Major Theories Of Technological Change

Technological Change

Technological change has been broadly defined as:
“the process by which economies change over time in respect of the products and services they produce and the processes used to produce them”.

More specifically, it has been termed as:

“Alteration in physical processes, materials, machinery or equipment, which has impact on the way work is performed or on the efficiency or effectiveness of the enterprise”.

Technological change may involve a change in the output, raw materials, work organization or management techniques - but in all cases it affects the relationship between labor, capital and other factors of production. While the policies to stimulate technological progress and productivity growth - at both national and firm levels - must be formulated in a broad socio-economic context, their focus ought to be on the internal dynamics of technological change. It has been suggested that the knowledge pertaining to technological change in the less developed countries would be a crucial input to the understanding of the phenomenon in industrialized nations.

Major Theories Of Technological Change

The following paragraphs provide a selective survey of theories of technological change .

Neo-Classical Theory

The basic tool for the study of technological change is the notion of a production function which specifies a quantitative relation between inputs and outputs. The most common inputs are capital and labor, which are called factors of production. The production function can be represented as a series of isoquants - curves corresponding to the constant output obtainable by the infinite number of available combinations of the factors of production. At any given time there is a given level of technology which determines the techniques available for production. According to this theory technological change takes place in the form of shifts of the production function towards the origin.

Limitations

• Only labor and capital are incorporated as factors of production. The inclusion of more factors, however, makes the application of the production function analytically more complicated.
• The presence of infinite techniques at a given level of technology is rather unrealistic. Real life situations often imply a choice between a restricted number of options.
• Only cost-reducing improvements can be described by the production function. Improvements in performance or the appearance of new services find no place in this theory.

Marxist Theory

Karl Marx perceived technology as not self generating, but as a process directed by willful, conscious, active people and molded by historical forces. He held that technological change - the development of the productive forces - was the prime mover of history. The individual entrepreneur invests and innovates because it is rational for profit maximization or necessary for survival.

Limitations

• Undermining of capital-saving innovations.
• Underemphasizing the concept of productivity.
• Controversy involved in the theory of the falling rate of profit.

Schumpeter’s theory

This theory views innovation as the engine of economic development and as a disequilibrium phenomenon. Innovation is defined as the carrying out of new combinations of means of production, which include a wide variety of cases such as: the introduction of a new good or of a new quality of a good, or of a new method of production, the opening of a new market, the conquest of a new source of supply of raw materials, the carrying out of a new organization of any industry. The emphasis is laid on the notion that technological change is to be understood as a case of innovation more generally and not as another piece of routine economic behavior. Schumpeter’s formulation of production function differed from neo-classical theory in that capital was excluded and only labor and land were included as inputs.

Limitations

• Psychology of the entrepreneur (the embodied aspect of innovation) is an elusive phenomenon.
• No explicit attention is paid to the process by which innovation is generated.
• Lack of empirical evidence.

Evolutionary Theory

This suggests a biological analogy to explain technological change. The Darwinian two-state process of mutation (invention) and selection (innovation) has been employed to understand the evolution of technology. Biological evolution appears to have a certain correspondence with the interpretation of technological changes in industrial sectors - from a state of flux when product innovation prevails in the search for a successful design, to a maturity phase where incremental process innovation prevails.

Limitations

• Dearth of quantitative models.
• Many propositions need to be validated.

Market-Pull Theory

Markets govern the innovation process. The market constitutes a communication channel through which political, economic, social and ecological forces influence buyers in their demand for technological products. Continuous changes in these forces have an impact on the response provided by technology with respect to the type, capabilities, performance, safeguards, solutions, etc. These messages are transmitted and communicated through the market where buyer’s requirements (themselves influenced by external forces) are matched with technological changes and where future demands can be detected by the producers of technology.

Limitations

• The logical and practical difficulties in interpreting the innovation process.
• Difficulties of defining demand functions as determined by utility functions.
• The incapability of defining the ‘why’, ‘when’ and ‘where’ of certain technological developments instead of others.

Technology-Push theory

Technology is defined as an autonomous or quasi-autonomous factor. It assumes a one-way causal determination approach, i.e., from science to technology to the economy. It proposes that technological developments occur exogenously through discoveries, theories, ideas and R & D work, which may or may not then create (or be matched with latent) demand for their output.

Limitations

• Failure to take into account the intuitive importance of economic factor in shaping the direction of technological change.
• Lack of understanding of the complex structure of feedbacks between the economic environment and the directions of technological change.
Limitations