Investment-specific technological progress
Investment-Specific Technological Progress
What is Investment-Specific Technological Progress ?
- To model how something is produced, we can think of a box that in one end takes in inputs such as labor (employees) and capital (equipment, buildings, etc.) and in another end spits out the final good (see figure 1). With this picture in mind now we can ask, how does technological progress affect production? One way of thinking is that technological progress will affect only specific inputs (arrows going in) such as equipment and buildings, and will do so at a cost. So for example, the advent of the microchip (an important technological improvement in computers) will affect the production of Ford cars only if Ford Motor Co.'s assembly plants (the red box) invest in computers with microchips (instead of computers with punch cards) and use them (they are one of the arrows going in the box) in the production of Mustangs (the arrow coming out). As the name suggests, this is investment-specific technological progress---it requires investing in new machines or buildings which contain or embody the latest technology. Notice that the term investment can be very general: not only must a firm buy the new technology to reap its benefits, but it also must invest in training its workers and managers to be able to use this new technology (Greenwood & Jovanovic 2001) .
Importance
- Why is identifying investment-specific technological progress important? Knowing what type of technological progress is operating in an economy will determine how you (should) want your tax dollars to be spent and how you may want to invest your savings\cite{gortgreenwood}. If \emph{investment-specific} technological change is the main source of progress, then you would want your dollars to be spent on helping firms buy new equipment and renovate their plants, because these investments will improve production and hence what you consume. Furthermore, you may want to help pay for current employee training in using new technologies (to keep them up to date) or subsidize the education of new employees (who will enter the job market knowing how to use the new technology). So, the type of technological progress will also matter for unemployment and education issues. Finally, if technological progress is \emph{investment-specific} you may want to direct your money towards the research and development (R \&D) of new technologies (like quantum computers or alternative energy sources)\cite{krusell rd}.
More generally, why is any type of technological progress important? Technological change has made our lives easier. Because of technological progress, people can work less, make more money and enjoy more leisure time \cite{greenwoodguillem}. Women have been able to break away from the traditional "housewife" role, join the labor-force in greater numbers \cite{greenwoodseshadri} and become less economically dependent on men \cite{greenwoodguner}. Finally, technological progress has been shown to affect the fall in child labor starting around 1900 \cite{greenwoodseshadri2}. Figure 2 illustrates this last point: as of 1900 child labor's share of the paid labor force began to fall.