10 Principles of Economics of Technology

Rokon Zaman

Human beings are driven by economic incentives—better product at a lower cost–so that both consumer and producer surpluses increase simultaneously. Technology is a vital tool in creating such an incentive without facing virtually any limit. Often with a curiosity, we pursue the mission of discovering scientific principles–defining underlying relations between naturally occurring variables. By taking the advantage of these principles, we succeed in developing techniques of changing some of those variables by others. With the relentless pursuant in finding improved means, curious human minds find some of these techniques useful to innovate tools to get target jobs done better at less cost. Such findings often lead to offering incentives for both technology providers and users. Providers find it as an opportunity of making a profit by improving those technologies and delivering innovative tools around them. On the other hand, for users, those tools become more effective and efficient means of getting the job done–producing consumer surplus. Such unfolding opportunities have taken the technology at the core of economics of production, distribution, and consumption for increasing wealth from depleting resources. Here is a set of 10 principles of economics of technology:

1. The purpose is to support innovation, often by delegating roles from human to machines, to get the job done better at less cost

Human beings are in a relentless journey of getting the job done better at less cost. In such pursuant, the delegation of roles has been the underlying strategy. For increasing role delegation, often from human, we keep developing technologies to build machines, better machines. Such increasing role delegation keeps improving the quality and reducing the cost of production and consumption—opening the opportunity of increasing both consumer and producer surpluses simultaneously.

2. Creating the market for turning science into technology is key to economic growth

Science is the raw material to feed creative minds engaged in inventing as well as improving technologies. For inventing new technologies, we need to have relevant scientific principals defining relations between target variables. On the other hand, for improving existing technologies, we need to keep adding improved understanding of underlying science into the target technologies. The flow of scientific knowledge and the exploration of using that knowledge is the key in inventing as well as keep improving technologies. On the other hand, in absence of the market demand in producing profitable revenue, such process of transferring science into technology does not function—slowing down or easing economic growth.

3. Policies, procedures, and standards of getting the work done are part of the broader technology landscape

But a single machine alone often cannot get the job done. The division of job into pieces and integration of diverse roles from both human and multiple machines are often the reality of getting a useful job done. As a result, policies, procedures, and standards—allowing diverse elements seamlessly fitting with one another–in forming the underlying process become part of the broader role of technology.

4. Technology increases scale and scope advantages contributing to lowering cost

Through the advancement of technology, not only per unit cost of production keeps falling, but also the minimum efficient scale keeps growing. Moreover, the growing role of technology also opens the opportunity of using same or similar components in developing additional products—increasing the scope advantage. Such scale and scope advantages are strong incentives for the producers for adopting technology means in increasing profitability and capturing larger market shares.

5. Externality effect is influenced by technology affecting the perceived value

Often the perceived value of products is influenced by the factors, which are outside the business of the producer. Continued progression of technology is increasing the importance as well as facilitating the externality effect. Particularly, in a networked economy, the role of externality is quite significant for the profitability for producers, and also for the utility of consumers. The offering of complementary innovations by 3rd parties increasing the utility plays a strong positive externality role. On the other hand, due to such externality effect, a newcomer faces significant entry barriers.  Due to such a growing role of externality, often new technology faces significant barriers as well as enablers to diffuse.

6. Technology is expanding from the material-centric improvement of mechanics, and design to software and externality effect

The technology journey began by processing material through the application of science. As a result, the utility of material started increasing. Mechanics out of those improved utility of material was being developed leading to industrial revolution. The addition of intelligence to machines through software has opened a new era of role delegation to machines to get our job done far better. With software intensive progression, technology is offering the opportunity of increasing the efficiency and effectiveness, often transferring services from the physical domain to the digital space of the connected society. As a result, the externality effect has climbed to an astronomical level. Zero cost of copying software and exponential growth of externality effect with the increasing number of consumers are two major forces of technology shaping the economics of production, distribution, and consumption.

7. Technology is dynamically changing the market value of the material, labor, and competitive advantage

Continued progression of technologies keeps changing the market value of both material and labor. Such progression opens the opportunity of increasing the utility of a certain resource, often at the substitute of another one. For example, renewable energy technologies, including wind, are creating the demand for naturally abundant resources, while reducing the demand for gasoline, to power the economy. Increasing role delegation from machines also changes the labor demand—both volume and nature. Technology has been the underlying strong force influencing the ability of producers, whether as a firm or country, to compete in globally connected, inter-dependent economy.

8. Scale, scope and externality effects of technology fuel monopolistic market power accumulation, demanding policy and regulatory intervention

By leveraging the scale, scope and externality effects—particularly of software and network intensive technologies–capable producers are increasingly finding technology means to increase the quality and reduce the cost, giving very insufficient catch-up time to competitors. As a result, in virtually every industry, technology is offering the scope of getting bigger and cheaper to be more profitable. Such reality is allowing the technology-intensive producers to acquire increasing monopolistic market power—making the invisible hands weaker in governing competition. This technology fueled growing monopolistic market power is demanding smarter policies and regulation for nurturing competition without throttling innovation.

9. Technology is dynamic, having an evolving life cycle, supporting the incremental growth of wealth creation

Technologies have dynamic life cycle. Technology providers are always improving them allowing the production to be better and cheaper. Such dynamic nature often limits the benefit of technology transfer. Rather the focus should on absorbing technology and acquiring the capability of continuously improving it. Continued technology improvement is the key to support incremental innovation for offering progressively better products at lower cost. Often such strategy is fundamental for market leaders of not allowing enough catch-up time to competitors—weakening the competition.

10. Emerging technology takes over the existing ones creating discontinuity and opening new, often disruptive, opportunity

Technologies are progressing like successive waves, one crushing over another one. In parallel to the effort of some people in improving an existing technology, often a dominant one, another group start working to develop new technology, as a better substitute to the incumbent–causing the effect of creative destruction, as articulated by Schumpeter. Such a dynamics has been creating a series of technology waves as opposed to just a single one. The emergence of new technology, with the promise of offering far better products at a lower cost, often creates the discontinuity in innovation and business space. Such discontinuity often places existing firms in a difficult situation, as their customers start adopting innovations around the emerging technology. Such discontinuity is also the key to the entry of new firms with the promise of creating far greater wealth than before, often causing disruption to products and firms creating wealth around previous generation technology.