Does Technical Knowledge by Itself Drive Economic Growth?

by
Frank Shostak
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Some have argued that new technological ideas, unlike material inputs and labor, are not in themselves scarce. Consequently, it is further argued that new ideas for more efficient processes and new products can make continuous economic growth possible. So-called experts, however, are of the view that in a fully competitive environment, firms are likely to be concerned that competitors are going to copy any innovations they introduce. Therefore, it is alleged that firms are likely to become reluctant to make costly investments in research and development.

To deal with this problem, “experts” believe that it is necessary to introduce policies, such as subsidies, for research and development. Hence, it is concluded that government policies play a critical role in promoting technological innovation. 

Contrary to this, the most important technological ideas actually emerged because of the initiative taken by various individuals in the private sector without any support from the government. To name a few, such as the innovations in computer technology in the late 20th century, the development of the electricity, the radio and the television in the early 20th century, the automobile industry, and the airline industry in the early 20th century. 

Furthermore, the policy of providing government subsidies bypasses the market mechanism, thereby stifling the usage of scarce resources and undermining economic growth.

Technological ideas and the availability of savings

Regardless of how many ideas people have, what matters is whether these ideas can be implemented. What always limits the implementation of various new techniques is the availability of savings, which enables the investment in capital goods which, in turn, increases production and efficiency. If the production of consumer goods were to increase (all other things being equal), the pool of savings will follow suit. This, in turn, permits a further enhancement and the expansion of the capital infrastructure.

Expanded savings allows people to introduce the new stages of production which, prior to the expansion savings, could not be undertaken. This permits the production of a greater quantity and variety of consumer goods. Additionally, once there has been an adequate increase in saved consumer goods, individuals would then be positioned to aim at enhancing their well-being by seeking things such as entertainment and service-related products, such as medical treatment, etc.

It is through the expansion in the pool of savings that an increase in the stock of capital goods emerges. And it is the increase in the capital goods that permits the economic growth to follow. According to Rothbard,

Capital is a way station along the road to the enjoyment of consumers’ goods. He who possesses capital is that much further advanced in time on the road to the desired consumers’ good. Thus, the role of capital is to advance men in time toward their objective in producing consumers’ goods.

The crux of the matter is that the increase in capital goods cannot happen without a prior increase in real savings. At any point in time, there is a finite pool of consumer goods and capital. To support a greater number of activities requires an increase in consumer goods. The key for the increase is the improvement in the productive structure (i.e., tools and machinery). With the help of better tools and machinery, one could secure a greater quantity and quality of consumer goods.

The amount of savings determines both the quality and the quantity of various tools and machinery. If savings are only sufficient to support one month of work, then creating a tool that requires two months to create cannot be undertaken. Even if we have the best technical knowledge, if there is not enough prior savings available, no growth is possible.

Enhanced infrastructure permits the expansion and availability of consumer goods. All other things being equal, this permits a greater allocation of investment toward a further improvement of the infrastructure and, consequently, this brings a higher living standard. While new ideas can result in a better use of scarce resources, they can do very little for real economic growth without preexisting savings. According to Rothbard, referencing Mises,

What is lacking in these [underdeveloped] countries is not knowledge of Western technological methods (“know-how”); that is learned easily enough. The service of imparting knowledge, in person or in book form, can be paid for readily. What is lacking is the supply of saved capital needed to put the advanced methods into effect.

If the limiting factor, as far as economic growth is concerned, were technological “know-how,” then most Third World economies could have resolved their economic difficulties quite easily by adopting the latest Western technology. The main reason this did not happen is not the lack of knowledge of the latest technology, but rather the scarcity of capital goods and the underlying savings that enable them.

For example, in order to make a particular tool, the toolmaker must have an idea (a “recipe”) as to how to make this tool. The idea alone, however, is insufficient to produce the tool. Various parts to make the tool must be produced before it could be assembled, then there is an opportunity cost of time, energy, labor, and resources to produce the tool. In the various stages of production (i.e., intermediate and final stages) individuals that are employed in these stages must be supported by providing them with consumer goods, which sustain them in the meantime. Without the allocation of consumer goods towards the individuals in the various stages of production, the tool is not going to be made, notwithstanding that the toolmaker has the technical knowledge of how to make it.

Conclusion

Contrary to the popular view, the key for economic growth is not mere technical knowledge, but savings that support the expansion and enhancement of the economy’s production structure.