The Economics Book

313

See also: The emergence of modern economies 178–79 ■ Institutions in

economics 206–07 ■ Economic growth theories 224–25

E

conomic growth is

powered by innovation and

invention. Some innovations

are incremental, while others are

revolutionary. A better drill may be

one of many small innovations by

which economies gradually become

more productive. The discovery

of electricity, however, was truly

revolutionary, and over the last

two centuries it has transformed

economies, enabling the use of new

types of machines. Recently,

economists have started to think

about these leaps. US economists

Timothy Bresnahan and Manuel

Trajtenberg call electricity a

“general purpose technology.”

A better drill helps builders;

electricity makes all firms more

productive. However, the positive

effects of such revolutionary

advances can take time to be felt.

Exploiting new technology

In the late 1980s US economist

Robert Solow (p.225) thought

that he had found a paradox: the

proliferation of information and

communication technology (ICT)

didn’t seem to have had an obvious

impact on productivity. During the

Industrial Revolution the spread of

steam power was surprisingly slow:

it took time for it to become cost-

effective and for firms to reorganize

in order to use it. ICT has taken

hold more quickly, but it has still

taken time to spread. Solow’s

paradox is resolved by the fact that

the full benefits of general purpose

technologies take time to arrive. ■

CONTEMPORARY ECONOMICS

LIKE STEAM,

COMPUTERS HAVE

REVOLUTIONIZED

ECONOMIES

TECHNOLOGICAL LEAPS

By the 1980s computers had

revolutionized the way that many of us

work. However, it can take years for

such fundamental changes to be

reflected in increased productivity.

IN CONTEXT

FOCUS
Growth and development

KEY THINKER
Robert Solow (1924 – )

BEFORE
1934 Joseph Schumpeter
stresses the vital role of
technological change in
economic growth.

1956 Robert Solow devises
the neoclassical growth
model in which technological
change plays a role but is
not explained.

1966 Jacob Schmookler
argues that technological
development responds to
economic incentives.

AFTER
2004 Nicholas Crafts
shows that general purpose
technologies take time to
diffuse through economies.

2005 Richard Lipsey argues
that technological revolutions
led to the rise of the West.