Much human progress arises from incremental improvements in the methods available to satisfy our wants.
Technological change increases output from a given set of resources, or allows distribution of previously unknown goods.
Technological change takes two basic forms: (a) improvements to nonhuman resources or (b) new knowledge about how to combine resources. New capital equipment that cuts production costs or a new strain of seed that boosts crop yields are examples of technological advances in nonhuman resources. New plowing methods that conserve topsoil or medical procedures that reduce a transplant patient's recovery time would be examples of new knowledge that represents technological progress.
Major technological breakthroughs tend to arrive in waves that influence numerous industries or forms of production. Advances in micro processing and optical networks have revolutionized the way we obtain, absorb and process information. Predicting the direction of such sweeping technological advances is impossible. In a few instances, however, profit incentives within a specific industry cause the direction of technological change to be reasonably predictable.
Consider, for example, adjustments to higher energy costs. Most industries had adapted to low-cost, abundant energy sources during the period 1900 to 1973. Oil drove much of our technology. Then oil prices quadrupled between 1974 and 1975. Car buyers' demands for more mileage were echoed in many industries when firms scuffled to find energy-efficient technologies. Electronic fuel injection replaced carburetors, roughly doubling average gas mileage. New types of insulation were developed, as were production processes that recycled heat or used less of it.
Profit opportunities may induce new technologies that change outputs and production techniques or improve resources, and ultimately drive down costs. Some technological changes occur as quickly as a creative mind can solve a new problem. At other times, refining a technology is never-ending. It is also uncertain whether giant or small enterprises are systematically favored by technological advance. Some new technologies enhance economies of scale and scope; others work best when an operation is small. We can be sure, however, that technological advances make options available that reduce average production costs.
The technology for producing semiconductors is expected to increase the cost of an efficient production plant from roughly $250 million today to nearly $2 billion by the turn of the century. Such high costs, risks and volumes of production are causing firms to forge worldwide alliances to produce microchips for the future.
In other areas, technology has reduced the costs of communications and air cargo. This has permitted many firms to hold trivial inventories in retail shops. Benetton, for example, analyzes daily sales data from retail stores all over the world, and then selectively produces and ships what is needed to restock customers using overnight delivery. Gone are the days of large backroom inventories -- what’s on the rack is what’s available on any given day.
Production based on immediate retail needs requires more flexibility in both production equipment and employees. Manufacturing plants must be designed so that lines can be shifted to produce different products quickly and efficiently. Similarly, workers must master a wide variety of skills and be flexible as the line changes. This revolution in production is changing employment careers as firms recognize that workers must more skilled and have more responsibility.
Edward Dennison has estimated the sources of long term U.S. economic growth. His estimates show that, second only to growth in the labor force, technological change has accounted for over 20 percent of long-term economic growth and over half of our productivity gains during the last half century.
Predicting the precise duration and effect of technological change is impossible, so we usually consider only the long-run adjustments of entry and exit into an industry, or the shrinkage or growth of a firm.