The Rate of Technological Adoption

With regard to productivity, efficiency, and the purpose of human labor, Milton Friedman also said while on tour regarding a government jobs-program that was then building a canal in an Asian country in the 1960s, “Why are there so few machines?…. I thought you were trying to build a canal…. If it’s [more] jobs you want, then you should give these workers spoons, not shovels.”  This anecdote was reported by the economics writer Stephen Moore of the Heritage Foundation, whose article was printed in the Wall Street Journal in 2009.   This real-world economic development account was selected here because of its vivid example of how technology can be embraced or resisted in the struggle to improve world living standards.  Now obvious, switching out picks and hand shovels for backhoes and graders creates greater societal advancements.

This switching out of technologies always comes at a cost and a benefit.   It requires taking informed risks and making investments in new assets.  Investment capital for new assets is typically scarce and rationed.  Poor investments may be selected.  Human labor also struggles with advancements.   To resist and defend against change, it also makes existing assets more vulnerable to displacement and prone to protective measures to extend their usage.   After the investment and the new production is offered, it is the resulting consumption of the output offerings driven by competition, marketing and sales which validates whether the investment was worthwhile or not—creating winners or losers of both capital and labor in the aggregate.  Such aggregate growth or loss is measured in terms of total GDP (Gross Domestic Product).  Growing GDP is beneficial.

From a top-down perspective for desired economic expansion and labor’s wellbeing, according to Evsay Domar back in 1947, in obtaining and sustaining full employment, investment is the key factor through its impact on domestic income and improving living standards.  But, it is not total aggregate investment that holds the key to increased levels of domestic income, but, rather, the incremental upward change in new investment.  Domar continues to describe that if large domestic investment is the same as yesterday’s domestic investment, then national income will be equal to and no larger than yesterday.  (See “Expansion and Employment,” The American Economic Review.  March 1947. pp. 34-55.)  Domar’s conclusion assumes that the rate of change of technical investment was also efficacious and productive—being based on eventual technology winners (substituting the new for old), which inexorably had passed through the refining forces of competitive consumption of the outputs of the new technology.

From a bottom-up perspective, it turns out this milieu of aggregate domestic investment, technological adoptions, changes in consumption and resulting increased national productivity can be mostly predictable.  By 1971, economists focused on growth had improved their understanding of the supply and demand behaviors for inferior goods/services, normal goods/services and superior goods/services.   Orthogonal to these goods and services, these out-puts of investment are also interacting with each other as complementary goods/services and substitute goods/services.   Driven by innovation, generally, substitutes lead while complements follow.   Studying substitution (of goods/services) was the key to forecasting.

With regard to this general substitution phenomena, in 1971, J.C. Fisher and R.H. Fry, both researchers at General Electric, published then and since the foremost prescient article regarding how to better forecast technological and associated social change.  This research directly lent itself to understanding aggregate technological adoptions, changes in consumption and resulting increased national productivity.   Quoting them:

“If one admits man has few broad basic needs to be satisfied—food, clothing, shelter, transportation, communication, education, and the like—then it follows that technological evolution consists mainly of substituting a new form of satisfaction for the old one.  Thus, as technology advances, we may successfully substitute coal for wood, hydrocarbons for coal, and nuclear fuel for fossil fuel in the production of energy….We may substitute guns for bows and arrows, or tanks for horses.  Even in a much more narrow and confined framework, substitutions are constantly encountered.  For example, we substitute water-based paints for oil-based paints, detergents for soap, and plastic floors for wood floors in houses.”  (A Simple Substitution Model of Technological Change. J.C. Fisher and R.H. Fry.  Page 75.  In Technological Forecasting and Social Change, 3, pp.75-88. © 1971 American Elsevier Publishing Company, Inc.)

In the article, dozens of such competitive product-market innovations and resulting substitutions were analyzed by GE’s Fisher & Fry with examples selected from that day ranging from substituting synthetic fibers for natural fibers to plastics for leathers and from non-lead paints for lead-based paints to electric-arc furnaces for open-hearth furnaces (in steelmaking).   Most interestingly, after the observed and recorded initial introductory competitive battles were waged, all of the various substitutions exhibited similar characteristics with regard to their respective rates of technological adoption.  Such technological progress and adoption are critical to improving the world’s living standards.

Besides GE, the article was leaped upon by other companies.  This new Fisher-Fry technology adoption research was so timely and useful and that its observed implementations were so applicable to R&D, product development, strategic management and sales-marketing development that embracing corporations considered its use and deployment trade secrets and a competitive advantage.   Dozens of derivative research projects have been spun-off of it since its first publication.   Even today, the original research is copy-righted and for sale.

Fisher & Fry used simple mathematical models to explain what was happening in substitution economics.  Illustrating the substitution of the old good for the new good, S-Curves accounted for the accumulation of the preferred goods over time.  An S-Curve is the integral (sum, area) of its underlying Bell-Curve.  The Bell-Curve for a given substitute good accounts for periodic total substitute good adoptions over segmented periods of time.   As such, with respect to time, the inflection-point of the S-Curve is the same as the peak-point of the Bell-Curve.  Bell-curves are also well-known and useful to score behaviors of populations.

By the late 80’s, this derivative substitute-good bell-shaped curve model became the focus and study of most economic consumption behaviors.  This research gave rise to the eventual notion that most new asset classes, ripe for substitution over the old asset, will be similarly described by and adopted by five separate classes of predictable consumer behaviors—i.e., in any new emerging and struggling market, there are the innovator-plungers first to purchase, then the early adopters enter in; after the initial tumult, then come the early majority, then the late majority and finally the laggards.  The plungers and the early adopters comprise approximately the first 15% adoption group of the substitution model.  The laggards make up the last 10% of the new product (asset) substitution model.   If this first 15% have a compelling early aggregate product/service consumption experience derived from the large initial investments and competitive struggle to establish the first and better substitute goods/services, this leading body of successful transactions (where many product/service failures also existed) will pull the rest of the market through to the winner’s eventual market take-over at predictable rates.   First to explain this Fisher & Fry discovered consumer behavior the best, one must read Michael Moore’s Crossing the Chasm: Marketing and Selling Technology Products to Mainstream Customers. Harper-Collins Publishers, New York, 1991.

With this encouraging new understanding of economics first described by Fisher & Fry and later elaborated on by Moore for better implementation, broad and rapid investment followed and created other new technologies that propelled consumption to concurrently substitute many new things including switching-out of plain-old-telephone landlines and services for now indispensable goods such as cell-phones and later for smart-cell-phones—and to substitute personal computers for old typewriters.  With the advent of substituting LAN services for Internet services, there is currently a wave of substituting Internet online shopping for physically shopping at local brick-and-mortar malls.  Gasoline-powered cars are being substituted by electrically-powered cars.  Other domestic assets are currently being substituted in manufacturing such as robots for human labor.

Through all of this, it is investment’s hope that the contemporaneous innovative substitution processes inexorably happening increase national productivity and full employment.  For every new hope there is an old hope.  Such change can create fear and hopelessness.  Not to worry.  Joseph Schumpeter coined the term Creative Destruction, in “Capitalism, Socialism and Democracy” in 1942 (Harper and Row Publishers, Inc., 1942, 1947, 1950.  George Allen & Unwin Publishers, Ltd., 1976).  He describes creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”  Therefore, if a free-market resolves the issues, substituting new for old is often better.

Substitution generates progress.  Fisher & Fry call their discovered economic progress processes the substitution struggle. (Page 88).  On the same page, they say regarding progress.…”The pace of change in a society is probably measured less by the speed with which a single isolated substitution occurs than by the number and magnitude of such substitutions taking place simultaneously.  It might be enlightening to examine this question in a given country as a function of time and between countries to determine the correlations between the number of such substitutions and the abundance of technical, economic, educational, and other resources available.”  Envisioned by Fisher & Fry, technological progress, or the lack thereof, to improving the world’s living standards is the very subject and question that is being currently debated worldwide to determine the relative wealth and productivity of nations.

Innovation and upgrading requires successful investment in R&D.  Michael E. Porter said in his book Competitive Advantage of Nations (Simon and Schuster, New York, 1990), “National prosperity is created, not inherited. It does not grow out of a country’s natural endowments, its labor pool, its interest rates, or its currency’s value, as classical economics insists.  A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.”  Regarding this capacity, to innovate and upgrade, there are two types of R&D available to businesses in their respective business climates.  Both are choices.  Both types eventually aggregate upward into the eventual wealth and productivity of its nation.   The first is typical R&D (Research & Development) to innovate and upgrade to substitute old and outmoded ways and means for new and modern ways and means.  The second is atypically the opposite R&D where old and outmoded ways and means are held on to or are substituted for new and modern ways and means.   This self-inflicted negative R&D is to consciously Regress & Devolve or Retrograde and Decay the business.  This equals national Reversal & Decline.   In the same way that businesses must invest in positive R&D (Research and Development), in the absence of such aggregate new investment, keeping the so-called traditional ways, ignoring neglected public infrastructure and education, the resulting waning businesses and ultimately the adversely affected aggregate national economy are always and everywhere left behind as a function of the alternative negative R&D pathway.

In each nation, are substitutions being allowed by market forces or disallowed by non-market forces?  Disruptive politics, taxation and adverse government policy typically bring about this latter sub-optimal type of negative R&D.  This was recently demonstrated in the downward regression and decline of Venezuela.  Cuba is frozen in time due to its dearth and decay of investment incentives.   After the Korean War, South Korea sprang forward becoming an advanced economy out-performing other nations.  North Korea has lagged far behind.  its people have suffered.  After starving an estimated 30 million to death from a cascade of man-made catastrophes, in the early 1980s China flipped Maoism for Socialist Capitalism embracing trade, privatization, new technologies and investment in modern ways and means.   China’s Shanghai Stock Exchange today has a market cap of $2.7 trillion.  Here, for example, a form of capitalism was substituted for orthodox communism.  As a result, China is striving nowadays to become a modern economic super-power.  For China, regular, truer and freer R&D made all the difference.  From its investment surpluses, its rate of technological adoption and emerging growth are a marvel compared to their past failed Leaps and Cultural Revolutions.

All subject to the effects of new investment in capital and labor, such rates of technological progress and growth and the differences between economic well-being and the living standards of countries are now being mapped, monitored, and studied earnestly.   To gauge such differential worldwide prosperity, a general economic common denominator is used to measure the investment inputs in capital and labor to a nation’s Gross Domestic Product (GDP).   Technological progress is determined by Total Factor Productivity (TFP).  This is accomplished by dividing total output (real GDP) by a combination of the capital and labor inputs utilized to produce it.   Subject to the technological substitutions always and everywhere happening at constrained and unconstrained rates, as Fisher & Fry envisioned, national TFPs are nowadays compared.

Central Banks and Nations jointly vend and deploy their money systems and policies to facilitate national investment and consumption.  The Federal Reserve, the most sophisticated central bank, typically has the latest and best figures on TFP.   They vigilantly follow-the-money, (especially Federal Reserve Notes–the world’s reserve currency) where they excel at understanding its worldwide quantities and prices thereof to facilitate exchange rates, investment and consumption.  Using this global monetary data in 2013, the Dallas Federal Reserve published Technological Progress Is Key to Improving World Living Standards by Enrique Martínez-García; in Vol. 8, No. 4, June 2013.  It is indispensable reading for comparing current TFP world standings especially in viewing the accompanying published colored world maps and related graphs.  Read more.

Martinez-Garcia presents historically-based TFP output data.  He discusses measuring productivity, improving living standards, how nations can catch-up or leap-frog each other, growth disparities and long-lasting effects of TFP.  The analysis shows there are under-performing and over-performing nations for each category of advanced and emerging nations.  His narrative is apolitical.  He states on the last page of his research, “More generally, persistent differences in observed TFP growth across countries and by level of economic development have contributed to sustained differences in labor productivity growth….[The] model suggests that the prospects for continued increases in emerging countries’ living standards, and for convergence over the long term, crucially depend on what happens to these TFP growth differentials.”

In summary, let’s state the demonstrated obvious from the Dallas Federal Reserve research.  Given all things being equal, nations should progress together in comparative unison.  They do not.   What makes the difference?  Using your mind’s eye, overlay a political geography legend on the map.  Propelled by investment and consumption, the real difference of nations is their rate of technological adoption affected by their civics.  Therefore, holistic economics is always political economy.  Clearly illustratable but not discussed by the Dallas Fed, for improving world living standards, national technological progress (greater TFP derived from aggregate substitutions) takes place faster geographically where there is also improving capitalism and freedoms, which is also the ultimate substitution struggle—pulling away from failing planned and controlled economies in exchange for freer markets.   To be a winner, a nations’ politics and policies should metaphorically substitute vassal spoon-jobs for veritable moon-shots.