Technical progress: Meaning, Criticisms & Real-World Uses

What Is Technical Progress?

Technical progress refers to advancements in knowledge and technology that enhance the efficiency with which goods and services are produced within an economy. It is a fundamental concept in macroeconomics, driving long-term economic growth and improving living standards. This progress allows for greater output from the same amount of inputs, or the same output with fewer inputs, leading to increased productivity growth. Technical progress is intrinsically linked to innovation, as new ideas and methods are developed and adopted across various sectors.

History and Origin

The concept of technical progress gained prominence in economic theory, particularly with the development of modern growth models in the mid-20th century. Early economic models, such as the Solow Growth Model, formally incorporated technical progress as a key determinant of sustained long-run growth. Robert Solow's seminal work treated technical progress as an exogenous factor, meaning it was assumed to occur independently of other economic variables, yet it was crucial for explaining why output per person continued to grow over time. This progress effectively shifts the production function upwards, enabling economies to achieve higher levels of output with existing levels of capital and labor. The Federal Reserve Bank of San Francisco notes that the Solow Growth Model, when augmented with technical progress, can explain sustained increases in output per capita.⁴

Key Takeaways

Technical progress signifies improvements in technology and knowledge that boost production efficiency.
It is a primary engine of long-term economic growth and a key factor in raising living standards.
This progress often stems from research and development (R&D) and investments in human capital.
Technical progress enables economies to produce more output with the same inputs, or the same output with fewer inputs.
While generally beneficial, it can also lead to short-term disruptions, such as shifts in labor demand.

Formula and Calculation

In growth accounting, technical progress is often measured as the "residual" or Total Factor Productivity (TFP). TFP growth represents the portion of output growth that cannot be explained by the growth of conventionally measured inputs, such as capital accumulation and labor force.

The aggregate production function is typically represented as:

$Y = A \cdot F(K, L)$

Where:

(Y) = Total Output (e.g., Gross Domestic Product)
(A) = Total Factor Productivity (representing the level of technology or technical progress)
(K) = Capital Input
(L) = Labor Input
(F) = A function representing how capital and labor combine to produce output.

In terms of growth rates, the contribution of technical progress ((\dot{A}/A)) to output growth ((\dot{Y}/Y)) can be expressed as:

$\frac{\dot{Y}}{Y} = \frac{\dot{A}}{A} + \alpha \frac{\dot{K}}{K} + \beta \frac{\dot{L}}{L}$

Where:

(\dot{Y}/Y), (\dot{A}/A), (\dot{K}/K), (\dot{L}/L) are the growth rates of output, technical progress (TFP), capital, and labor, respectively.
(\alpha) is the output elasticity of capital (the share of income going to capital).
(\beta) is the output elasticity of labor (the share of income going to labor).

The term (\dot{A}/A) is often calculated as the residual: (\dot{A}/A = \frac{\dot{Y}}{Y} - \alpha \frac{\dot{K}}{K} - \beta \frac{\dot{L}}{L}). This residual captures the effects of improvements in efficiency, management techniques, and new technologies that are not directly accounted for by changes in the quantity of capital and labor inputs.

Interpreting Technical Progress

Technical progress fundamentally alters the relationship between inputs and outputs, allowing an economy to produce more efficiently. When interpreted, it signifies an outward shift in an economy's production possibilities frontier. This means that a country can produce more Gross Domestic Product (GDP) with the same amount of workers and machines, or it can produce the same amount of GDP with fewer resources. For example, the invention of the internet enabled vast improvements in communication and information access, leading to efficiency gains across nearly every industry without necessarily requiring more physical capital or labor. It indicates a society's capacity to innovate and apply new knowledge to economic processes. Higher rates of technical progress are generally associated with robust economic growth and rising living standards because they allow for more goods and services to be consumed per person over time.

Hypothetical Example

Consider a small manufacturing company, "Widgets Inc.," that produces widgets. Initially, their production process relies heavily on manual labor and basic machinery. With their existing labor force and machinery, they can produce 1,000 widgets per day.

To enhance its operations, Widgets Inc. makes a significant investment in new, advanced robotic arms capable of performing assembly tasks faster and more precisely. This represents a form of automation driven by technical progress. After integrating the new robots, Widgets Inc. can now produce 1,500 widgets per day with the same number of employees, or even a slightly reduced number, and the same factory space. The additional 500 widgets produced, without a proportional increase in traditional inputs like total labor hours or factory size, can be attributed to the technical progress embodied in the new robotic technology. The company's efficiency has increased due to the advancement in production methods.

Practical Applications

Technical progress is a central consideration for policymakers, businesses, and investors. Governments often seek to foster technical progress through policies that encourage research and development, improve education to build human capital, and protect intellectual property rights. For instance, OECD data on R&D expenditure tracks national investment in research and development, which is a key driver of technical progress.³

In the corporate world, businesses constantly strive for technical progress to gain competitive advantages, reduce costs, and develop new products and services. The adoption of new technologies can streamline supply chain management, optimize manufacturing processes, and enhance customer service. Investors often look for companies and industries that are at the forefront of technical progress, expecting them to deliver higher growth and profitability. At a macroeconomic level, the rate of technical progress is a critical input in projections for future Gross Domestic Product and long-term economic prosperity. The International Monetary Fund (IMF) emphasizes how technological advancements shape future global economic growth and productivity.²

Limitations and Criticisms

While technical progress is widely lauded for its benefits, it also presents certain limitations and criticisms. A significant concern is the potential for job displacement, as new technologies like automation can reduce the demand for human labor in specific tasks or industries. This can lead to structural unemployment and increase income inequality if displaced workers cannot acquire new skills quickly enough. Reports indicate that new technology could eliminate millions of jobs in certain regions by 2030, highlighting the disruptive potential of technical progress on labor markets.¹

Another criticism is that the benefits of technical progress may not be evenly distributed, potentially exacerbating wealth disparities and contributing to social unrest. There are also concerns about the environmental impact of increased production driven by technical progress, especially if not coupled with sustainable practices. Furthermore, accurately measuring technical progress is challenging; as seen with Total Factor Productivity (TFP), it often serves as a "measure of our ignorance," capturing everything not explained by measured inputs. This means that factors like improved resource allocation, better management practices, or even measurement errors can be mistakenly attributed to technical progress. Governments must consider potential societal disruptions and manage policies, such as fiscal policy or social safety nets, to mitigate these adverse effects. The impact of technical progress on inflation can also be complex, as efficiency gains may lower prices but increased demand or specific industry dynamics can counteract this.

Technical Progress vs. Productivity Growth

While closely related, technical progress and productivity growth are distinct concepts in economics. Technical progress refers specifically to the advancement of knowledge and technology, leading to new and more efficient ways of producing goods and services. It is an underlying cause or enabler of increased efficiency.

Productivity growth, on the other hand, is a broader measure that quantifies the increase in output per unit of input over time. It can result from various factors, of which technical progress is a major one. For example, productivity growth can also occur due to:

Capital Deepening: An increase in the amount of capital per worker.
Improved Allocation of Resources: Moving resources from less productive sectors to more productive ones.
Economies of Scale: Increased production leading to lower average costs.
Better Management Practices: Organizational improvements that enhance efficiency.

Therefore, technical progress is a significant driver of productivity growth, often manifesting as Total Factor Productivity (TFP) growth. However, productivity growth encompasses these other elements as well.

FAQs

How is technical progress measured?

Technical progress is challenging to measure directly. Economists often infer it as Total Factor Productivity (TFP) growth, which is the residual portion of output growth that cannot be explained by increases in measurable inputs like labor and capital. This involves calculating how much output has grown beyond what is attributable to simply having more workers or machines.

Does technical progress always lead to job losses?

Not necessarily. While technical progress, particularly through automation, can displace workers in specific industries or tasks, it also creates new jobs, industries, and demands for new skills. Historically, economies have adapted, with workers shifting to new roles and sectors. The overall impact on employment depends on the pace of technological change and the economy's ability to adapt and reskill its labor force.

Who benefits most from technical progress?

The benefits of technical progress can be widespread, leading to higher wages, lower prices for goods and services, and improved quality of life for consumers. However, the distribution of these benefits can be uneven. Highly skilled workers in complementary fields to new technologies, innovators, and capital owners may see disproportionate gains, while those in routine, easily automatable jobs might face challenges. Governments can influence the distribution through education, social programs, and fiscal policy.

Can governments influence technical progress?

Yes, governments can significantly influence the rate and direction of technical progress through various policies. These include funding basic research and development, investing in education and human capital development, providing tax incentives for innovation, protecting intellectual property rights, and establishing regulatory frameworks that foster technological adoption. Monetary policy can also play a role by creating a stable economic environment conducive to long-term investment in new technologies.