Technology and Economic Growth in the Information Age

Policy Backgrounders | Economy

No. 147
Thursday, March 12, 1998
by W. Michael Cox & Richard Alm

Capitalism Makes Technological Change Possible

"Capitalism's ability to unleash innovative and invention lies at the very heart of economic progress."

As with most economic activities, putting technology to work has a lot to do with incentives. An economy will produce technological change faster when the costs of doing so go down or the benefits go up. Technological know-how doesn't just happen. Ideas produce nothing until an entrepreneur or a company transforms them into new goods and services or better production methods. The process involves discerning consumer tastes, researching, designing prototypes, obtaining financing, manufacturing, marketing and, often, starting all over again. Entrepreneurs and companies go through this process because capitalism gives incentives to innovate by bestowing profit on those who bring successful products to market.

Just as important, capitalism readily shifts money, people and other resources from producing yesterday's goods and services to what consumers will buy today and tomorrow. Capitalism's ability to unleash innovation and invention lies at the very heart of economic progress. Understanding this fact will help us see what speeds it up or slows it down.

Role Of Competition.  In a free enterprise system, there is always competition among inventions and innovations that meet consumers' needs in a different way or make it cheaper and easier to manufacture existing products. Most of us overlook this "minor" feature of a market-based economy. When we catch a bargain on airfare, see our long-distance phone rates plummet, get a good deal on a car and so on, we welcome the low prices that result from companies competing for market share. However, we owe the existence of airplanes, telephones, automobiles and other amenities to another kind of rivalry capitalism promotes. That's the competition from the next generation of goods and services, made possible by the relentless impulse in human beings to make themselves better off by improving life for everyone else.4

The Case Of Transportation.  Successive generations of transportation show how new products come along to compete with existing ones. Suppose bankers in New York and San Francisco want to enter into a merger. In California's Gold Rush era, meeting might have meant a boat trip around the tip of South America. As time went by, the bankers would have found the train faster, then the airplane faster still. With the advent of teleconferencing, they can now convene in a matter of seconds, skipping the hassle and expense of transcontinental flight. Sometime beyond 2020, virtual meetings and all modes of shipping may be made obsolete by a Star Trek-like "transporter" that zaps people and products from one place to another.

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