Model Answer
0 min readIntroduction
Technical progress, historically treated as an external force in economic models, has increasingly been recognized as an internally driven process. This shift is captured by endogenous growth theory, which posits that technological advancements are not simply ‘manna from heaven’ but are the result of deliberate economic activity – investment in research and development (R&D), human capital, and knowledge spillovers. The question of whether technology is a ‘non-rival’ good is central to understanding its implications for economic growth, as non-rivalry implies that one person’s use of a technology does not diminish its availability to others, fostering potentially limitless expansion. This answer will explore the factors that make technical progress endogenous and critically assess the non-rivalrous nature of technology.
What Makes Technical Progress Endogenous?
Traditionally, neoclassical growth models (Solow-Swan model) treated technological progress as exogenous – a factor occurring outside the model, determined by forces beyond economic analysis. Endogenous growth theory, pioneered by Paul Romer (1986) and Robert Lucas (1988), challenged this view. Several factors contribute to making technical progress endogenous:
- R&D Expenditure: Investment in research and development by firms and governments is a primary driver of innovation. The more resources allocated to R&D, the higher the probability of new technologies being discovered.
- Human Capital Accumulation: A skilled and educated workforce is essential for both creating and adopting new technologies. Investment in education and training enhances a nation’s capacity for innovation.
- Knowledge Spillovers: Innovations often generate knowledge that benefits other firms and industries. These ‘spillovers’ are a crucial mechanism for spreading technological progress. For example, the development of the internet spurred innovation across numerous sectors.
- Learning by Doing: Experience gained through production processes can lead to incremental improvements in technology.
- Network Effects: The value of certain technologies increases as more people use them. This creates a positive feedback loop, encouraging further innovation and adoption.
- Government Policies: Policies like patent protection, subsidies for R&D, and investment in education can significantly influence the rate of technological progress.
Is Technology a ‘Non-Rival’ Good?
In theory, technology possesses the characteristics of a non-rival good. Once a technology is discovered, it can be used by multiple individuals or firms simultaneously without diminishing its availability. The marginal cost of replicating and using information-based technologies is often close to zero. However, this ideal is complicated by several factors:
- Intellectual Property Rights (IPR): Patents, copyrights, and trademarks grant exclusive rights to inventors and creators, making technology temporarily rivalrous. While intended to incentivize innovation, IPR restricts access and can slow down diffusion.
- Absorptive Capacity: The ability of a firm or economy to absorb and utilize new technologies depends on its existing knowledge base and skills. A lack of absorptive capacity can make a technology effectively rivalrous for those unable to utilize it.
- Tacit Knowledge: Some knowledge is ‘tacit’ – difficult to codify and transfer. This limits the extent to which technology can be freely replicated.
- Network Effects & Congestion: While network effects can enhance the value of technology, congestion can arise with overuse, making it less effective for all users (e.g., internet bandwidth limitations).
- First-Mover Advantages: Firms that are first to adopt a technology can gain significant competitive advantages, creating a form of rivalry in the market.
The degree to which technology is non-rival also varies across different types of technology. Software and digital information are closer to being purely non-rival than, for example, a specialized piece of manufacturing equipment which has a physical form and limited capacity.
| Characteristic | Technology as Non-Rival | Limitations to Non-Rivalry |
|---|---|---|
| Replicability | Low marginal cost of replication | IPR, tacit knowledge |
| Simultaneous Use | Multiple users can use simultaneously | Network congestion, absorptive capacity |
| Diffusion | Potential for rapid diffusion | Cost of information, lack of infrastructure |
Furthermore, the concept of ‘creative destruction’ (Schumpeter, 1942) suggests that new technologies inevitably render older ones obsolete, creating a form of rivalry over time. The rise of smartphones, for instance, made many previous mobile phone technologies redundant.
Conclusion
In conclusion, technical progress is demonstrably endogenous, driven by deliberate economic activity and influenced by factors like R&D, human capital, and government policies. While technology possesses inherent characteristics of a non-rival good, its non-rivalry is often constrained by intellectual property rights, absorptive capacity, and the dynamics of market competition. Recognizing these limitations is crucial for designing effective policies to promote innovation and ensure that the benefits of technological progress are widely shared. Future policy should focus on balancing incentives for innovation with the need for knowledge diffusion and accessibility.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.