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The Price Of Progress: How Technology Affects Economic Performance

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Overview: Theory Vs History

Since the advent of the industrial revolution, advancing technologies have rapidly reshaped and redefined our domestic and international economies. The inventions of the steam engine, commercial agriculture fertilizers, lightbulbs, and many other inventions generated greater workplace efficiency and expanded production capabilities. However, the impact of the industrial revolution was not limited to the workplace.  In domestic settings, the inventions of the first patented washing machine, mass-market sewing machines, among others redefined the traditional responsibilities of individuals and households. Indeed  the most basic economic unit of society shifted from “households” to individuals. This created a premium on individual agency, innovation, and mobility that was highly complementary to technology advances.  Greater efficiency, drives greater productive capacity, drives more numerous and less expensive outputs. 

This logic consistently underpinned subsequent economic theory, and informed policy recommendations for decades to come. In the mid-20th century, the Solow-Swan model came to prominence as a leading model of economic growth examining factors of labor, capital, savings, and technology. On the basis of this theory, permanent economic growth is attainable solely through technological progress. Following decades have supported the necessity of technological advancement across industries and nations. Few factors have proved as compelling a determinant for national prosperity than burgeoning technological developments. 

However, behind the luster of promising economic theories often lies a more complex reality. In 1811 and 1812, the Luddite Riots marked the culmination of a century’s worth of changes in the textile industry, which in conjunction with Napoleonic Wars and rising food prices, inspired acts of violence across England . Infamously, many textile workers took to the destruction of weaving looms and other nascent factory machinery, before setting factories ablaze. As global mechanized manufacturing increased, tradesmen and craftsmen found themselves shut out of markets due to their inability to compete with lower-priced goods from factories, driving further unemployment and social distress. These themes echo into the modern era, with trends of technologically-enabled mass production and increasing mechanization of individual production. For example, automotive workers across the United States have consistently been forced out of work as a result of mechanized assembly lines. Similar trends also prevail in retail, hospitality, and even law enforcement industries.

Historical Context: Perspectives from the Old Masters

A foundational document in the field of economics, Adam Smith’s An Inquiry into the Nature and Cause of the Wealth of Nations was among the first works to establish both laws of supply and demand, as well as broader observations on pre-industrial economies. Even in the late 18th century, Smith articulates prescient observations about the natural progression of technology over time in his commentary on the division of labor in western economies:

“how much labour is facilitated and abridged by the application of proper machinery…It is naturally to be expected, therefore, that some one or other of those who are employed in each particular branch of labour should soon find out easier and readier methods of performing their own particular work, whenever the nature of it admits of such improvement.”

The cool self-evidence of the evolution of technology may have been apparent to Smith, however another contemporary had a more dismal perspective. Reverend Thomas Robert Malthus published the An Essay on the Principle of Population in 1798 in which he supported that with a linear progression of derived resources (e.g., food, land, etc.) and exponential population growth, the world would succumb to famine and exhaustion arising from overpopulation. 

Malthus also posited that advances in technology would at best have a temporary effect for the bettering living conditions for the masses, which would later be diluted away by continually increasing populations. It is with great irony, therefore, that a mere decade after the ink had dried on Malthus’s seminal publication, a new wave of technology changed the face of economic development for centuries to come.

The Industrial Revolution and Creative Destruction

Smith and Malthus may be regarded as among the first voices to recognize the role of and changing relationship with technology in industrializing economies. By the early 1800s, the confluence of changing labor divisions in factory work, increasing international trade, and a surge of infrastructural, productive, and even recreational technologies carpeted communities across continents.

It is difficult to overstate the impact of inventions such as the railway transit, telegraphs, and even bicycles were all invented in the space of twenty years. More than just increasing productive capacity for factories across western Europe and the Americas, people and information itself now traveled at a speed unimaginable in centuries passed. Greater physical mobility begot larger workforces, larger customer bases, and ossifying urbanization across nations. This period known as the “Great Divergence” saw the rise of the middle and working class, widespread acceptance of factory work models, and rising levels of income per capita. 

Nearly a century later, economists would turn to this period of history to inform new economic models on technology and its resultant effects on economic development. Joseph Schumpeter is perhaps one of the most well-known figures in the neverending discussion of how technology affects economic dynamics. His concept of “creative destruction” posits how creating new technology may result in the destruction of jobs at small or large scales. For example, Schumpeter recalls the example of carriage drivers driven out of business by the introduction of consumer automobiles in the early 20th century. Obsolescence had begun to emerge as the price of technological progress, with deepening consequences.

The Dark Side of Technology | Layoffs and Lament

The past, present, and future fortunes of technology have continued to be an irresistible topic of financial investment and macroeconomic policy. Today, there are nearly 100 technology equities ETFs with total assets under management (“AUM”) of about $200 billion. As of May 2023, just half a dozen technology industries accounted for a staggering 35% of U.S. economic growth in the last decade. However, for all the promising cash flow from these verticals, a grimmer reality pervades the pages of history.

As early as the Luddite Riots of 1811 and 1812, individuals from the working or middle classes have experienced the impact of technology on structural or systemic layoffs. Reskilling workers can be both costly and of limited efficacy. 

Recently, some economists have ascertained additional insight into the phenomenon of creative destruction and unemployment. In his recent publication Creative Destruction and Subjective Well-Being, Philippe Aghion and other researchers analyzed the effects of creative destruction and unemployment. Because of the frictionality in job markets, there is a timeline mismatch between layoff and rehire in most industries.

Conclusion

What will the next century of technological innovation yield? It is difficult to predict, however advances in text processing technologies such as OpenAI’s ChatGPT offer both promise and peril. Will increasing artificial intelligence capabilities spur the creation of new jobs and economic opportunities? Or will continuing use lead to increasing layoffs, systematic unemployment among writing-focused careers? At what cost do we realize the promise of the Solow-Swan growth model?

Assignment

  1. How has technology development affected your personal or professional life? Have the changes been positive or negative?
  2. If you were in charge of growing economic advancement in your own nation, would you prioritize technology developments in your policies? Why or what not? How much do you believe technology drives the global “success” of a nation?
  3. Do you believe the long-run benefits of creative destruction outweigh the short-term consequences of job loss, workplace instability, and re-skilling of individuals? Do the “ends” justify the “means”?
  4. Given limited financial resources, do you believe it is worthwhile to promote workplace re-skilling of individuals? If yes, how would you support successful retraining / reintegration into workplaces? If not, how would you address obsolete members of the workforce? 
  5. What are some potential consequences of ChatGPT / artificial intelligence in the current workplace? Do you believe ChatGPT will result in a net negative or net positive for job creation?
  6. What social consequences could you imagine arising from an increasingly technologicalized economy? How would you incentivize equitable education and access to technology? Should technology be accessible to everyone?