Technological Changes and Economic Growth

Technological Changes and Economic Growth
It is often hypothesised that technological advances in the

industrialised economies from the 1900s to the 1940s, the
period during which two great World Wars also occurred,
helped significantly in the process of economic growth. When
technological advances occur, the new technical know how
helps in producing new products for which demand may be
created and so production will further increase ultimately
leading in economic growth. Technological advances also
help in reducing cost and time taken to produce particular
products and increases efficiency in production. All these
factors may again lead to increased production and thus
economic growth may occur.
Technological changes are an exogenous factor which

influences economic growth. The Solow Model of Economic
growth attempts to explain the process of economic growth by
looking at the rate of capital accumulation, labour or
population growth and the changes in productivity driven by
technological progress. Now it is often argued that
technological progress is an even more important mover of
economic growth than capital formation or population growth.
Technological progress means the discovery of new and

improved methods of producing goods. The benefits of
technological progress lie in the fact that same amount of
goods can be produced by using less resources or at lesser
cost or more goods can be produced by using same amount of
resources. Basically, technological progress leads to increase
in productivity or productive capacity of factors of production
like labour, capital etc, or increase in total factor productivity.
But the question arises as to how the technological progress

takes place. The technological progress takes place through
inventions and innovations. The word invention is used for the
new scientific discoveries, whereas the innovations are said to
take place only when the new scientific discoveries are
commercially used for actual production of goods. Some
inventions may not be economically profitable to be used for
actual production.
Thus, technological change leads to increase in output per

head. Technological advances can be distinguished from
change in technique in the aspect that technological advances
lead to development of new knowledge and improved
methods of production while change in technique refers to
using a different but already known method of production.
Technological advances help facilitate the process of

economic growth in two ways. Firstly, technological progress
can help in the discovery of new natural resources which will
help increase the productive potential of the country, and
secondly technological advances also help in increasing
productivity of existing resources.
This is the age of technology. The developing countries are

obsessed by the desire to make rapid progress in technology
so as to catch up with the present-day developed countries.
Frantic efforts are being made to install improved technology
in agriculture, industries, health, sanitation and education; in
fact, in all walks of human life. Indeed, the newly emerging
nations have come to regard technology as a bastion of
national autonomy and as a status symbol in the international
community.
Now the question arises how the relation between

technological advances and economic growth played out in
the industrialised economies during 1900-1940.
In this case we must bear in mind the technological advances

which took place in the US Economy during the period of the
second industrial revolution which later spread elsewhere to
other industrial economies also.
The U.S. was awash in an abundance of natural resources

from its newly acquired territories, a growing supply of labour
immigrating from Europe, and the migration of emancipated
African Americans North and West, an expanding market for
manufactured goods, and the availability of capital for
investment.
The Second Industrial Revolution took local communities and
their new products out of the shadow of large regional
agriculturally based economies which was assisted by new
labour forces and production techniques. During the Second
Industrial Revolution, innovations in transportation, such as
roads, steamboats, the Eerie Canal, and most notably
railroads, linked distant, previously isolated communities
together.
There was a problem of the General Purpose Technologies

(GPTs) nature of some of the technologies adopted during that
era. A general-purpose technology or GPT is a term coined to
describe a new method of producing and inventing that is
important enough to have a protracted aggregate impact.
Electricity and information technology (IT) probably are the
two most important GPTs so far.
Electrification era lasted from the start of the 20th century till
the early 1930s. Generally, when technologies of the nature of
GPT are first invented, there is a lengthy delay between the
time of their introduction and the time when they are finally
applied and the effects start showing on the economic well
being of the people. It was accompanied by a rise in “creative
destruction” and turbulence as measured by the entry and exit
of firms, by mergers and takeovers, and by changing
valuations on the stock exchange. It also spawned new
innovations in terms of patents and trademarks issued.
Light bulbs, televisions, fans, telephones and inventions

which were related to the two great wars like new tanks, new
guns, and other weapons and arms and ammunition were all
enabled in some or the other by GPT technologies such as
Railways, internal combustion engine, iron steamship and
electricity. Often adoption of GPT technologies first led to
decrease in productivity for a certain period before the real
benefits start to show up.
If productivity is decreased initially due to adoption of new

technologies of the GPT nature, then the consumption of
goods and services will also be affected negatively and there
will be a disruption caused by adoption of new technologies.
After that time, because technological advances would cause

an increase in factor productivity and would help facilitate
economic growth, the consumption would also increase as
more income means more demand for goods and services.
Thus, we can see that technological progresses in the 1900-

1940 period positively affected economic growth as the
standard models of economic growth like the Solow model
teach us it should.
R.J Gordon stated in his book chapter that the US experienced

a great leap forward from 1920-1940.
He justifies this statement with a number of arguments and

examples throughout the chapters.
Till 1928, beginning from 1874, whatever the real GDP and
productivity growth trends were, based on those values, the
output per hour growth rate from 1928-1950 should have been
52%, that means output per hour should have 52% higher in
1950 than in 1928. In reality it was a 99% increase. It may
seem surprising at first glance because so much growth
occurred between 1928 and 1950. There were no new
technologies as such to speak of, and the benefits being
incurred in terms of productivity increases were a result of
technological advances in previous decades, as the great
inventions of the late 19th century had by then reached almost
every urban home, like electricity and gas and sewer lines and
telephones. Automobiles had a greater influence than
electricity not only transforming urban but also rural America
as the transportation and commuting problems eased
significantly.
There is a mystery hidden in the American great leap forward

phenomenon because the data and history do not provide us
with a record of unbroken progress through the two decades.
Rather, the operation of the normal economy and gathering
information about technological progress became very
difficult during the years of the great depression of 1928-
1933, the recovery period of 1933-1937, and the years of the
great war from 1938-1945.
During the great depression, output, employment and hours of

work collapsed. Distortions continued through the partial
recovery period till 1937, the severe recession of 1938, and
then came the period of extraordinary economic boom funded
by enormous wartime spending from 1938 till the end of the
war in 1945. What was amazing for many economists was
that even after the wartime stimulus was removed gradually in
the period 1945-1947, the economy did not collapse and
rather flourished into an unprecedented era of stable economic
growth and prosperity for some decades.
The question is that why did this “leap” take place so

smoothly in the first place. Did the great depression
permanently dent US economic growth? Would post war
prosperity that occurred have been possible if there had been
no WWII at all? What happened to labour input, capital input
and labour productivity in the two decades?
In terms of quantifying the leap, Gordon is analysing the

trends in three components, output per person, which by
definition is equal to labour productivity (output per hour)
times hours per person. After analysing the trends in all three
components, it is found that by 1950s productivity growth was
far above the earlier trend, real GDP was modestly above the
earlier trend and so hours per person were below their
previous trend.
A search for explanations leads us to see the trend in real

wages which rose due to the labour Unions gaining bargaining
power after the passage of the New Deal. An increase in real
wages leads to boost in productivity as firms substitute capital
for labour.
The World War II itself is seen as one of the single largest
contributors to the American great leap phenomenon. The
beneficial aspect of the war can be examined through both
demand and supply side of the economy. The war created
household saving that was spent after the war on goods that
were unavailable during the war, a classic example of ‘pent-
up demand’.
Basically, World War II rescued American Economy from the

secular stagnation of the 1930s though it also caused a lot of
destruction, devastation and loss of human lives.
The supply side effects are more subtle. They include a wide
expansion of the nation’s capital stock as the Government
invested in new factories and equipment which were then
used by private firms to create new weapons, aircrafts and
ships. Infrastructure development also took place rapidly in
forms of dams and highways.
So, in summary, the American economy really saw a great

leap in GDP values, factor productivity and decrease in hours
which meant more leisure for the working class and even
more consumption which led to even more growth and all this
happened in the decades starting from the 1920s till the end of
the 1940s. So, RJ Gordon’s statement above given at the start
of this section. is fully justified.

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Technological Changes and Economic Growth

It is often hypothesised that technological advances in the

Technological changes are an exogenous factor which

Technological progress means the discovery of new and

But the question arises as to how the technological progress

Thus, technological change leads to increase in output per

Technological advances help facilitate the process of

This is the age of technology. The developing countries are

Now the question arises how the relation between

In this case we must bear in mind the technological advances

The U.S. was awash in an abundance of natural resources

There was a problem of the General Purpose Technologies

Light bulbs, televisions, fans, telephones and inventions

If productivity is decreased initially due to adoption of new

After that time, because technological advances would cause

Thus, we can see that technological progresses in the 1900-

R.J Gordon stated in his book chapter that the US experienced

He justifies this statement with a number of arguments and

There is a mystery hidden in the American great leap forward

During the great depression, output, employment and hours of

The question is that why did this “leap” take place so

In terms of quantifying the leap, Gordon is analysing the

A search for explanations leads us to see the trend in real

Basically, World War II rescued American Economy from the

So, in summary, the American economy really saw a great

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