Technological progress: Meaning, Criticisms & Real-World Uses

What Is Technological Progress?

Technological progress refers to the continuous improvement and advancement of technology, leading to new methods of production, products, or services. In the field of economics, it is a fundamental driver of increased productivity and overall economic growth. This progress often manifests as the ability to produce more output with the same or fewer inputs of labor and capital expenditure, or the creation of entirely new goods and services that enhance societal well-being. Technological progress is crucial for fostering long-term prosperity and improving the standard of living.

History and Origin

The concept of technological progress has been central to economic thought for centuries, gaining prominence with the Industrial Revolution, which dramatically transformed production methods through innovations like the steam engine. Economists have long observed that sustained improvements in human welfare go beyond simply accumulating more physical capital or labor. Instead, a significant portion of long-term economic expansion is attributable to advancements in how goods and services are created and distributed. Early 20th-century economists, notably Robert Solow, formalized this idea, demonstrating that a substantial part of Gross Domestic Product growth could not be explained by increases in labor and capital alone, coining this unexplained residual "Total Factor Productivity," often used as a proxy for technological progress. Historic examples of "General Purpose Technologies" (GPTs), such as electricity and information technology, illustrate how fundamental advancements can permeate numerous sectors, leading to widespread productivity gains across an economy.¹⁰, ¹¹

Key Takeaways

Technological progress represents the advancement of knowledge and methods that improve efficiency or create new possibilities in production.
It is a primary determinant of long-term economic growth and rising standard of living.
Often measured as Total Factor Productivity, it accounts for output growth not explained by increases in labor or capital inputs.
Technological progress drives innovation, leading to new industries, products, and services that transform economies and societies.
It can contribute to shifts in employment patterns and requires ongoing adaptation from labor markets.

Formula and Calculation

While "technological progress" itself is not a direct formula, its impact is often measured econometrically through concepts like Total Factor Productivity (TFP), also known as multifactor productivity. TFP represents the residual growth in total output that cannot be explained by the growth in traditionally measured inputs of labor and capital. It encapsulates improvements in efficiency, technology, and organizational methods.

The fundamental production function often used in economics is:

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

Where:

(Y) = Total Output (e.g., Gross Domestic Product)
(A) = Total Factor Productivity (representing technological progress and efficiency)
(K) = Capital Input
(L) = Labor Input
(F) = A function that describes how capital and labor are combined to produce output.

To calculate the growth rate of TFP, one can use growth accounting, which is derived from the production function:

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

Where:

(\frac{\Delta Y}{Y}) = Growth rate of output
(\frac{\Delta A}{A}) = Growth rate of Total Factor Productivity (technological progress)
(\frac{\Delta K}{K}) = Growth rate of capital input
(\frac{\Delta L}{L}) = Growth rate of labor input
(\alpha) = Output elasticity of capital (share of capital in total income)
(\beta) = Output elasticity of labor (share of labor in total income)

Rearranging to solve for the growth rate of technological progress (TFP growth):

$\frac{\Delta A}{A} = \frac{\Delta Y}{Y} - \left( \alpha \frac{\Delta K}{K} + \beta \frac{\Delta L}{L} \right)$

This formula suggests that technological progress is the portion of output growth that remains after accounting for the growth in labor and capital inputs. The U.S. Bureau of Labor Statistics (BLS) regularly publishes data on multifactor productivity, which serves as a practical measure of technological advancement at a macroeconomic level.⁸, ⁹

Interpreting Technological Progress

Interpreting technological progress primarily involves understanding its impact on economic systems and societal well-being. A high rate of technological progress indicates that an economy is becoming more efficient, inventive, and capable of generating greater output per unit of input. This translates to increased productivity, which allows for higher wages without triggering inflation, better quality goods and services, and the emergence of entirely new industries.

Conversely, a slowdown in technological progress can lead to stagnant productivity, slower economic growth, and limited improvements in living standards. Economists closely monitor indicators like multifactor productivity growth to gauge the underlying pace of innovation and efficiency gains in an economy. When technological progress is robust, it can offset other economic headwinds, fostering long-term prosperity and enhancing global competitiveness.

Hypothetical Example

Consider a hypothetical manufacturing company, "Widgets Inc.," that produces widgets. For years, Widgets Inc. used manual assembly lines where workers individually assembled each component. Their process required 100 employees and five specialized machines to produce 1,000 widgets per day.

Through significant research and development efforts, Widgets Inc. invests in new robotic automation technology. After implementing this new technology, the company can now produce 1,500 widgets per day with only 70 employees and the same five machines. The 30 employees who previously performed manual tasks are either retrained for new roles in robot maintenance, programming, or other parts of the supply chain, or they seek employment elsewhere.

In this scenario, Widgets Inc. has experienced technological progress. They are now able to produce 50% more output (from 1,000 to 1,500 widgets) using fewer labor inputs and the same capital inputs, demonstrating an increase in their productivity due to the adoption of advanced technology. This improvement reflects enhanced efficiency and a better method of production, characteristic of technological progress.

Practical Applications

Technological progress has pervasive practical applications across various sectors of the economy. In investing, it fuels the growth of companies that develop or leverage disruptive technology, offering potential for high returns on investment. Fund managers and analysts often seek out companies at the forefront of technological advancement, recognizing their potential to gain market share and create new revenue streams.

In the broader markets, technological progress impacts industry structures, often leading to increased market efficiency and competitive shifts. Sectors like manufacturing, telecommunications, and finance are continually reshaped by new technologies, from automation to artificial intelligence. For instance, the International Monetary Fund (IMF) highlights how technological advancements, including artificial intelligence, can boost global economic growth and improve financial services, particularly for underserved populations through financial inclusion.⁵, ⁶, ⁷

At the regulatory level, governments and international bodies grapple with how to foster technological progress while mitigating potential risks, such as market concentration or the need for evolving regulatory frameworks. Policies supporting research and development, education, and infrastructure are often aimed at accelerating technological advancement.

Limitations and Criticisms

While generally viewed as beneficial, technological progress also presents limitations and criticisms. One significant concern is the potential for technological unemployment, where automation and advanced technologies displace human labor, requiring significant workforce retraining and adaptation of human capital. This can lead to increased inequality if the benefits of progress are not widely shared.

Another criticism revolves around the "productivity paradox," where despite visible technological advancements, measured productivity growth, particularly in recent decades, has appeared slower than expected. This has led economists to question the accuracy of current measurement methods for output and services in a rapidly digitizing economy, or if new technologies are simply having less broad economic impact than past innovations like electricity or the internal combustion engine.³, ⁴ The Federal Reserve Bank of St. Louis, for example, points to challenges in measuring the impact of newer technologies, like social media, on labor productivity, suggesting a potential lag before their full economic benefits are realized.² Furthermore, reliance on complex technologies can introduce new vulnerabilities, such as cybersecurity risks, and raise concerns about data privacy and the ethical implications of artificial intelligence.

Technological Progress vs. Innovation

While often used interchangeably, "technological progress" and "innovation" represent distinct but closely related concepts. Technological progress refers to the overall advancement of technology, encompassing the cumulative improvements in knowledge, techniques, and capabilities that allow for new or more efficient ways of doing things. It's a broad, systemic shift in the technological frontier.

Innovation, on the other hand, is the application of new ideas or technologies to create new products, processes, or services. It is the act of bringing something new and useful into existence or significantly improving existing ones. While technological progress provides the underlying pool of scientific and technical knowledge, innovation is the entrepreneurial act of transforming that knowledge into practical, economic value. For example, the development of semiconductor physics was technological progress, while the creation of the integrated circuit and subsequent personal computers was an innovation that applied that progress. Technological progress fuels the potential for innovation, and successful innovations, in turn, demonstrate and contribute to overall technological progress.

FAQs

How does technological progress affect the economy?

Technological progress significantly boosts the economy by increasing productivity, which means more goods and services can be produced with the same or fewer resources. This leads to higher economic growth, rising incomes, and an improved standard of living.

Is technological progress always good?

While generally beneficial for economic growth and human welfare, technological progress can have drawbacks. These include potential job displacement due to automation, increased income inequality, and the emergence of new societal challenges, such as data privacy concerns or cybersecurity threats.

How is technological progress measured?

Economists often measure technological progress as Total Factor Productivity (TFP) or multifactor productivity. This metric captures the portion of economic output growth that cannot be explained by increases in traditional inputs like labor and capital, thus reflecting improvements in efficiency and technology. The Bureau of Labor Statistics (BLS) is one entity that tracks this data.¹

What role does research and development (R&D) play?

Research and development (R&D) is a critical driver of technological progress. Investments in R&D lead to new discoveries, inventions, and improvements in existing technologies, which then translate into higher productivity and economic expansion.

Can technological progress cause inflation?

Directly, technological progress tends to be disinflationary because it increases efficiency and lowers production costs, potentially leading to lower prices for goods and services. However, if rapid technological shifts lead to significant structural changes or disruptions in supply chains, there could be indirect or temporary inflationary pressures, though this is not a direct consequence.