Technology affects the production, distribution, and consumption of goods services. Both the population and per capita has have been growing. The quality of living standard of the growing number of fellow human beings is on the rise. But the natural stock has not been increasing. What is the secret sauce of increasing wealth supply from the depleting resource stock? For sure, that is technology. Ideas of creating increasing economic value from the same number of natural resources and labor offer an increasing quality of living to the growing fellow human beings. Hence, the economics of technology is at the core of the continued advancement of our living standards. For leveraging technology possibilities, the economics of technology focuses on policies for the functioning of the market so that competition to profit from ideas in offering us better quality products at decreasing cost keeps intensifying.
Human beings extract utility in getting jobs done. How much utility we derive in performing our jobs determines our quality of living standards. As we have an endless urge to increase our quality of living, we are after means of getting our jobs done better. Hence, we gather knowledge, invent technologies and innovate products to help us extract increasing utility from performing our jobs. Economics of technology looks into economic value creation out of technology possibilities by addressing issues pertaining to public policies for technology advancement, addressing market failure, and governing competition.
Genesis of Economics of Technology: Inherent urge of pursuing ideas of recreation
From the very beginning, human beings are after technologies to innovate products for deriving increasing economic value from the same amount of resources. Hence, from the invention of stone tools to silicon chips, they have been after technologies. Furthermore, they have been relentless in finding better technologies to replace existing ones for recreation. In retrospect, the human race has been progressing by creating new means, causing destructive effects. In ancient philosophical writings, Carl Marx noticed a reoccurring observation that human beings have an inherent tendency and ability to replace the existing way of doing things through recreation out of better ideas.
Consumer and producer surpluses:
For helping customers to extract increasing utility from getting jobs done, producers are offering a better quality of products. Hence, they are after improved technology ideas in mixing ingredients. If technology is appropriate, producers succeed in creating the willingness to pay greater than the cost of production. Consequentially, producers succeed in selling the outputs at a profit-making price—creating both consumer and producer surpluses. The summation of these two surpluses could be attributed to the role of technology in creating economic value. We can extract increasing value from the same units of resources with better quality technology. Hence, we are after advancing technology for creating increasing wealth for the society.
Scarcity and trade-off:
Often, we are under the impression that the human race is constraint by the scarcity of the resource. Hence, we focus on the trade-off in allocating scarce resources for maximizing social welfare. Yes, in the short run, we have a scarcity of wealth. Fortunately, in the long-run, technology offers the opportunity to get rid of scarcity and trade-offs by creating increasing wealth from the same resources. For example, in the short-run, food production is limited by the scarcity of land. But in the long run, we have the possibility of overcoming this limitation. Yes, it does not happen all of a sudden. Instead, the cumulative effect of the role of advancement of technology in expanding our wealth reservoir leads to dealing with scarcity. To clarify it further, Prof. Romer has come up with the theory of ideas and objects in economic value creation.
Market failure for leveraging the economics of technology:
Regardless of the greatness, all technologies emerge in primitive form. The economic value creation potential remains latent. Hence, all technology possibilities suffer from the lack of demand in the beginning. Furthermore, there are pervasive uncertainties regarding future growth and value extraction suitability through innovations. Hence, there has been a natural market failure tendency to leverage technologies. To address it, Government has a vital role. Therefore, Government should invest in inventing technologies and nurturing them until they cross the infancy period.
Furthermore, Government should be lead users for inferior innovations out of premature technology core. Government should also offer policy support for the adoption of premature innovations by the general citizen. The role of the Government in rolling out infrastructure and adopting standardization for compatibility is also instrumental.
In the absence of these roles, technologies neither get invented nor grow to reach adulthood for alluring profit-making competition. For example, the role of the US military in the early stage of the airplane and wireless communication was critical to nurture the latent potential.
Competition for ramping up the economic value creation:
Upon growing from infancy, the technology life cycle demands competition for further growth and exploitation of its potential through both product and process innovations. Hence, economic policies in supporting profit-making competition out of ideas highly matter. Such competition is vital to scale up the flow of ideas to improve quality and reduce cost. Thereby, this race leads to increasing both consumer and producer surpluses. For example, digital camera in the 1980s was primitive. Intense competition has been playing a vital role in its continued growth in quality and reduction in cost.
Attaining price-setting capability and creating an imperfect market:
Unlike other inputs like material, energy, and labor, technology offers the scope of increasing quality and reducing costs simultaneously. By leveraging this possibility, a producer can make cost-quality trade-off irrelevant. For leveraging, it requires upfront high R&D cost. But the marginal cost of replicating R&D outputs is negligible. Hence, the journey of creating a quality-cost advantage out of technology leads to growing economies of scale.
Furthermore, technology possibilities also offer the opportunity to develop core assets and innovate a family of products out of it to take advantage of economies of scope. Besides, network external effects out of technology possibility creates demands side scale advantage. Combining all these options out of technology develops a substantial competitive advantage.
Hence, there is a real possibility that the winner may show up offering the highest quality at the lowest cost. Upon attaining this state, the winner sets the price to make a profit while compelling competitors to take a lower price for their poorer products to incur a loss. The continuation of this situation will lead to the disappearance of competitors and the creation of an imperfect market. In retrospect, all products and industries with a vital role in technology naturally tend to monopoly. Unfortunately, along with monopolization, competition to invest in R&D for further advancement keeps disappearing, leading to slow economic growth.
Challenge of the economics of technology: dealing with imperfect perfect due to natural tendency of monopoly
What could be the remedy to this reality? On the one hand, we need competition to exploit the economics of technology. On the other hand, the race leads to creating an imperfect market, weakening competition, and slowing down R&D investment. Should we go for regulatory measures for clipping the wings of the top performer? Perhaps, no. We should look for ways to fuel the next wave of growth for creative destruction of price-setting capability, intensifying another wave of competition.
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