Stiver, JD (2003) - Technology Creation, Diffusion and Growth Cycles

Stiver, JD (2003) - Technology Creation, Diffusion and Growth Cycles

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Technology Creation, Di ff usion, and Growth Cycles John D. Stiver This Draft: July 2003 Abstract Standard macroeconomic models that assume an exogenous stochastic process for mul- tifactor productivity o ff er the interpretation that recessions are the result of ”bad news” (technological regress) and expansions are the result of ”good news” (technological advance- ment). The view taken here is that both expansions and recessions are the result of ”good news” in the sense that in both cases, aggregate production possibilities have increased. Recessions can be thought of as the transition from one technological frontier to the next. Department of Economics, University of Connecticut, One University Place, Stamford, CT 06901. Tel: (203)251-8433. FAx: (203)251-8592. Email: [email protected] 1
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1 Introduction Standard neoclassical models of economic fl uctuations often rely on an exogenous autoregressive process for multifactor productivity. The interpretation is that recessoins are the result of a temporary decline in productivity while expansions are the result of a temporary increase in productivity. In other words, downturns are the result of ’bad” news and expansions are the result of ”good” news. The view taken here is that neither recessions nor expansions are necessarily good or bad news, and that both are, in fact, associated with increasing production possibilities. The driving force behind an economy’s development lies its ability to produce newer, more productive capital goods. However, when a new, more productive capital good is introduced into an economy, it takes time to learn how to use it appropriately and to improve on its operation and e ciency. Therefore, there will be a natural slowdown as the economy transitions to the new ”technological frontier”. Once the economy has su cient knowledge of the new product, it begins to improve on it - producing the next generation. However, as each new generation is introduced, the marginal productivity gains become smaller and smaller. Eventually, the marginal gains will become small enough that the costs outweugh the bene fi ts of improvement. At that point, when a capital good is ”played out”, a new, revolutionary product must be developed - and the cycle starts over. For example, Gordon (2000) uses the example of word processing. The invention of the typewriter surely represented a dramatic increase in productivity once individuals learned how to type. The next generation memorey typewriter, which eliminated much repetitive retyping, also marked a substantial productivity gain. However, as we move through successive improvements (a DOS PC with Wordperfect 4.2, Wordperfect 6.0, Word for Windows, Word 95, Word 98, Word 2
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2000), one can imagine the marginal productivity improvements rapidly approaching zero. From my own experience, I can say that I am no more productive using windows 98 than I am using windows 95. However, as we speak, Microsoft is working on perfecting word processing software with voice recognition - possibly the next ”revolution” in word processing software.
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