How Does Technology Affect Economics?

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Construction vehicles arriving at a work site.
Construction vehicles arriving at a work site. (Image: Justin Sullivan/Getty Images News/Getty Images)

Technological change is part of the economic process. The economist Joseph Schumpeter once described economic innovation as “the perennial gale of creative destruction,” Competition and the drive to find better, more efficient ways to produce goods and provide services leads businesses to take advantage of every new technology. Technological innovation comes with a price, however, destroying some jobs while creating others.

Technology in History

The impact of technology has been felt for centuries. The woolen mills of the early Industrial Revolution put cottage industries operating hand looms out of business. The internal combustion engine left many harness makers and blacksmiths jobless. And the more contemporary technological revolution has displaced secretaries, postal workers and telephone operators. Technological innovation makes it possible to do more with less. Facebook bought Instagram in 2012 for $1 billion. Instagram had 30 million customers and just 11 employees. By contrast, Kodak, which had just filed for bankruptcy, had 145,000 employees at the height of its operations. Displaced workers are usually first to feel the impact of innovation, with the middle and under classes bearing the brunt of unemployment.

Technology and Economic Growth

According to classical economic theory, the accumulation of physical capital – tools, trucks, bulldozers and assembly lines, for example – is responsible for increasing human productivity. You can drive a nail with a rock, a hammer or a nail gun, but you will be most productive with the latter. But capital goods do not account for all economic growth. Technology plays a significant role in fueling economic growth. The impact of technology can be seen in advances in manufacturing where robots perform precision operations and in hospitals where robots are used to make medical procedures less invasive. Advances in technology are improving batteries to create better performance in everything from hand-held devices to electric automobiles. Predicting the advances made possible by technology is challenging, but they will continue unabated.

The Downside of Technological Change

A negative aspect of technological change is its impact on income distribution. Workers who are displaced by technological advances may find it difficult to become re-employed as new jobs require advanced skills they do not possess. Technology impacts the number of jobs needed to produce goods and services. At the turn of the 20th century, a third of American workers were employed in agriculture. Asof publication, only 2 percent of the labor force works on the farm, producing more than their predecessors. A report from Oxford University states that 47 percent of all jobs may be automated in the coming decades. Middle-class jobs will be lost, and the gap between the haves and the have-nots will widen.

Prospering with Technological Change

The rate of technological change makes it necessary to take a fresh look at education. While the technological revolution opens opportunities for better jobs, workers must be retrained and re-educated to take advantage of them. Education must be less by rote and more focused on creative thinking. The Internet has made online learning an alternative to traditional classroom instruction, and many academic institutions are turning to blended learning – a mix of classroom and online. Online opportunities such as Khan Academy or the colleges that post their academic courses for anyone to audit for non-credit are examples of the technological wave that can give workers the knowledge to gain higher-paying jobs.

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