Microeconomics & Technical Change Research Paper Starter

Microeconomics & Technical Change

(Research Starters)

This article focuses on microeconomics and technical change. It provides an overview of the connection between technical change, productivity, and economic growth as well as the economic theory and history of technical change. The main processes of technical change, including technical evolution and technical innovation, are described. The main actors involved in promoting technical change are discussed. The issues associated with measuring technical change in the global market are addressed.

Keywords Diffusion; Economic Growth; Firm; Global Economy; Globalization; Innovation; Invention; Microeconomics; Nations; Private Sector; Productivity; Public Sector; Technical Change; Technical Evolution; Technical Innovation

Management> Microeconomics


The field of economics, and microeconomics in particular, has an established history of studying the relationship between technical change and capitalist economies. Economists argue that technical change drives economic growth, productivity growth, and social change. Understanding the microeconomics of technical change is important in an increasingly global and technological world. Technical change refers to a change in the amount of output produced from the same inputs. Technological change is characterized by a change in a set of existing production plans and procedures. While technical change may occur in any area, including organization, production, or technology, economists generally consider technical changes in the technology field to be the primary engine of economic growth and social change.

Technical change occurs through two different processes: technical innovation or technical evolution.

  • Technological innovation (TI) refers to the process by which industry generates new and improved products and production processes. Technical innovation is characterized as a goal-directed activity. A technical change is one that has been chosen from amongst a set of feasible changes. Karl Marx considered technical innovation to be one of the main forces of history.
  • Technical evolution is generally conceived of as a process of trial and error or the culmination of small modifications to the production process (Brotherton, 1988). Despite the similarity in names, technical evolution differs from biological evolution. Technical evolution can be directed and managed while biological evolution is a slow, self-generating process (Parayil, 1999). In addition, technical evolution is much more rapid than biological evolution. Human beings, with the capacity for memory, expression, recording, teaching, and communication, may guide technical evolution by changing production techniques and social organization. Technical knowledge is cumulative and builds on what comes before (De Bresson, 1987).

The following section provides an overview of the economic theory and history of technical change. This overview serves as the foundation for later discussion of the process of promoting technical change and the issues associated with measuring technical change in the global market.

Economic Theory

Microeconomics vs. Macroeconomics

Economists have studied and debated the economics of technical change since the eighteenth century. The debate about the economics of technical change has tended to divide economists. Economists tend to favor explaining technical change as either a macroeconomic process or a microeconomic process. Microeconomics is a subfield of economics that studies how small economic groups, including households, individuals, and firms, make economic decisions. Microeconomics is concerned with the relationship between price, supply and demand, and small economic group decision-making.

In contrast, the field of macroeconomics is concerned with large-scale economic activity, including inflation, unemployment, and national growth. Macroeconomic studies of technical change or progress tend to be concerned with the rate of technical progress or change in a market or society. In addition, macroeconomic studies tend to equate technical progress and advances in knowledge. Macroeconomic studies of technical change consider "pure" technical progress the single most important determinant of the growth of living standards. In contrast, microeconomic studies of technical change examine the process of technical change in a disaggregated way. For example, microeconomic studies of technical change studies production functions as separate subjects (Kennedy & Thurlwall, 1972).

Development of Technical Economic Growth Theories

Economic study of technical change was lead by Karl Marx in the nineteenth century and Joseph Schumpeter in the twentieth century. Marx's viewpoints characterized the classical economic position on technical change. Marx argued that the forces of production and technology determine social change. Schumpeter, following Marx, saw that technological change was the key factor behind economic development. Modern economists are building on Schumpeter's work to develop new theories of economic growth with technical change at their center. Schumpeter prioritized the importance of innovation process in the technical change process. According to Schumpeter, technological change is lead by entrepreneurs and connected to the business cycle. The destruction of existing modes of production and exchange in the marketplace creates economic evolution and economic growth (Parayil, 1999).

Schumpeter's Trilogy

Schumpeter argued that technological change occurs in three distinct steps or stages: invention, innovation, and diffusion. Invention refers to the "generation of a new idea or new concept that may lead to a new product or process" (Curlee & Goel, 1989, p.5). Innovation, which follows invention, occurs when the "idea from an invention is developed into a new product or process and the new product or process is commercially transferred. Diffusion refers to the process in which the new process or product spreads across firms within and across markets" (Curlee & Goel, 1989, p.5). Schumpeter's theory of technical change, also referred to as the Schumpeter trilogy, argues that technical change occurs most rapidly and successfully in concentrated industries. Concentrated industries refer to industries in which a small number of companies sell a large percentage of an industry's product.

Modern Economics Theories of Technical Change

Modern economic theories of technical change tend to be based on neoclassical economics. Neoclassical economic theory argues that new creation occurs due to the drive to maximum profits. Neoclassical economic theory argues that individual firms and whole industries produce technical innovation in response to two types of market forces, demand-pull and technology-push. The demand-pull market force approach argues that firms employing larger marketing research facilities have an advantage over firms that have smaller marketing research facilities. The technology-push market force approach argues that technical change originates within a firms’ research and design department (Curlee & Goel, 1989).


Promoting Technical Change

Economists, businesses, and governments recognize that technical change increases economic growth and productivity. As a result, businesses and governments actively promote technical change at the corporate and industry level. Governments actively diffuse new technologies into society and industry in an effort to increase productivity in their nations and increase their level of international competition. Economists encourage the public and private sectors to cooperate and work together to promote technical change. Governments and firms work together to promote the expansion of new technological capabilities in an effort to counteract and address market failures that inhibit the invention, innovation, and diffusion of new technologies (Curlee & Goel, 1989).

Promotion of Technical Change by Firms

Firms and governments promote technical change. Individual firms and whole industries make frequent technological choices. Economists argue that firms engage in ongoing cost-minimizing technical choices. Firms choose from a wide variety of feasible production techniques based on their relative prices of production. Firms are moving toward technical progress characterized by increased optimization. Technical progress requires that firms embrace a technical strategy characterized by technical innovation or technical adoption. Economists argue that firms self-select into one of these two categories. Firms that prioritize technical innovation, such as biotechnology and pharmaceutical firms, tend to focus on discovering new techniques of production or consumption. These firms tend to have large high research and development (R & D) budgets. In contrast, firms that prioritize the adoption of existing techniques of...

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