Investment-specific technological progress: Difference between revisions

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{{Essay-like|date=December 2007}}

'''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. To model the influence of [[technological change]] upon production the influence of a technological change upon the specific inputs (i.e. [[Labour (economics)|labor]] and [[Capital (economics)|capital]]) of a [[Production theory basics|production]] model is assessed in terms of the resulting effect upon the [[final good]] of the model (i.e. goods and services).

To realize the benefits of such technological change for production a [[business|firm]] must invest to attain the new technology as a component of production. For example, the advent of the [[Integrated circuit|microchip]] (an important technological improvement in computers) will affect the production of [[Ford Motor Company|Ford]] cars only if Ford Motor Co.'s assembly plants invest in [[computers]] with microchips (instead of computers with [[punched cards]]) and use them in the production of a product, i.e. [[Ford Mustang|Mustangs]]. Investment-specific technological progress requires investing in new production inputs 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 [[management|managers]] to be able to use this new technology.<ref>{{Cite book|lastlast1=Greenwood|firstfirst1=Jeremy|url=https://www.worldcat.org/oclc/290503961|title=New developments in productivity analysis - Accounting for Growth|last2=Jovanovic|first2=Boyan|date=2001|publisher=University of Chicago Press|others=Hulten, Charles R., Dean, Edwin., Harper, Michael J., Conference on Research in Income and Wealth.|year=|isbn=0-226-36064-4|___location=Chicago|pages=|oclc=290503961}}</ref>.

==Significance==

Identifying ''investment-specific'' technological progress within an [[economy]] will determine how an individual behaves in reaction to new technology, i.e. whether the individual will invest their [[savings]].<ref>{{Cite journal|lastlast1=Gort|firstfirst1=Michael|last2=Greenwood|first2=Jeremy|last3=Rupert|first3=Peter|date=March 1, 1999|title=How Much of Economic Growth is Fueled by Investment-Specific Technological Change?|url=https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/economic-commentary-archives/1999-economic-commentaries/ec-19990301-how-much-of-economic-growth-is-fueled-by-investment-specific-technological-progress.aspx|journal=Economic Commentary|issue=3/1/1999 |publisher=Federal Reserve Bank of Cleveland|volume=|pages=1|via=}}</ref>. If "investment-specific" technological change is the main source of progress in an [[Industry (economics)|industry]], then the individual would invest in firms to purchase and develop new capital, as technological improvements result in improvements to the goods available to consume. Firms may also choose to train current employees in the new technology or subsidize the education of new employees in the operation of the new technology. As such technological progress has an impact upon the labour market .<ref>{{Citation

| last=Krusell | first=Per

| title= Investment-Specific R and D and the Decline in the Relative Price of Capital

| journal= Journal of Economic Growth | volume=3

| issue=2 | year=1998 | pages=131–141 | doi=10.1023/a:1009701518509}}</ref>.| s2cid=154164754

}}</ref>

Technological progress has direct positive impacts upon human [[welfare economics|welfare]]. As a result of new technologies producers can produce a greater volume of product at a lower cost. The resulting reduction in prices benefits the consumer, who now can purchase more. <ref>{{Citation | lastlast1=Greenwood | firstfirst1=Jeremy | last2=Vandenbroucke | first2=Guillaume | year=2006 | chapter= Hours Worked: Long-Run Trends

| editor=Lawrence E. Blume, Steven N. Durlauf | title=The New Palgrave Dictionary of Economics | edition=2nd | publisher=Palgrave Macmillan | place=London }}</ref>. 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.<ref>{{Citation ( | last1=Greenwood &| first1=Jeremy | last2=Guner | first2=Nezih | title=Marriage and Divorce since World War II: Analyzing the Role of Technological Progress on the Formation of Households | journal=NBER Macroeconomics Annual 2008| volume=23 |year=2009)| pages=231–276 | doi=10.1086/593087| s2cid=4713240 | url=https://www.econstor.eu/bitstream/10419/35115/1/559459432.pdf}}</ref> Further impacts include a reduction in [[child labor]] starting around 1900 .<ref>{{Citation| lastlast1=Greenwood | firstfirst1=Jeremy | last2=Seshadri | first2=Ananth| year=2005 | chapter=Technological Progress and Economic Transformation | editor= Philippe Aghion and Steven N. Durlauf | title=Handbook of Economic Growth | publisher=Elsevier North-Holland | place=Amsterdam}}.</ref>.

[[Image:kid1.jpg|thumb|400px|center|Figure 1]]

An example of investment-specific technological progress is the [[microwave oven]]. The first microwave oven cost between $2000 and $3000 US and was housed in refrigerator-sized cabinets. Through regular technological investment the microwave industry has developed into a competitive market, with small compact units in many households.<ref>{{Citation | last=Gallawa | first=J. Carlton | title=Who Invented Microwaves | url=http://www.gallawa.com/microtech/history.html | year=2005 | access-date=2006-06-02 | archive-date=2017-12-12 | archive-url=https://web.archive.org/web/20171212162021/http://www.gallawa.com/microtech/history.html | url-status=dead }}</ref> Many industries have adopted the microwave through capital or research investment, applications outside the food industry include the [[iron]] and [[steel]] industry as a heating tool<ref>{{Cite journal|last1=Yoshikawa|first1=Noboru|last2=Ishizuka|first2=Etsuko|last3=Mashiko|first3=Kenichi|last4=Chen|first4=Yan|last5=Taniguchi|first5=Shoji|date=2007|title=Brief Review on Microwave (MW) Heating, Its Application to Iron & Steel Industry and to the Relevant Environmental Techniques|url=http://joi.jlc.jst.go.jp/JST.JSTAGE/isijinternational/47.523?from=CrossRef|journal=ISIJ International|language=en|volume=47|issue=4|pages=523–527|doi=10.2355/isijinternational.47.523|issn=0915-1559|doi-access=free}}</ref> and the [[chemical industry]] as a tool for [[organic synthesis]].<ref>{{Cite book|title=Milestones in microwave chemistry|others=Keglevich, György|date=22 March 2016|isbn=978-3-319-30632-2|___location=Switzerland|oclc=945552571}}</ref>

==A simple example: the microwave oven==

An example of investment-specific technological progress is the [[microwave oven]]. 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 known 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.

==Measurement==

WhileThere is no direct metric for measuring technological progress, isas notsuch easy,workarounds economistsbased haveupon founddirect indirectrelationships waysbetween oftechnological estimatingprogress it.and Ifrecordable values are used. "'investmentInvestment-specific'" technological progress makes producing goods easier, then the price of the goods affectedas (relativea toresult the price of otherthe goods) shouldwill 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 oneit wouldis expectexpected the price of them towill fall or the value of themthe good towill rise relative to older versions of the same good.

Figure 2 (the pink line) shows how the price of new [[Durable good|producer durables]] (such as equipment) in the United States relative to the price of new consumer nondurables (like clothing) has consistently declined over the past fifty years.<ref>{{Citation ( | last1=Gort et| al.first1=Michael | last2=Greenwood | first2=Jeremy | last3=Rupert | first3=Peter | title=How Much of Economic Growth is Fueled by Investment-Specific Technological Change? | journal=Economic Commentary, Federal Reserve Bank of Cleveland | date=March 1, 1999). }} </ref> 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 paysof (forthe thingsfirms likeproduct [[jeans]])pays. People use relativeRelative prices soare theyused canto sayrepresent how many units of equipment can be bought instead (or in terms) of buyingthe onea single unit of consumer goods.As Figurea 3result (theof pink line) says that overtechnological timedevelopment, firms have been able to buy more andcomparitevly more units of equipment insteadfor of oneeach unit of consumption, especially when taken into account that the quality of equipment being acquired has increased (a computer today is much faster than a computer five years ago and that should be taken 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).

with the quality of the goods increasing while the cost of production decreases. When changes in quality are not taken into account the apparent price of equipment undergoes a smaller reduction (see the black line in Figure 2).

[[File:Investment-specific technological progress - Figure 2.jpg|thumb|400px|center|Figure 2]]

MeasuringOne approach to measuring the price of technologically improved structures is moreto complicatedassign thannewer measuringbuilding thea pricehigher ofvalue equipment,due butto economiststhe haveembodyment againof beenthe ablenew totechnology getwith anthe ideadesign.<ref>{{Citation of how| muchlast1=Gort progress| therefirst1=Michael has| beenlast2=Greenwood in| structuresfirst2=Jeremy (such as| buildings).last3=Rupert One| approachfirst3=Peter is that| iftitle=How newerMuch buildingsof wereEconomic constructedGrowth oris designedFueled usingby newerInvestment-Specific technologiesTechnological thenChange? they should| bejournal=Economic worthCommentary, moreFederal thanReserve olderBank buildingsof (becauseCleveland they| '''embody'''date=March the1, new1999 technology}} (Gort et al. 1999).</ref> In particular, they should rent for more. As Figure 3 shows, this is truei.e. Rentingrenting 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.

[[Image:figure4.jpg|thumb|400px|center|Figure 3]]

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).

[[File:Rent in dollars per square foot, as function of age in years.jpg|thumb|400px|center|Figure 3]]

==Conclusion==

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.<ref>{{Citation (Gort et| al.last1=Greenwood 1999)| (Greenwoodfirst1=Jeremy et| al.last2=Hercowitz | first2=Zvi | last3=Krusell | first3=Per |author-link3=Per Krusell | title=Long-Run Implications of Investment-Specific Technological Change | journal= American Economic Review | volume=87 | issue=3 | year=1997). | pages=342–362}} </ref>

In the second section it was mentioned that "investment-specific" technological change is important since it will affect production (both in quality and size). An important question then is, just how much "bang for your buck" do you get with "investment-specific" technological change? The answer is quite astounding; economists have found that 37% of growth in United States output (production) is due to technological progress in equipment and 15% is due to technological progress in structures (Gort et al. 1999) (Greenwood et al. 1997). All in all, more than half (37% + 15% = 52%) of the growth of the United States economy is due to "investment-specific" technological change (Gort et al. 1999) (Greenwood et al. 1997).

==References==

{{Reflist}}

* {{Citation

| last=Gallawa | first=J. Carlton

| title=Who Invented Microwaves

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| last3=Rupert | first3=Peter

| title=How Much of Economic Growth is Fueled by Investment-Specific Technological Change?

| journal=Economic Commentary, Federal Reserve Bank of Cleveland | date=March 1, 1999 }}.

* {{Citation

| last=Greenwood | first=Jeremy | last2=Guner | first2=Nezih

| title=Marriage and Divorce since World War II: Analyzing the Role of Technological Progress on the Formation of Households

| journal=NBER Macroeconomics Annual 2008| volume=23 |year=2009| pages=231–276 | doi=10.1086/593087| url=https://www.econstor.eu/bitstream/10419/35115/1/559459432.pdf}}.

* {{Citation

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| title=Long-Run Implications of Investment-Specific Technological Change

| journal= American Economic Review | volume=87 | issue=3

| year=1997 | pages=342–362}}.

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| title=New Developments in Productivity Analysis | publisher=University of Chicago Press | place=Chicago }}.

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[[Category:Economic growth]]