How Well Does Economic Theory Describe the Nature And Consequences of Technological Change - Essay Example

Order 141190 Topic: How well does economic theory describe the nature and consequences of technological change? Introduction This paper seeks to discuss and analyze economic theory on how it could describe the nature and consequences of technological changes. This paper posits that technological changes are readily visible effects of the ever occurring trade off between limited resources and the unlimited needs and wants of mankind. Scarce Resources but with Man’s Unlimited Wants Mainstream economics assumes that resources are scarce and that it is necessary to choose between competing alternatives, hence, the reality of tradeoffs. Give the scarcity, choosing one alternative implies forgoing another alternative, hence we have the opportunity cost, which creates an implicit price relationship between competing alternatives. As to how scarcity is recognized in application, it is often explicitly quantified by price relationships (Wikipedia, 2006) (Paraphrasing made). If resources are scarce and there is necessity to choose between competing alternatives a trade off is indeed caused by the opportunity cost. As to how this concept of economics explained the nature and consequence of technological change must not be hard to comprehend. Technological change is essentially caused by the desire of human being to find satisfaction to his unlimited needs and wants and in so doing he assigns an implied price or opportunity cost as called in economics. Because of the unlimited needs and wants, man will have to work hard and this use of power have must be given a value and that value is what we call price. What is the nature and consequences of technological change? We will answer this question by the going over the terms, first by defining technological change. Samuelson and Nordhaus, (1992) said, “Technological change occurs when new engineering and technical knowledge allows more output to be produced with the same inputs, or when the same output can be produced with fewer inputs. In terms of production terminology, technological change occurs when the production function changes.” On the other hand, Wikipedia (2006) said, “A technological change is a term that is used in economics to describe a change in the set of feasible production possibilities.” In defining the same term, Wikipedia (2006) refers to the behaviour of technological change in models. It continued saying, “A technological innovation is Hicks neutral (following Hicks (1932)) if the ratio of capitals marginal product to labour’s marginal product is unchanged for a given capital to labour ratio. A technological innovation is Harrod neutral (following Hicks (1932)) if the technology is labour-augmenting (i.e. helps labour); it is Slow neutral if the technology is capital-augmenting (i.e. helps capital).” It added that more information on the economic view of technological change which can be found in the reference by Jones and that Mansfield (2000) has an old but readable section on technological change as well. It also mentioned Thomas Kuhns (1962) sociological view of scientists working within paradigms and even the concept of memes as proposed by Richard Dawkins (1990) (Paraphrasing made). Summarizing the definitions above, it could be stated that man uses technology to try to increase output as result of limited supply. Hence technological change seems to put a balance of the Malthusians principle that population growth is exponential while the growth of resources is not. Imagining that resources would not be enough to supply the needs of mankind, man devised a way to the solution of problems and we the same as ‘technology’ where man could improve the process and thereby increase production. In so increasing production, he will be able to at least meet his some of his unending needs. In addition, technology must be presumed to be changing because of the pressure for the better production and better process to compete in the market among suppliers in the production environment. To understand economic theory further let us visits some of the economic assumptions as discussed in the next section. Economic Assumptions One of the assumptions is about value. Wikipedia (2006) said “It could be argued that beneath an economic theory is a theory of value. Value can be defined as the underlying activity which economics describes and measures. It is what is "really" happening.” Value was used in economic literature and different contexts. To illustrate, Wikipedia (2006) said, “Adam Smith defined "labour" as the underlying source of value, and "the labour theory of value" underlies the work of Karl Marx, David Ricardo and many other classical economists. The "labour theory of value" argues that a good or service is worth the labour that it takes to produce. For most, this value determines a commoditys price. This labour theory of price and the closely related cost-of-production theory of value dominate the work of most classical economists, but those theories are far from the only accepted basis for "value". For example, neoclassical economists and Austrian School economists prefer the marginal theory of value.” Closely related with the concept of value is market theory. In it there is no "value" separate from price, so that the market incorporates all available information into price and that so long as markets are open, that price and the value are one and the same, according to Wikipedia (2006). The second economic assumptions are supply and demand. Wikipedia (2006), said, “The supply and demand model describes how prices vary as a result of a balance between product availability and demand.” If further explained that in microeconomic theory, supply and demand attempts to describe, explain, and predict the price and quantity of goods sold in perfectly competitive market and that it is one of the most fundamental economic models, ubiquitously used as a basic building block in a wide range of more detailed economic models and theories. Wikipedia (2006) illustrated, “To define, demand is the quantity of a product that a consumer or buyer would be willing and able to buy at any given price in a given period of time. Demand is often represented as a table or a graph relating price and quantity demanded. Most economic models assume that consumers make rational choices about how much to buy in order to maximize their utility - they spend their income on the products that will give them the most happiness at the least cost. The law of demand states that, in general, price and quantity demanded are inversely related. In other words, the higher the price of a product, the less of it consumers will buy.” On the other hand, it said, “Supply is the quantity of goods that a producer or a supplier is willing to bring into the market for the purpose of sale at any given price in a given period of time. Supply is often represented as a table or a graph relating price and quantity supplied. Like consumers, producers are assumed to be utility-maximizing, attempting to produce the amount of goods that will bring them the greatest possible profit. The law of supply states that price and quantity supplied is directly proportional. In other words, the higher the price of a product, the more of it producers will create.” It should be pointed out that the theory of supply and demand is crucial to explaining the many mechanism and events particularly in the production processes by the firms in a given industry. The third assumption as component of economic theory is price. Wikipedia (2006), said, “In order to measure the ebb and flow of supply and demand, a measurable value is needed. The oldest and most commonly used is price, or the going rate of exchange between buyers and sellers in a market. Price theory, therefore, charts the movement of measurable quantities over time, and the relationship between price and other measurable variables. In Adam Smiths Wealth of Nations, this was the trade-off between price and convenience.” It explained that a great deal of economic theory is based around prices and the theory of supply and demand, hence it inferred that the most efficient form of communication, in economic theory, comes about when changes to an economy occur through price, such as when an increase in supply leads to a lower price, or an increase in demand leads to a higher price (Paraphrasing made). The fourth assumption is about scarcity. Wikipedia (2006) said, “Neoclassical economics is characterized by maximization (leisure time, wealth, health, happiness - all commonly reduced to the concept of utility) subject to constraints. These constraints - or scarcity - inevitably define a trade-off. For example, one can have more money by working harder, but less time (there are only so many hours in a day, so time is scarce). One can have more radishes only at the expense of, for example, fewer carrots (you only have so much land on which to grow food - land is scarce).” One need go deep to see the reality of scarcity because things are finite while needs and wants are unlimited. Seeing the combinations of the assumptions would make things clearer. Wikipedia (2006) said, “Scarcity is defined as: when the price is zero, the quantity demanded exceeds the quantity supplied. Price is a measure of relative scarcity. If all other market variables are held constant; when the price is rising, this indicates the commodity is becoming relatively scarcer. When the price is falling, this indicates the commodity is becoming relatively less scarce.” It also cited that Adam Smith considered, for example, the trade-off between time, or convenience, and money, where he discussed how a person could live near town, and pays more for rent of his home, or lives farther away and pay less (Paraphrasing made). Marginalism Another assumption that must not be forgotten is the marginalism. Wikipedia (2006) said “In marginalist economic theory, the price level is determined by the marginal cost and marginal utility. The price of all goods will be the cost of making the last one that people will purchase, and the price of all the employees in a company will be the cost of hiring the last one the business needs. Marginalism looks at decisions based on "the margins,” what the cost to produce the next unit is, versus how much it is expected to return in profit. When the marginal return of an action reaches zero, the action stops. Marginal utility is how much more happiness or use a person receives from a purchase in contrast with buying less. Marginal rewards are often subject to diminishing returns: Less reward is obtained from more production or consumption. For example, the 10th bar of chocolate that a person consumes does not taste as good as the first, and so brings less marginal utility.” It explained that marginalism became increasingly important in economic theory in the late 19th century, and is a tool which is used to analyze how economic systems will react. It also said that marginal cost of production divides costs into "fixed" costs which must be paid regardless of how many of a commodity is produced, and "variable costs"; hence the marginal cost is the variable cost of the last unit. Simply stated, marginalism prohibits production when the profit from the next unit will be zero (Paraphrasing made). At this point, can we really say that economic theory really explains nature and consequences of technological change? It is submitted that we have laid the foundation for a clearer understanding of he economics theory in describing the nature and consequences of technological change. With the working of the market, firms compete for profitability in a given industry and there normally two ways to compete. One is through revenue and the other is through expense. It can maximize revenue by building competitive advantages and hence it will need investments in technologies that would allow it to sell at prices than competitors. In using expense, it could invest in each research and development cost to find the optimum was of minimizing cost or expense so that profits could also be maximized. In both cases, the target is profit maximization, which is a declared objective of any business firm in the industry where there is a capital market that competes also for resources for investments by companies. Globalization An evidence to indicate the effect of technological change is the globalization phenomenon. It has allowed companies which had build its competitive advantages in its home country to go for wider economies of scale because of greater markets outside its home base. Companies in their home countries may have saturated their markets hence then need to get outside their own to tap the foreign market. One of evident reasons for this is that they can only sell as much in their own country. This could have been caused by the advanced technology. This is evident in the case of Honda Motors of Japan. In the 1960s to 1970’s it was the British Companies that has the biggest market share in the motorcycle industry. What Honda Motors had done was that it made it sure that it had built strong competitive advantage in Japan, where it could not sell lower prices of its products in the US as against its British competitors and so virtually driving the British firms to retreat to the United Kingdom. Mair (1999) quoted BCG’ report saying: “Mair (1999) quoted BCG’ report saying: “The success of the Japanese manufacturers originated with the growth of their domestic market during the 1950’s . As recently as 1960, only 4 percent of the Japanese motorcycle production was exported. By this time, however, the Japanese had developed huge production volumes in small motorcycles in their domestic market, and the volume related cost reductions had followed. This resulted in highly competitive cost position which the Japanese had developed huge production volumes in small motorcycles in their domestic market, and the volume-related cost reduction had followed. This resulted in a highly competitive cost which the Japanese used as springboard for the penetration for the world market with small motorcycles in the early 1960’s (Boston Consulting Group,1975: xiv).” In analyzing what happened, there is only one outstanding explanation, Honda Motors made use of technological change to improve products and therefore attain leadership in the industry. Until this time the result that strategy is still very relevant for the Honda Motors and its competitors. Even Public Sector is affected by technological changes and the role of ICT. Companies resort to make or build competitive advantages around the world to become increasingly innovative in the manner that they conduct their operations and services. Even the public sector which has been traditionally been protected from the pressures that their private counterparts, they too need to innovate on how to deliver efficiency in their operations. They could not be excused from the impact of global competitiveness. Demand for better at cost-efficient service by the public sector drives the need to innovate. (Deloitte Consulting 2001 quoted in Ross et al 2004, p.1-2). The use of information and communications technology (ICT) by firms wishing to go global on their operations is obvious. It is a fact that foreign expansion is information intensive and thus favoured with the use of the new, market oriented technologies (a firms web site, for example) (Basile and Guinea 2004, p.20) (Paraphrasing made). Technological change for economic survival Companies need to adjust and change for economic survival, hence Matsushita (1986) must be right in saying, “if the company cannot make products and ensure services that can compete successfully on the world markets as well as locally, it will face a bleak economic future”. Understand their customers’ needs and expectations are just realities for survival as cited by Morck and Yeung (2001, p.8) that those countries that show more of innovation are better off and expand faster. Conclusion Economic theory admits the scarcity of resources but with unlimited needs and wants. To bring equilibrium on the competing forces of supply and demand is the price which actually measures the value. Firms do not simply produce the sake of producing. They are also influenced by value as measured by price which will give them profits over the cost that that they have spent. With the opportunity cost of investments they sourced from different investors and creditors, they need to operate with profits. Seldom however that they will not have competitors in the market, hence in their struggle to compete, they make use if not embrace of technology to stay in the course of business while the unlimited needs and wants and consumers get partially satisfied and which keep going while alive to keep producers also producing goods and services, which must use technology to survive. A change then in technology is unending because of the unlimited needs and wants of consumers. References: Basile, R and Guinta A 2004, Things Change, Foreign Market Penetration and firm’s behaviour In industrial districts: an empirical analysis (January), Working Paper No. 48, Istituto di Studi e Analisi Economica, Italy Retrieved 2 May 2006 from http://www.isae.it/ Working_Papers/WP_Basile_n48_2005.pdf#search=determinants%20of%20market%20change Boston Consulting Group (1975) Strategy Alternatives for the British Motorcycle Industry, London: HMSO Dawkins, Richard (1990) The Selfish Gene, (Oxford University Press), USA; Jones,(2002) Introduction to Economic Growth,: W.W. Norton and Co., 2002. New York , USA Kuhn, T. (1962) The Structure of Scientific Revolutions. Source: The Structure of Scientific Revolutions (1962), University of Chicago Press, Mair (1999) ,Learning From Japan? Interpretations of Honda Motors by Strategic Management theorists {www document} URL http://www.nissan.ox.ac.uk/nops/nops29.pdf, Accessed November 21,2006 Mansfield, (2000) Edwin Microeconomics Theory and Applications Microeconomics: Theory and Applications, Tenth Edition, , W. W. Norton & Company, USA Matsushita, K 1986, ‘Why Change?’, Building Strategic Partnerships in Continuous Business Improvement. Retrieved 2 May 2006 from http://www.icon.co.za/~tqma/whychange.htm. Morck, R and Yeung, B 2001, The Economic Determinants of Innovation (January), Occasional Paper No. 25, Industry Canada Research Publications Program, Canada. Retrieved 1 May 2006 from http://dsp-psd.pwgsc.gc.ca/Collection/C21-23-25-2000E.pdf#search =market % 20deter min ants %20of%20innovation Ross, VE, Kleingeld, AW, and Lorenzen, L 2004, ‘A Topographical Map of the Innovation Landscape’, The Innovation Journal: The Public Sector Innovation Journal, Volume 9 (2). Retrieved 1 May 2006 from http://www.innovation.cc/peer-reviewed/ross-kleingeld-lorenzen-9-2.pdf#search=factors%20that%20influence%20innovation. Samuelson and Nordhaus, (1992), Economics, McGraw-hill, London, U.K. Wikipedia, (2006) Technological Change , http://en.wikipedia.org/wiki/Technological_change Accessed November 21, 2006 Wikipedia, (2006), Econnomics, {www document} URL http://en.wikipedia.org/wiki/Economic_theory, Accessed November 21, 2006 Read More