Progress (noun)=developmental activity in science, technology, etc., especially with reference to the commercial opportunities created thereby or to the promotion of the material well-being of the public through the goods, techniques, or facilities created. (dictionary.com)
Economics of Progress
Individuals continually look, or sometimes make investments in, to improve their earning capacity. They invest in education, health, household relocation, new jobs, and other things. This selfishly motivated activity improves their own earning power, and society’s output level. Progress on a small scale.
Owners of firms also continually look for opportunities to increase numbers of new clients, look for new product opportunities, opportunities to improve efficiency and product differentiation, and look to expand marketing channels in order to grow output levels and market share. They look to do all this for selfish reasons, but it also improves the yield to society from the pool of scarce resources.
Firms and households are always looking to make things better, and these changes make small, incremental changes in society’s output levels, in what gets produced, who consumes this incremental output, and what jobs exist for people in the workforce. We would call this “economic progress” because we are allocating our scarce resources more economically. This improvement in allocative efficiency, and higher social output level, allows some households to get more of society’s yield, and other households will therefore get less. Some firms will grow and benefit in controlling society’s resources, but other firms will shrink.
Progress creates a growing sized economic pie for society, but it also reallocates who gets the pie itself. There are winners and there are (at least temporary) losers as jobs shifts occur, as firms and people move around, as product demand changes, etc.
Some examples of progress:
In the last half of the 19th century several innovations led to a huge change in the quality of rural life in America, and how all Americans were clothed. Cotton was needed to be grown in the south, but was not a particularly viable crop (even with slave labor) because of the problem of extracting the seeds from the fibers after the cotton was picked from the plant. The “cotton gin” was invented which made the task of separation much less expensive than doing it by hand. A second innovation was rural electrification–spreading infrastructure for a “power grid” to provide access to electrical power to non urban areas across the country. Together, these innovations led to increased reliance on cotton fabric, and a shift in the location of the textile industry south from New England, where mills had previously been located near fast flowing rivers to have a source of power for the mills.
This innovation expanded the productivity of farmland in the south, cheapened the cost of clothing for families, and otherwise made the economic pie in America bigger. But it also raised incomes in rural areas, created jobs and incomes for people living in areas that a previously had no viable source of power and, therefore, no manufacturing. But, this economic growth also was accompanied by a negative shift in economic opportunity in places like Lawrence, Lowell, Manchester and Fall River.
More recently, the growth in access to the internet beginning in the 1990s led to vast advances in the ability of the economy to create growth in the size of the economic pie. One example is in the way inefficiencies in the use of time were eliminated, allowing people to work and play more, and not spend so much time driving and shopping. Amazon led the way to use the web to shop more efficiently. Comparison shopping requires a few “clicks” rather than walking to another store, or driving to another location, parking, etc. The time savings involved (a scarce resource) is a huge benefit, particularly for two income families. But there are downsides here too. By allocating resources toward software, distribution centers, package delivery. and enjoying the time savings, we have caused thousands of retail businesses to fail and dislocated the lives of millions of families who depended on those firms.
Driverless cars are another, rapidly approaching form of “progress”. The technology issues seem able to make this work, but we remain ignorant of what the stream of economic benefits will follow from this innovation. But, we can imagine some of the “dislocations” that may follow. The single biggest occupation in the U.S. today, according to the Bureau of Labor Statistics is “Drivers”. All kinds of people work as paid “drivers” of some type (long haul trucks, delivery vehicles, taxi/Uber, etc.). So, when we consider economic progress in the form of “driverless vehicles” we know it will “replace scarce labor” with software and hardware of various sorts, but we also can anticipate massive dislocation of people who now have jobs, who will lose them!
The Theory of Economic Progress
The benefits of technological progress, or innovation, is best understood as in increase in Output of the economy (or the firm, or household) for the same quantity of input resources. The PRODUCTION FUNCTION shown here captures the basic nature of the economic benefits:
The “shift” in production, or output, due to an innovation, allows output to be increased at all levels of input usage. Henry Ford achieved it by introducing mass production techniques in auto production. We also achieve it when we outsource some business functions when we hire more effective managers or more advanced systems, for replacing our own efforts to do that function (cafeteria functions, receivable debt collections, shipping). We also achieve this kind of “Progress or technology effect” when we ‘outsource’ to organizations in other countries, where labor costs 1/10 what it does here. We call that specialization and trade. “Progress” can take the form of technologic innovation, or “specialization and trade” — it is always depicted as an intervention that shifts the PRODUCTION FUNCTION and improves the productivity of labor.
There are several related concepts to Progress.
- Disruptive Innovation. The “uberization” of an industry because someone revised the business model is certainly a form of “progress, at least to the extent that the new model drives out the preexisting business model. The general thinking about “disruption” is that firms, over time, tend to prefer to expand share, gain monopoly power, and generally drive up prices, at least for many customer segments. At higher price points the firm thrives, but many potential customer remain unserved because the cannot buy at the existing price point. Disruptive opportunity exists to capture the growing volumes of unserved customers at low price points. So, disruption isnt just “a new way of doing things” , but a new business model that can deliver at a lower price point.
2. Entrepreneur. An important innovator— of a new industry, a new business model, and often a disruptor too. Usually, persons starting new firms are copy-catting the prevailing business model. Yes, it will likely have some differentiators, but basically not really entrepreneurial. The entrepreneur is an essential driver of capitalism. Someone who has ideas and a business vision that can, if implemented, create a new industry, or a “progress” in a big way. Most entrepreurial wannabees are dreamers and not successful. Most people people walking around with business plans and looking for angel investors are certainly not entrepreneurs. Entrepreneurs are the source of “progress”, able to create new industries out of invention and technological progress.
The forces of innovation are, in a capitalist society, largely unplanned and uncontrolled. They happen when they happen. Yes, firms often invest in research and development (R&D) in anticipation of change. Tax policy may deliberately encourage higher levels of R&D and promote progress(see the other posts on Entrepreneurism and the one on R&D). Patent policies, and other actions by government to encourage R&D activity in Bio tech firms are notable in their bias to encourage higher growth rates for new chemical entities. So innovation and progress may sometimes be random, but not entirely, because society sometimes deliberately invests in progress.
Dislocation Effect of Progress
There is a dislocation effect of “progress” on the nature of jobs, and incomes of the displaced workers (and the loss of incomes). Economists often consider this a relatively minor transaction costs, one that will be only temporary and therefore not important in the long term. True enough I suppose. But the dislocation effects don’t always get resolved instantaneously. Ask the people of Lawrence or Lowell how important or long lasting it was to achieve family resolution of the loss of the textile industry. Or ask the people of Detroit how long it takes to replace the jobs lost in the auto manufacturing plants when Americans began buying small, economical Japanese cars?
Does this mean that “innovation” or “technological progress” is not GOOD in an economic sense. Hard to say. Was electrification good? Looking back, we’d all say yes it was progress. But at the time, urban area were electrified first, rural areas last. Implementation wasn’t fair. Was the progress of the cotton gin invention and rural electrification good, along with the relocation of the textile industry? Sure, looking backward it provided economic growth. But it hurt a lot of lot of people for a long time. Was it fair? Nobody ever asks.
More systematically, lets consider the labor market effects of “progress”. The personal computer, the web, then wireless— all touched everybody’s lives, their budgets, their jobs, …everything. Lots of new businesses, lots of new jobs emerged– and at the start these new firms had difficulty finding enough workers with the skills they needed. Wages rose as a result for things like software and computer engineers for Apple, Microsoft and IBM. New kinds of salesmen and repair/installation people were needed for verizon, comcast, and other similar new companies. So, the emerging business opportunities have come almost continuously in the past 40 years….with great new opportunities for people with the needed skills–and people with the vision and drive to start new firms that fed off of the opportunities. The capital markets made fortunes for 1000s of Americans who bought Intel at $6 and initial offerings of Microsoft and Apple and some biotech stocks. Those who could participate in the “new” progress, as a laborer or as a capital investor, also experienced a good rate of return.
But many workers saw their jobs eliminated, or replaced with outsourced contracts to companies in other countries. People’s budgets changed, where they chose to live changed, and how they live changed. Amazon was a wonderful form of progress— for those of us whose time was saved by the new shopping experience — but millions of retail and shopkeep incomes were displaced. And, while we were discovering the software economy, others were experiencing progress in the form of mass manufacturing in China. As many people lose jobs with progress, they cannot instantly (or easily) adapt to the newly created jobs. No, they aren’t ready to do that— and they tend to apply for work they can do. And, markets for lots of unskilled and common skilled labor become crowded, and wages stay stagnant for long periods of time, or even fall.
So, there are three categories of workers in the economy. The main group– where progress doesnt have a direct effect on products and markets, or wage growth. The second group are those directly affected by progress– where investors and workers who experience fast growth in earnings. And, the third group– where displaced workers find themselves out of work & very unsuited to the new labor markets that progress has created. The strong opportunities and income growth for some, and the corresponding wage and income reduction or stagnation for others has created a huge economic problem over the last 40 years— the income distribution inequity in America. The fast paced growth and back-to-back forms of progress has created an economy with a huge and ever increasing “wedge” or “gap” between the “haves” and the “have nots”—- a gap that arises because of the pace of progress and the slow adaptation of the displaced workers it causes. see the blog post here on the Income Distribution and Public Anger.
Schools and Retraining
Most of the unfairness aspects of “progress” stem from people losing jobs because of the innovation or new technology. We may well not want to regulate progress that grows the economic pie. But if we want to think about how to minimize the temporary harmful problems with progress. We probably don’t want to ask Thomas Edison (who along with Tesla, brought us electrification) to bear the burden of paying for dislocation he caused. Three points about schools and retraining.
- The idea of government taking over k-12 education was because the market for private education was not efficient or fair in getting out people educated enough to run a democracy and a growing economy. But, the way we finance the Government system of schools in the U.S. is certainly not fair to everyone. Property taxes finance public schools, and schools in wealthier communities have bigger school budgets, and better educated children, who are more likely to go on to college, and more likely to earn higher future incomes.
- Retraining (not K-12 education) is the main issue in coping with dislocation due to “progress” anyway. If dislocation becomes so protracted, and becomes an intergenerational thing (as in Lowell and Lawrence) then schools may be a needed area of intervention. But, the real problem of the manufacturing workers laid off in Detroit is not school financing, but retraining to find a decent job.
- The size of the payoff for “retraining” or “redeployment” is related to the speed of the process.
What should the government do here? Options to think about are:
1. the government should finance and run the retraining programs
2. the government should expand the systems of community colleges to do it
3. the tax code should be revised to have a “negative income tax” structure. this would Pay tax money to families according to achieve a minimum standard (this was proposed by famous conservative economist Milton Friedman). And then, let the govt let the people worry about the retraining problem (what they need, where to get it, how to pay for it).
professorgaumer 