Tag Archive: technology

A Production Possibilities Frontier

The engine of economic progress must ride on the same four wheels (supply side factors), no matter how rich or poor the country:

  • Human resources (including labor supply, education, discipline and motivation)

Labor inputs include, of course the quantity of workers. However, many economists believe that the quality of labor inputs, the skills, knowledge, and discipline of the labor force, is the single most important element in economic growth. capital goods can be effectively used and maintained only by skilled and trained workers.

Improvements in literacy, health, and discipline, and most recently, the ability to use computers, add greatly to the productivity of labor.

  • Natural resources (including land, minerals, fuels and environmental quality)

The important resources here are, arable land, oil and gas, forests, water, and mineral resources.
But the possession of natural resources is hardly necessary for economic success in the modern world. New York City prospers primarily on its high density service industries. While many countries that have virtually no natural resources, such as Japan, have thrived by concentrating on sectors that depend more on labor and capital than on indigenous resources.

  • Capital formation (including machines, factories and roads)

Tangible capital includes structures like roads, and power plants, and equipment, like trucks and computers. In this regard, some of the most dramatic stories in economic history, often involve the rapid accumulation of capital.
Accumulating capital requires a sacrifice of current consumption over many years. Countries that grow rapidly tend to invest heavily in new capital goods. In the most rapidly growing countries, 10 to 20% of output may go into capital formation. In this regard when we think of capital we must not concentrate only on private sector investment. In fact, many investments are undertaken only be governments, and provide the necessary social overhead capital and infrastructure for businesses to prosper. Roads, irrigation and water projects, and public health measures are important.

Government projects involve external benefits that private firms cannot capture so government is necessary to provide them.

  • Technology (from science and engineering to management and entrepreneurship)

Historically, growth has definitely not been a process of simple replication, adding rows of steel mills, or power plants next to each other. Rather, a never-ending stream of inventions and technological advances led to a vast improvement in the production possibilities of Europe, North America, and Japan. Technological change denotes changes in production processes or the introduction of new products or services.

Technological change is a continuous process of small and large improvements.

While the four supply factors of growth relate to the physical ability of the economy to expand, there are two other factors that are equally important:

  • First, there is the demand factor

To realize its growing production potential, a nation must fully employ its expanding supply of resources. This requires a growing level of aggregate demand.

  • Second, there is the efficiency factor

To reach its production potential, a nation must not only achieve full employment, but also two kinds of economic efficiency. Specifically, a country must achieve productive efficiency. That is, it must use its existing and new resources in the least costly way to produce what it does. And it must also achieve allocative efficiency, meaning that the specific mix of goods and services it produces must maximize society’s well-being.

Technological Advance

One of the most famous studies ever conducted in economics was the study done by Edward Denisen. He found that the most important factor accounting for a full 28% of increased productivity, has been technological advance – just as growth theory suggests. And by the way, Denisen’s eighth category (legal-human environment) is a negative number. It estimates the negative impact that legal and regulatory constraints have had on productivity and growth. Which takes us to Ferguson (2012) who states that among the most deadly enemies of the rule of law is bad law (p.77).

  • While some economists and policy makers stress the need to increase capital investment,
  • others advocate measures to stimulate research and development and technological change.
  • Still a third group emphasizes the role of a better educated work force.

The Neoclassical growth model was pioneered by professor Robert Solow of MIT:

  • Major model components in this neoclassical growth model: Capital and technological change.
  • Primary tool: Aggregate Production Function (APF), which relates technology and inputs, like capital and labor, to total potential GDP.
  • Key concept: Capital deepening – the process of increasing the amount of capital per worker, e.g. more farm machinery and irrigation systems in farming, more railroads and highways in transportation, and more computers and communication systems in banking. In each of these industries societies have invested heavily in capital goods. And as a result, the output per worker has grown enormously.

The first major insight of the model is that in the absence of technological change, capital deepening does not lead to a proportional increase in output.

Reason: The law of diminishing returns – the basic idea is that as you add more and more capital to a fixed supply of labor, eventually the marginal product of capital must fall as the law of diminishing returns kicks in.

The second major insight of the neoclassical growth model is that while capital deepening can dramatically increase the productive output of an economy, it will eventually lead to economic stagnation in the absence of technological change.

At this point, the economy enters a steady state in which, without technological change, both capital incomes and wages end up stagnating.
In the long run, equilibrium of the neoclassical growth model makes it clear that if economic growth consists only of accumulating capital through replicating factories with existing methods of production, then people’s standard of living will eventually stop rising. And that’s why we must come to understand the importance of technological change in averting this fate, as modern economies in this century have so obviously done.

This leads to the third major insight of the neoclassical growth model. It is ultimately only through technological change that we can avoid the trap of economic stagnation.

Technological change represents both advances in production processes, and the introduction of new and improved goods and services. It also includes new managerial techniques, as well as new forms of business organisation.

Technology Influence in Business Strategy

There is a spectrum of attitudes towards technology that is found in different organisations:

1 2 3 4 5
Technology as a tool for efficiency Technology as a tool for achieving business strategy Technology as a function alongside finance, marketing, HR, etc., typically called R&D (product technology) or operations (process technology) Technology strategy influences business strategy in a bottom-up manner Technology strategy leads the business, effectively determining business strategy

Table 1: Degrees of technological influence on business strategy (Source: Fowles, 2005)

Technologies mean different things to different people at different times in the sense of how they are interpreted. Rural customers of the Ford Model T used it for ploughing. Farm tractors evolved as a response. Lacking electricity, the same customers used the car as a source of power to drive farm machinery and even domestic tools such as a washing machine. Nor is it only customers who interpret a technology in various ways. The maker’s technology strategy decides on resource allocation. The decisions of one strategy are closely intertwined with those of the other. By asking to what they allocate resources it is possible to tell them apart.

Understanding Technology

There are various meanings that help to analyse technology. In modern common usage, the word ‘technology’ essentially means ‘kit’, which is to say technology as artefact (product). This refers to made objects, and also to what they do (examples in table below). This usage of the word is quite recent. Dictionaries – which tend to lag behind common usage – almost all define technology as a body of knowledge and practice, for example “a particular practical or industrial art” (Oxford English Dictionary). Past definitions have distinguished other categories, namely technology as knowledge and technology as mode of enquiry and action. These meanings are different ways of understanding technology. They can be conceptualised as a dependent series: There can be no artefact without action, no technological action without knowledge, and no knowledge without enquiry. This implies that two sets can create meaningful combinations, such as “application knowledge”, or “product mode of enquiry” (Fowles, 2005).

Artefact Knowledge Mode of enquiry and action
Application Formulation, symptom relief Diagnostic indications Clinic trials
Writing electronically Observing office work Prototyping, software development
Product Bio-active ingredients, systemic effects Molecular structure Systematic search for and analysis of medical plants
Word processor Convert keyboard keys to strings Developing software modules for communication
Production Fermentation and fermenters Drug testing and approval system Process improvement
Compilers, assemblers Software engineering Understanding software development and quality standards

Table 1: Meanings of technology and examples for medicine and IT

Knowledge is not easy to picture: Although knowledge is sometimes written down, very often it resides only in people (Nonaka and Takeuchi, 1995). Let’s consider the assembly line in a car fabric: It implies product knowledge of the design of car bodies – such as the arrangement of parts, the suitability of materials etc. It also implies production knowledge of the organisation of an assembly line and the manner and sequence in which parts are fitted. Some of these were important subjects at certain points in the technology’s life cycle. We can imagine business conditions, such as a high rate of change and degree of complexity, where production knowledge creation, using a “continuous improvement” method such as ‘Kaizen’ (Imai, 1986), would be an essential part of an organisation’s technology strategy as product performance.

The mode of enquiry and action refers to technological method. It is what develops a technology as time passes. R&D is a prime example. More generally, it is a way of doing things that is concerned with observation, problem solving, inventing, improving, management of change, etc. Here are some guidelines on categorisation (Fowles, 2005):

  • Application mode of enquiry and action might be trial and error to see how a technology is best used, sited, etc.
  • Application knowledge would include knowledge of use, siting, maintenance…
  • Application artefacts comprise the framework within which a technology is ultimately used. The framework might include ancillary mechanisms to improve performance, such as guidance for users.
  • Product mode of enquiry and action might be a particular approach to R&D.
  • Product knowledge is about architecture and design, e.g. the arrangement of components in a successful working entity.
  • Product artefacts include the product as delivered and component technologies within it, and the effects they have.
  • The production mode of inquiry and action might be a particular approach to process improvement.
  • Production knowledge is about the systems of operation and control, craft practices etc.
  • Production artefacts are the organisations, structures and tools that enact these systems and practices, and the effects they have.

Technology Strategy

Organisations large and small need to maximise their technologies’ potential, to integrate technology with current and future needs, to know how to apply technology to gain a competitive advantage and make the organisation more flexible and responsive, to know when to keep pace with technological progress on their own or with partners. These issues all lead to questions of how technology strategy forms in organisations.

When you connect to the Web, you implicitly adopt the strategy on which it is based. Nevertheless, there was a time when you would have to think explicitly about choosing a strategy for communicating between computers, because there were alternatives available. The difference between direction and focus is one of timing and detail. Direction is about the broad, long-term goal; focus is about the immediate decisions of what to do and what not to do. Technology strategists are among the most important actors because, by definition, they decide on the allocation of resources to technologies, features, and so on. It is the technology strategists who change the world, not the technology. We think more in terms of ‘socio-technology’, where a technology is interlinked with people, groups, organisations and institutions (Fowles, 2005).

But for too long new applications have been added over the years in pursuit of short-term gain or because board-level intervention came from the CEO reading an article about what a great thing apps were and how every company should have them – with little or no thought given on how to integrate them or how they should work within the wider infrastructure.
It is a problem made worse within companies with decentralised purchasing power, or within hospitals where many clinics have power and inclination to further their own interests (Mintzberg et al. 1998, p. 261), operating as highly decentralised organisations of experts. So the oncological director buys the latest radiology system, which promises productivity gains and much better diagnostic abilities. But of course no one has told him that the data from this new system will have to go into and come out of an ageing hospital information system (HIS) or a database that hosts inventories etc. This usually results in unexpected investment in middleware or integration server technology to glue the systems together. Whatever the particular case, the reality for most organisations is that integration is an inescapable, resource-hungry aspect of their IT strategy. The main challenge is to find the most effective and efficient way of enabling integration necessary to ensure that systems can seamlessly support the business. Systems are not integrated because there is no strategy for consistency.