Technological Change, Population, and Growth

Transcription

1 Technological Change, Population, and Growth BCPM0058. ECONOMICS Dr. Kumar Aniket Bartlett School of Construction & Project Management Lecture 2

2 LOOKING BACK The recent rapid, sustained increase in income and living standards is largely due to technological progress. (Unit 1) Major changes started very suddenly, 200 years ago. How did the technological revolution start? Why did it not start earlier? Later?

3 Wages of skilled workers (craftsmen) in London and population of Britain ( ). Does something change around 1830s?

4 EXPLAINING THE INDUSTRIAL REVOLUTION Why did the Industrial Revolution start in the 18th Century? Why did it start in an island off the coast of Europe? There are many alternative explanations Europe s scientific revolution and enlightenment Political and cultural characteristics of nations as a whole Cultural attributes such as hard work and savings Abundance of coal and access to colonies low coal prices, large markets for output Relatively high cost of labour and cheap local sources of energy Relative prices of inputs

5 PRODUCTION FUNCTION What is a production function? tells you what the output would be if you feed in the inputs and choose the technology that would be used. Feed in the quantities of inputs Choose the technology Gives you the output ideas of how to combine inputs 1 Barista + 1 espresso machine + 30g coffee beans + 300ml water + 1 cup = 1 cup of espresso

6 MAKING CLOTH

7 MAKING CLOTH

8 MAKING CLOTH

9 MAKING CLOTH

10 MAKING CLOTH

11 Input Technology Output

12 Input Technology Output 5 different ways to produce 100 metres of cloth, using inputs, labour and coals. E technology is relatively labour-intensive; A-technology is relatively energy-intensive.

13 FIRM S CHOICE: DOMINATED TECHNOLOGIES Some technologies are dominated by other technologies.

14 FIRM S CHOICE: MINIMISING COST Firms aim to maximise their profit, which means producing cloth at the least possible cost. This is why the firms choice of technology depends on economic information about relative prices of inputs. c = (w L) + (p coal R) = (wage #workers) + (price of coal tonnes of coal)

15 ISOCOST LINES Isocost lines: Combinations of inputs that cost the same Slope of Isocost line: relative price of inputs

16 ISOCOST LINES Isocost lines: Combinations of inputs that cost the same Slope of Isocost line: relative price of inputs Rearrange the cost equation: R = c w L p coal p coal The firm will choose the least-cost technology.

17 CHANGE IN RELATIVE PRICES IN BRITAIN Technology B: Technology labour-intensive before Industrial Revolution. Technology A: Increase in wages relative to price of coal in Britain creates incentive to innovate more capital-intensive technologies.

18 THE BENEFITS OF INNOVATION If relative prices of inputs change, a firm that switches to the new cost-minimising technology (B A) will have an advantage over its competitors. Profits = Revenue Costs Profit increase by the same amounts as the decrease in costs due to adopting new technology. This is called innovation rent. Rent is a very specific term in Economics Innovation Rent gives incentive to create new technologies.

19 CREATIVE DESTRUCTION The first adopter is called an entrepreneur. An entrepreneurial firm is willing to try out new technologies and to start new businesses. The first adopters will enjoy Schumpeterian (innovation) rents. Creative destruction: the process by which old technologies and the firms that do not adapt are swept away by the new, because they cannot compete in the market.

20 TECHNOLOGICAL CHANGE IN INDUSTRIAL REVOLUTION One of the first sectors to undergo technological change was textiles Before the Industrial Revolution, making clothes for the household were time-consuming tasks By the late 19th century, a single spinning mule operated by a very small number of people could replace more than 1,000 spinsters These machines were powered by water wheels and later coal- powered steam engines instead of using human labour

21 WHY WAS BRITAIN FIRST? English wages were higher than wages elsewhere, and coal was cheaper in Britain than in the other countries

22 WHY WAS BRITAIN FIRST? English wages were higher than wages elsewhere, and coal was cheaper in Britain than in the other countries Wages relative to the cost of capital goods (late 16 th to the early 19 th century).

23 SHIFT TO A LOWER-COST TECHNOLOGY The combination of capacity to innovate and changing relative prices of inputs led to a switch to energy-intensive technology.

24 BEFORE THE INDUSTRIAL REVOLUTION A different model to explain the stagnation in population and living standards before 18th century.

25 DIMINISHING AVERAGE PRODUCT OF LABOUR Production function gives maximum output for a given set of inputs.

26 DIMINISHING AVERAGE PRODUCT OF LABOUR Production function gives maximum output for a given set of inputs. If we hold one input (land) fixed, and expand the other input (labour), the average output per worker is going to fall. This is the law of diminishing average product of labour.

27 MALTHUS MODEL Key Concepts 1. Population expands if living standards increase 2. But the law of diminishing average product of labour implies that as more people work on the land, their income will inevitably fall In equilibrium, living standards will be forced down to subsistence level. Population and income will stay constant.

28 THE MALTHUS LAW Model predicts a self-correcting response to new technology. In the long run, an increase in productivity will result in increased population but not increased wages.

29 WAS MALTHUS CORRECT? The relationship between real wages and population in England between show evidence of this Malthusian trap. But what about the subsequent hockey-stick growth?

30 REVISING MALTHUS LAW Three conditions are required to stay in the Malthusian trap: Diminishing average product of labour Rising population in response to increases in wages An absence of improvements in technology to off set the diminishing average product of labour Permanent technological revolution third condition no longer holds and Explains why Britain was able to escape the Malthusian trap.

31 ESCAPING THE MALTHUSIAN TRAP

32 SUMMARY Introduction to economic models Less is more: use simplifying assumptions to focus on the key mechanism Used models to obtain insights about technological revolution Model of a firm: high wages (relative to capital, including energy) motivated technological innovation Malthus model: permanent technological revolution enabled economies to escape economic stagnation