many sources. Familiarity with a product, process or production technique often suggests a better way to work, or a better product design. Experience and frustration can lead to curiosity and invention. However, most invention and innovation has its origin in specialized research and development. From this perspective the output of new ideas depends on the resources allocated to R&D. There are costs involved and the focus and usefulness of the results may not be apparent for some time, if ever. Some research is pure research that seeks new knowledge and understanding. Most of it takes place in university departments, usually funded in part by industry, in part by government and in part by private individuals. Applied research, on the other hand is usually based in and financed by industrial firms, with some support from government grants and tax incentives. New knowledge with commercial applications is the goal of this applied R&D.

Investment in R&D, like investment in human and fixed capital, is risky. It cannot be known in advance that new, useful knowledge will result. Funding is provided and committed in the hope and expectation that research projects will be successful. Even if research succeeds it may be difficult to apply the new knowledge or technology in a way that increases your market power enough to allow recovery of the costs. Success gives competitors strong incentives to copy the new product or create a close substitute for it. Patent laws and government subsidies are designed to help private companies and individuals recover their costs of R&D, recognizing that society benefits from improvements in technology.