Accessing the Potential of Technology

in Economicslast month

Hi Everyone,

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People have a mixed reaction to technology. Some people love it and marvel in all it can offer. Some people dread it and believe that it is destroying us. There is an element of truth to both trains of thought. Technology has changed our lives in many ways. Most of us would struggle to cope with the technology we had 100 years ago. However, I suspect most of us would also be able to eventually adapt and still achieve some quality of life.

I do not believe technology can be labelled as bad. The effect it has on us depends on how it is applied. It could be used to greatly improve food production and crop yields. It could be used to build lifesaving medical equipment. It could also be used to build dangerous weapons of mass destruction or invasive surveillance systems. The rewards and benefits of technology might be available to all who have contributed to its positive impact or the rewards could be hoarded by a few powerful people and organisations that control the technology. In this post, I want to discuss the areas technology has the potential to improve our lives as well as why this potential is often not fully reached.

The potential technology offers

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People are continuously finding new ways and new tools to improve their efficiency in reaching their desired outcomes as well as the quality of their desired outcome. In regards to the positive use of technology, we can categorise its applications into two broad areas. One area relates to production of goods and services and the other relates to developing or enhancing goods and services. Technology can enable us to do things faster and to a higher standard. In some cases, it can greatly reduce the need for human effort. We can achieve more using less effort and time. This enables us to spend more time doing the things we enjoy as well as provide us with more things to enjoy.

Technology and Efficiency

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Improved efficiency can reduce time spent to reach a particular output, reduce number of people required to reach a particular output, increase the overall output, reduce the quantity of input required to produce an output, or some combination of the above.

I believe the simplest way to explain the effect of improved efficiency through technology on output is relating it to the factors of productions. Arguably, there are four factors of factors of production. They are labour, capital, land, and entrepreneurship. All four are required to produce outputs. Technology is usually applied to improve efficiency across all four factors of production. However, it is usually introduced as improved capital investment. For example, a machine that speeds up the assembly of products. The machine improves the efficiency of labour as workers spend less time operating it to achieve the same output. The machine improves the efficiency of entrepreneurship as owners are able to get their products to the market for sale faster. The machine may reduce other costs relating to energy due to less operating hours and less input materials from less wastage.

The introduction of capital that has been enhanced by technology alone is rarely sufficient to improve efficiency. Workers need the required skills to operate the technologically enhanced capital. This could involve upgrading the skill of the existing workforce or replacing and/or adding workers to the workforce who have the necessary skills (read more about the impact of technology on employees in my posts Technology – Curse or blessing? and Less jobs vs less working hours – Further discussion about efficiency and technology). Entrepreneurs may need to learn how the new capital affects their business model prior to investing in it. The new capital may also affect resource usage (e.g. quantity and timing). More or less land might be needed. Other upgrades to infrastructure might be needed. Some operations might need relocating.


Relationships between Technology, Efficiency, Costs, and Output (Mathematical References)


The relationship between outputs and factors of production can be shown using a production function (e.g. Cobb-Douglas production function). See below for an example

Output = f(K,L,M) = α(LaKbMc)β

Where :
α = efficiency
β = adjustment for economies of scale
L = Labour
K = Capital
M = Land
a, b, and c = returns to factors of production labour, capital, and land respectively

The equation shows that efficiency affects output from all factors of production (entrepreneurship is required to organise the factors of production to optimise their usage; hence, not directly included in the equation). Each factor has a different extent of diminishing returns. Technology is likely to reduce the extent of diminishing returns to capital (i.e. ‘b’ increases). Hence, proportion of capital to labour can be expected to increase.

Technology can improve efficiency by reducing costs per unit of output. Costs for factors can be broadly expressed using the following cost function.

Costs = (w × L) + (I × K) + (r × M)

Where:
w = wages
i = Interest
r = Rent
Note: profits (payment to entrepreneurs) is not included as it is determined by the excess of revenue over costs

As technology improves less of each factor of production is required to produce the same output. Some of these cost savings will be reduced as factors of production costs per an hour may increase (e.g. wage increases).


Technology and Improved Outputs

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The other key benefit of technology is improved outputs and a wider range of outputs. Technology can enable existing products to do more and to do it better. A great example of this are computers and computer related products. Computers are continuously improving. They have greater capacity and speed to perform operations, hold data, and facilitate applications. Software is continuously improving. The upgraded computers (e.g. hardware) enables the development of more sophisticated software that can do more. The usage of computers have expanded. Sophisticated computers have become a big part of people’s homes in many different areas. They are built into mobile phones (i.e. smart phones), they are in game consoles, televisions (e.g. smart televisions), washing machines and dryers, refrigerators, lawn mowers, and many more items and appliances around the house.

Technology does not just improve existing products, it also creates new products that address our needs and wants in different and unique ways. Many of these new products and services are linked to the internet. We have online communication, online communities, online shopping, online media, online study and research, online gaming, online banking and finance, and many others. In relation to the workplace, the internet improves efficiency. In relation to everyday living, the internet offers convenience. The extent we rely on that convenience depends on us.

I believe the most significant technological breakthrough this century has been blockchain technology and cryptocurrency. Decentralised blockchains enable the secure storage of data without the need to rely on any organisations or institutions. It has facilitated the growth of alternative financial systems consisting of its own native money (cryptocurrency coins and tokens), money creation, payment systems, lending and borrowing facilities, decentralised contracts, self-funding mechanisms and more. The blockchain offers both privacy (e.g. individuals can remain anonymous) as well as transparency (all data stored on the blockchain can be observed publicly). The potential to build on a blockchain is almost limitless; existing examples include customised tokens, communities, applications (e.g. games, videos, photography, and social), governance models, and navigation tools. I elaborated on the potential uses of the blockchain in my post The Blockchain Economy.

Sharing the rewards from technology

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Technology has many potential benefits. We can broadly categorise the benefits into gains in efficiency and improved capability to produce improved and new goods and services. However, the existence of benefits does not necessary lead to their fair distribution. What determines the distribution of benefits and rewards from technology? Potentially, everyone can substantially benefit. We can broadly categorise people into five groups; they are:

  • Inventors
  • Investors (e.g. represented by firms)
  • Employees
  • Customers
  • Society

Inventors can benefit from the sale of their technology. Firms can benefit from higher profits. Employees can benefit from higher wages and reduced working hours. Customers can benefit from improved products and variety. Society can benefit from overall improved productivity (e.g. lower prices or more social initiatives). What are the extent of these benefits and how are they determined? They can be determined through market forces, they can be controlled directly, or they can be manipulated.

The easiest and most comprehensive way to explain how the benefits and rewards of technology can be distributed is through market forces. Once we can establish the possible outcomes, it is easier to understand how manipulation can take place (e.g. direct intervention or a strong nudge that cannot be easily reversed on its own).

Market forces consist of demand and supply. Demand is determined by how much buyers want and how much they are willing to pay for it. Supply is determined by how much sellers are willing to make and how much they are willing to receive for it. Buyers’ desire to own and pay for something depends on its perceived value (e.g. utility or production) of it. Sellers’ desire and ability to produce something depends on production capacity and costs. The benefit (e.g. consumer surplus) to buyers’ is the difference between the price they are willing to pay and the price they actually pay. The benefit (e.g. producer surplus) to sellers’ is the difference between the price they are willing to receive and the price they actually receive.

Competition

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The extent of the benefit from technology is mostly determined by competition. Strong competition exists when there are many competitors and none of them are able to consistently dominate the others. Competition is often determined by barriers to entry. Low or no barriers to entry enables new competitors to enter with ease. New competitors are most likely attracted by the potential benefits of successful competition. However, their entry reduces the benefits of the existing entrants. This is good for those choosing the winners (e.g. shopper with many products to choose from or firm with many customers to buy their products).

Competition on the demand side forces prices higher as only those willing to pay the most will receive. A higher price reduces the buyers benefit as the price they pay and the price they are willing to pay are closer. A higher price increases the sellers benefit as the price received exceeds the price they are willing to receive by a larger margin and the quantity they can sell is also likely to increase.

Likewise, competition on the supply side forces prices lower or forces a greater diversity of products as firms compete with each other. A lower price and product customisation reduces the benefit to sellers as price drops closer to what they are willing to receive. A lower price and product customisation increases the benefit to the buyers as the gap between what they pay and what they are willing to pay widens and they have an improved selection of what they want to buy.

Competition on both the demand and supply side is usually beneficial to both sides. Price is not pushed too strongly in either direction. There is sufficient demand to reward the better performing sellers. There is sufficient supply to offer plenty of variety to most buyers. Competition on both sides is likely to be sustainable in the long-run. Whereas, lack of competition on one side may cause higher rates of failure on the other side; thus reducing overall competition (selection of winners is in the hands of a few).

Applying competition to different groups of buyers and sellers

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We can divide our five groups (inventors, investors, employees, customers, and society) into buyers and sellers based on their interactions. Table 1 shows the likely interactions between these groups.

Table 1: Buyers and Sellers

BuyersSellers
Investors/FirmsInventors
Investors/FirmsEmployees
CustomersInvestors/Firms
SocietySociety/????

Firms are an integral part of most of these relationships. Therefore, the extent of competition between firms is a strong determinant of how all parties are rewarded from technological improvements. The two most significant relationships are between firms and their employees and firms and their customers. These relationships exist prior to and regardless of advances in technology. These relationships will strongly influence who benefits the most from new technology.

If there is strong competition between firms, this is good for their customers (i.e. buyers of goods and services) and good for employees (i.e. sellers of labour hours to produce outputs). When the firms acquire improved technology so will their competitors. This will push prices lower and/or improve the final product; beneficial to customers. Many firms with job opportunities relating to the new technology is good for new employees. Wages will be forced up as firms compete to acquire employees with the necessary skills. Higher wages for new employees is good for existing employees as firms may choose to retrain existing employees than hire highly paid new employees.

If there is minimal competition between firms, this is bad for their customers and bad for their employees. Only a few firms will acquire the new technology. Firms will likely use the technology to lower their costs, with minimal decrease in price and minimal increase in quantity. New products are likely to be designed for their benefits rather than customer needs (e.g. products with addictive properties or can monitor customers behaviour). Employees, new and existing, will benefit very little as they will have few employment options. Firms will be able to determine wages of new employees. Existing employees will be forced to retrain with minimal wage increase or lose their jobs as they can be easily replaced with new employees.

Inventors are motivated by both potential profit from their inventions and the accomplishment of inventing something new. However, their rewards are strongly linked to their buyers. If there are few buyers (i.e. few firms), inventors may profit very little from their inventions. They may even lose some autonomy in regards to what they invent as the firms may request particular technology improvements that may not align with what their customers want.

Benefits to society as a whole links to the production of more goods and services at lower prices. Lower prices can be seen as an advantage as people can buy more for less. However, in the long-run, lower prices (deflation) is bad. People tend to hold onto money as it is appreciating in value rather than using it to invest. This can be expected to reduce future growth and developments. Instead of accepting falling prices, money supply can be increased. Increased money supply reduces interest rates, hence encourages borrowing, investment and other spending. The increase in demand from more money circulating in the system prevents deflation. Additional money in the system can be used to fund more social projects that can benefit everyone.

What is the risk of the benefits of technology not reaching the people that contribute to its success?

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If free markets prevail, the benefits and rewards from technology are highly likely to be well distributed. Free markets encourage competition at all levels. Natural barriers to entry can exist for firms. However, these can mostly be overcome through cooperation between the smaller firms. Cooperation between smaller firms prevents larger firms from gaining prolonged substantial advantages. Size eventually works against larger firms as they are less able to be meet changing market conditions as well as respond to changes in technology (see my post Game Theory #6 - Triple Threat (Work-in-Progress) Idea for an explanation of the how small firms can compete with larger firms).

Unfortunately, free markets rarely exist. Governments intervene to protect their own interests and the interests of Big Business. This intervention strongly enables larger firms and prevents smaller firms from competing. Reasons and logic are explained in my posts A Few Thoughts on the Importance of Competition and Markets, Controlled Opposition and Divide and Conquer, Oligopoly – The market structure that does not let the market decide and Power, Money and Me Me Me. This lack of competition between firms is the main catalyst for benefits and rewards of technology being skewed towards just a small group of people and why improved technology could be perceived as bad.

Exploitation of Technology

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Technology has the potential to offer opportunities to all. However, these opportunities may not be realised. This could be because people do not know how to fully utilise technology for their benefit. This could be because the market is weighted in favour of particular groups so that they benefit more than others.

Not managing the benefits


Technology’s greatest appeal is the convenience it creates. It enables us to do things faster and with less effort. However, this may also cause overdependence on it.

Overdependence on technology can cause us to lose skills because they are less needed because it bypasses their usage. This is not a problem when technology is working well but when it fails, breaks or is no longer available, we are left unable to perform basic tasks. For example, software automates mathematically operations. The user does not need to know how to perform these operations when the software is working and available. However, when it is not working, the user may lack the skills to perform these operations manually.

Overdependence can cause physical and mental inactivity. We may let technology takeover all activities that requires effort. Our bodies become accustomed to being inactive and we lose the desire to be active even for activities that we formerly enjoyed. Inactivity is bad for both our physical and mental health. We are more likely to become overweight; thus, more likely to fall ill. Lack of mental activity restricts our mental capacity from expanding. It may even cause depression if we start to lack purpose in life or no longer able to enjoy the things we did when we were more active.

Technology for the benefit of the few


When firms stand to benefit the most from technology because of size and market share, they also gain control over the direction of technology and how it affects business in the long-run.

Continuous technological improvement reduces the need for quality products; they can fail within a short time because they would be replaced be newer products containing more advanced technology. This is great for firms because they are able to continue selling more of their products. This is bad for many customers because they are forced to buy new products when they would have been happier with the older product if it had been better quality. A similar practice is conducted for products that require support (e.g. software). When a new product becomes available, the firm stops supporting the previous products/versions of the products. This strongly pushes customers towards buying the new product.

As discussed in my post A Few Thoughts on the Importance of Competition and Markets, firms do not necessarily need to rely on market forces to earn revenue. They can have Governments as stable customers, they spend on behalf of large groups of people. They only need to please these few customers. Therefore, they only need to pursue the technology that fulfils these limited needs. Many of the needs of Government do not align with the needs of the people they are representing. Governments’ objectives typically revolve around maintaining or gaining more power and control (see my post, Power, Money and Me Me Me). Technology becomes directed towards surveillance systems, weapons, information control, behavioural influencing gadgets and substances, and restricting movements and actions of people.

Crime


Technology can be used to commit crimes and it can be vulnerable to attacks from criminals. Technology (e.g. internet and telecommunications) enables criminals to extend their reach to most countries in the world. This enables them to conduct widespread and elaborate scams, which have a higher chance of success. These criminals could be located in any country; thus, makes it more difficult for them to be caught. Technology often shifts processes from the physical to the virtual. Money is often transferred virtually instead of physically. Criminals no longer need to take money from a physical location. Information is also stored virtually. This becomes a target for criminals. They can hack into computers through links in emails and messages. This can lead to theft of information or viruses being placed on computers. They can hold people’s information for ransom or pass it on to other people for profit.

The potential for crime is not necessarily bad for firms. It creates a market for security and anti-virus software. It also provides firms with the excuse to update software or develop new software to resolve the current problems and weaknesses. This allows them to earn more revenue as well as sneak in some additional features that Governments might have requested.

My Views

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Technology has the potential to change the world for the better. It can increase efficiency and productivity of all factors of production. It enables these factors of production to benefit. For example, workers can earn higher wages from increased output as well as work less hours; this enables them to spend more time doing the activities they enjoy. Technology improves and increases the number of goods and services available to people. This enables people to more adequately meet their needs and wants. This could enable them to travel to more places, enjoy different and interesting entertainment, have a healthy lifestyle, enjoy a safer environment, and have more freedom.

The benefits of technology often are not distributed in a way that benefits all that have contributed to its effectiveness. This most likely relates to lack of competition between firms. The small number of large firms claim the benefits for themselves and provide the minimum to their employees and customers. Dominant firms play a significant role in determining the type of technological advancement. These advancements are likely geared to what benefits them or some of their more powerful customers such as Governments or other large firms. Governments benefit more from close relationships with a few large firms than needing to deal with many small firms. Therefore, Government policy normally favours large firms. This is normally done discreetly and under other pretences.


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Technology is a powerful thing. These are development, profit, growth and so on. This is the engine. The world is full of technology, which is great.

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I get excited about new technology. The potential is amazing. I'm also concerned about who is controlling the technology as well as its development. Anything that has the potential for good also appears to have potential for bad.

May it be better for good than for evil. There is already enough evil on the planet.


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