Is Endogenous Technology Conservative?

In our previous post, we reviewed the basics of the debate between Paul Ehrlich and Julian Simon over whether economic growth would lead to widespread resource scarcities and demographic catastrophes.

In The Bet: Paul Ehrlich, Julian Simon and Our Gamble over Earth’s Future, Paul Sabin puts this debate, and their famous wager, in context and provides useful and interesting historical details.

Sabin also follows one interpretation of this debate in which Paul Ehrlich is the liberal, voicing left-wing concerns about economic growth, and Julian Simon the conservative, subscribing to a techno-optimistic view.

Though it is true that Paul Ehrlich considered himself to be from the left, and Julian Simon’s views came to be adopted by the right (and Simon himself embraced some American conservatives’ climate-skeptic views), it is wrong to see this debate as pitting liberal vs. conservative views of technology and economic growth.

At the center of the debate are some basic economic questions: is technology endogenous, and can it change enough to overcome scarcities?

There is nothing inherently right or left in the answer to these questions.

To an economist, it is natural to presume that technology is endogenous, and many economists view technological change as a powerful factor capable of overcoming all sorts of scarcities.

John Hicks anticipated this in his Theory of Wages, writing

A change in the relative prices of the factors of production is itself a spur to invention, and to invention of a particular kind—-directed to economizing the use of a factor which has become relatively expensive…

The most famous version of this idea is embedded in the endogenous technological change models every economist encounters in graduate school (and nowadays, many even see in their undergraduate studies).

In the basic neoclassical growth model, as formulated by Robert Solow, long-run economic growth necessitates exogenous technological change (except in some degenerate cases). Without such technological change raining down as mana from heaven, capital accumulation can drive growth for a while, but must ultimately come to an end. One way of understanding the reason for this is that as capital accumulates, the capital-labor ratio increases and this makes labor “more scarce” (relative to capital). This increases wages and reduces the return to capital, discouraging further capital accumulation.

Looked at it from this perspective, what endogenous technological change models do is that they create incentives for technology to also advance. As a result, even though labor does become more expensive (thus more scarce), this does not choke off economic growth. Scarcities are overcome by technological ingenuity.

Nice in theory, but does this have anything to do with reality?

Actually yes. Considerable empirical evidence shows that technology does indeed respond to incentives, including scarcity.

An interesting example comes from David Nye’s  Electrifying America: Social Meanings of a New Technology, 1880-1940, where he argues

Cities grew larger, better transportation was needed, so the [electric] trolley was invented, called into being by the crowded late nineteenth century cities….By the 1870s large cities had ceased to be accessible by foot, or built to the scale of pedestrians, and traffic congestion was terrible.

But crucially, the difficulties that over-congestion created also induced the development and adoption of new technologies in the form of the electric trolley, which ultimately solved the major conundrum that cities were facing at the end of the 19th century.

The famous Habakkuk hypothesis in economic history also amounts to the same thing (with different historical examples to back it up).   

In American and British Technology in the Nineteenth Century Habakkuk argued that technological progress was more rapid in 19th-century United States than in Britain because American labor scarcity induced faster technological progress and mechanization.

Habakkuk, for example, quoted from a contemporary observer of technology, Pelling, who wrote:

… it was scarcity of labor `which laid the foundation for the future continuous progress of American industry, by obliging manufacturers to take every opportunity of installing new types of labor-saving machinery.’

Or in Habakkuk’s own words:

It seems obvious—- it certainly seemed so to contemporaries—- that the dearness and inelasticity of American, compared with British, labour gave the American entrepreneur … a greater inducement than his British counterpart to replace labour by machines.

More recently, economic historian Robert Allen suggested in The British Industrial Revolution in Global Perspective the same mechanism as the reason why Industrial Revolution took place in Britain rather than in continental Europe or elsewhere.

A more contemporary example comes from the work of economists Richard Newell, Adam Jaffee and Robert Stavins. They show with historical data from Sears catalogs that, when energy was abundant and cheap, innovation in air conditioners tended to reduce prices and leave energy efficiency largely unchanged. After the oil price hikes, when energy became more expensive and “scarcer”, the direction of technological progress changed and air conditioners started becoming more energy efficient over time (but not much cheaper).

So the idea that technology is endogenous and responds to prices and scarcities isn’t an ideological belief, but an economic idea with fairly solid empirical backing.

This of course doesn’t mean that technological change is always powerful enough to overcome all scarcities. That’s another empirical question, and one we will discuss more in the next post.

But here, to put it into context, it is perhaps also useful to note that belief in the power of technology to overcome scarcity and create abundance is not under the monopoly of the right.

Many of the early socialist thinkers, including Robert Owen, Henri de Saint-Simon, Charles Fourier and Edward Bellamy, believed in the power of technology to create their utopian societies. Even Karl Marx was fairly optimistic about what technology and scientific knowledge could achieve (even though he was fiercely critical of what technology did under capitalist control, arguing, for example that “all progress in increasing the fertility of the soil for a given time isn’t progress towards winning the more long-lasting sources of that fertility… Capitalist production, therefore, develops technology, and the combining together of various processes into a social whole, only by sapping the original sources of all wealth…”).

Neither is there anything inherently progressive or left-wing in arguing, as Paul Ehrlich did, that the world is overpopulated and population must be controlled at all costs.

Matthew Connelly’s entertaining and troubling Fatal Misconception shows how the obsession to control population (which in practice means international organizations controlling or attempting to control population in poor countries) could acquire an almost fascistic zeal.

In light of all this, it would seem that the debate between Ehrlich and Simon shouldn’t be viewed as the struggle of left and right-wing ideologies, but an economic and empirical debate.

On the economics of it Simon’s position seems right: technology is endogenous and does respond to scarcities and prices.

On the empirics of it, that is, on the question of whether this response of technology is powerful enough to overcome all scarcities and avoid serious negative environmental consequences, the answer is a little more nuanced as we will see next week.

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