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Technological Progress and its Expected Implications

By Mark Croughan and Trip Calihan

The relationship between technological progress and the ability to mass produce at a higher level is easily comprehended; the more automated a process is, the less manual labor is needed to fine-tune every product, and thus a machine based system will often be both cheaper over time and be able to produce without slowing down. However, a rather overlooked byproduct of the mechanization of the American economy is the effect it has not on mass-produced goods, but services that cannot be mechanized. American Economist William Baumol has addressed this as part of his theory of "Cost Disease" and is quoted as saying, "in a world of rapid technological progress, we should expect the cost of manufactured goods — cars, smartphones, T-shirts, bananas, and so forth — to fall, while the cost of labor-intensive services — schooling, health care, child care, haircuts, fitness coaching, legal services, and so forth — to rise." And although the theory was proposed years ago, Baumol's words hold true. Goods as a whole have declined, whereas services such as health care and education have risen (relative to the inflation rate.) We can observe these phenomena below:

In accordance with Baumol's accurate hypothesis, we can see how American government spending has become far more focused on service spending as a whole. While conservative mindsets potentially view this as a tragic misuse of government dollars, Baumol suggests that there was no avoiding this. He claims, "It was simply inevitable that these services would get more expensive over time...the rising cost of services is an unavoidable side effect of rising affluence generally." This holistic rise of affluence is again, another byproduct of American mechanization and technological advance. As we become further and further ingrained to a mechanical system, we learn to work better around it and force the system to produce as much as it possibly can for the economy. Bottom line, this growing capability to mechanize the production of goods has completely reshaped the proportion of dollars going towards goods versus services.

Cited:

  • http://econospeak.blogspot.com/2018/02/baumol-cost-disease-and-relative-prices.html
  • https://fred.stlouisfed.org/series/SUUR0000SAS
  • https://fred.stlouisfed.org/series/SUUR0000SAD

15 thoughts on “Technological Progress and its Expected Implications

  1. bernsteinl20

    Are there any greater short or long run implications of this? Does this reshaping of spending have any long term effects that companies and the government should be concerned with? It seems as though this is just a reallocation of funds, and that the GDP wouldn't change much. The graphs used are very interesting, especially when contrasted with each other.

    1. bullr20

      A service economy usually requires a higher investment in human capital. The labor force will need to receive higher levels of training/education and will also require higher wages than they would working in a factory. It will be interesting to see what happens to CPI when services can be mechanized...

  2. dodsonm20

    I wonder how the two graphs for the U.S. compare to graphs for other countries. Especially nations that have more government funded service programs. Not arguing one method of government intervention is better than other, just curios to see the effect it has on the two graphs and whether a possible solution to the issue might be reached through analyzing this.

    1. mannm20

      I think Matt raises an interesting point about what these graphs might look like for other countries. I would be curious to see how graphs for first world countries compare to that of third world countries. With this being said, I think the costs of services will continue to rise until there is some sort of intervention because at this rate it does not appear that technological progress and in turn the decreasing costs of goods will slow.

  3. bullr20

    As the economy becomes more and more mechanized, human capital increases in importance. Agricultural and industrial work is easily mechanized, while jobs which require specific knowledge (or specialized ability in human interaction) cannot be as easily replaced. Mechanization therefore enables the growth of the knowledge economy, an economy which requires extensive investment in human capital (aka government spending on education, health care, welfare).

    So, mechanization leads to cheaper goods but more expensive services, and simultaneously increases the importance/value of those services as the economy becomes more oriented around human capital... Sounds like a pickle. I hope our governments are capable of addressing it!

    1. minsong20

      As we crave efficiency, we will cut down on the jobs that require human involvement. Already, accounting services and basic legal services can be found online or in other cheap ways. This process will demand that we re-evaluate what a specialized ability is.

  4. scottm20

    It is interesting to observe the two graphs in relation to your “bottom line” sentence. Other than the mechanization of the American economy, what other externalities could factor into the inverse relationship between mass-produced goods and services? If the main economic driver responsible for the graphical trends is the ability to mechanize production of domestic goods, as suggested, questions and concerns can be raised about long term outlook. As the cost to produce goods continues to decline and margins become more favorable for the consumer, disposable income increases which allows for more spending in other areas such as services. While this logic supports the graphical trends, the relationship between the two remains quite compelling. What this means for the future, and how we spend our money, remains relatively unknown.

  5. dugganj20

    Economic productivity is based on human capital, physical capital, and technological progress. Of these three factors, technology tends to create the most progress. I think it is very interesting that due to an increase in mechanization and technology, the cost of goods has decreased thus causing the cost of services to increase. It also makes a lot of sense, because machines cannot provide everything, thus services solely provided by human hands will become much more specialized, expensive, and valued. I think we will only continue to see this trend rise.

  6. the prof

    For a careful analysis we need to factor in price and income elasticities of demand. Do we consume more cars as incomes rise? The US has been at about 2 per household for a long time, suggesting that higher incomes may lead us to drive fancier cars but not to own more cars. Ditto price changes. We certainly have more clothing, but we don't necessarily spend more – price inelastic demand: prices fall 10% but we only spend 5% more so total expenditures fall 5%.

    We can see this in agriculture: farm productivity is far higher, and farm incomes have held their own. But we have fewer farmers and spend less on food.

    So ... more people work in services, but we spend proportionately more money. Prices must rise.

    Baumol though started at the opposite end: if labor markets are competitive, then wages will be approximately equal in agriculture and manufacturing and services. If productivity rises for the economy as a whole, so will wages. But if we still need one barber for 15 minutes to cut hair, their pay per hour has to rise to maintain wage parity. So this is the "cost disease" of services. It's a big factor in education. Now State U can offset that a little bit by having large classes and grad student slave labor as teachers. But not much – they were already doing both 50 years ago.

  7. ingramk20

    I found an interesting article that discusses how the cost disease is an inadequate explanation for the astronomical increase in the cost of certain services like higher education. One study found that Baumol's cost disease only accounts for 16% "of the total increase in spending at public research universities from 1987 to 2008." Here's the link:https://www.forbes.com/sites/prestoncooper2/2017/05/10/the-exaggerated-role-of-cost-disease-in-soaring-college-tuition/#6beac1b42b4e

    Basically, the "cost-disease" explanation for rising higher ed ignores that the cost of instruction (paying for teaching faculty) accounts for less than half of universities' spending. On the other hand, as we've been hearing a lot recently, most of the increases in the cost of higher ed come from greater money spent on improving amenities to attract competitive applicants.

  8. riversc20

    Its so interesting to learn there was a theory behind this; it has been evident through aspects of the economy like the rise of health care costs that the prices of certain services were rising, while the prices of manufactured goods are falling. This is concerning to think that service prices are rising; while there are many necessary goods, like food, toiletries, etc, whose prices are falling, the prices for necessities such as medical care, child care and schooling are beginning to rise to prices out of reach for many. The elasticity of demand Professor Smitka mentions is very important too, as things like medical acre we are willing to pay more for due to how badly we need it. As you said, this theory makes it clear as to why more and mor government spending is going towards health care and other services for US citizens.

  9. prochniaka20

    I think it also important to consider the impact on unemployment. As process become more mechanic, there is a large negative impact on the job opportunities for people in the newly technology driven industries.

  10. Mariam Samuel

    Technology's effect on the price level is very interesting. On paper, it seems ideal because prices decrease while GDP increases. However, in reality this can only go so far before 1) the technological advances decrease in effect until they eventually plateau and 2) those producing the technology find a way to make money off of it, considering a capitalist economy. In this way, it is sort of tricky, but of course given an opportunity for technological advancement, our society should always accept that. Another factor to be considered with technology within manufacturing, is the impact of technology on jobs. We saw it in the iron belt, but I feel like we have yet to maximize our technological potential, especially with the rise of self- driven cars.

  11. montjoyr20

    It will be interesting to see how developing computer technology in the service sector will impact the cost of services in the future. For example, 'machine learning' computer technology has allowed developers to create applications which can help with asset portfolio management, fraud detection, and trading based on algorithms ( https://www.techemergence.com/machine-learning-in-finance/ ). Will the widespread availability of financial analysis AI in the future change the market price for the services of investment bankers, wealth managers, and other financial advisors. If these technologies remove the time consuming analysis portions of this kind of work, why should the prices on these services be so high in the future, especially if consumers have access to this technology on their own.

  12. skinnerf20

    Do labor intensive service jobs include those whose profession it is to manage/repair the automation in manufacturing? If so, I wonder how these professionals pay has increased- whether it is proportional to the other increases seen in service labor- or if, due to their newfound importance, they have seen a larger spike.

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