Last week we noted that, contrary to everyday usage, the economist's interpretation of technology is generic, in that it includes anything that allows real output to be increased without any change in the quantity of the other productive factors used. In other words technology is knowledge. The questions left unanswered for this week are: how is technology produced? Are there any special features to the market for technology?

Invention Factories

Experience shows that technology is 'discovered' in many ways. It could happen by chance or accident when, through sheer luck, someone discovers how something new might be created, or something already in existence might be more efficiently produced. It could also happen by trial and error, or sudden inspiration.

While all these are possible, two features have dominated the source of discovery of technology over time. One is that much technological progress has been continuous. That is, it has been produced from small incremental improvements, which, over time, add up to a vast improvement. The second is that in the age of globalisation, technical progress has now become heavily dependent on the amount of expenditure on research and development that is directed to it. Worldwide, most of this expenditure is provided by government and the large transnational firms (TNCs).

Patents

To make this profitable in a market economy, each innovation has to be granted protection. This is done by issuing a 'patent' for the discovery. A patent establishes that the particular technical change is original. For this the 'inventor' is guaranteed by law, exclusive rights to use the invention for a period of time. This period is 17 years in the USA. From this economists infer that, the output of technology may be measured by the number of patents obtained.

When any commodity is produced, e.g. rice, factors of production (land, labour, capital etc.) including technology are brought together as inputs to produce the commodity. The same process applies to technology. To produce technology (patents), you require inputs, like for all other commodities, i.e. the factors of production, including technology. The simple, but effective answer to the first question therefore, is that, technology has a production function (input and output relation), which is the same as that for all other goods and services.

The Technology Market

There are two special and unique features of the technology market. To see this, consider again the example of rice. If people in Georgetown consume more from the present rice crop, then, other things being equal, less rice from the crop will be available for other parts of Guyana. This means that when consumers consume products like rice, they are in rivalry with each other. With technology it is different. If I invent a new method of processing rice, its use by one or a million companies would make no difference to the amount of technology. There is no rivalry in the consumption of technology. Economists call this feature, 'non-rivalry.'

The other unique feature of the technology market is that, the invention cannot prevent other people from using the new technology, unless the law protects him/her by preventing others from doing so. This is what a country's 'intellectual property laws' seek to do. This feature economists term as 'non-excludability.' Despite legal protection, however, the principle behind a new technology can be adapted/modified by others for other uses. In this way economists say that technology 'spills-over' from one activity to others.

The UNDP Technology Index

With this week's and last week's discussion of the economist's view of technology, we can see how difficult it has been for the UNDP to arrive at an easily understood, yet workable index of the level of technology arrived at in a country, for purposes of drawing worldwide comparisons. Let us explore how they have approached this. To begin with the technology index focuses on measuring the creation and diffusion of technology and the building up of the human skills base (human capital).

Four indicators are measured. The indicator for technology creation is measured by the number of patents a country's residents obtain, plus a country's receipt of royalties and licence fees for the use of its technology abroad. All are calculated on a per person basis. The indicator for the diffusion of new technology is measured by the number of Internet hosts and the share of high and medium technology exports in the total goods exports of a country, with both calculated on a per person basis. The indicator for the diffusion of old innovations is measured by the number of telephone lines and electricity consumption, per capita. Finally, the indicator for human skills is measured by the average years of schooling in the population aged 15 years and above, plus the gross enrolment ratio of science students at tertiary level educational institutions.

Goalposts

In order to rank countries based on these indicators the UNDP had to set up goalposts from which the country calculations are made. For this purpose they simply examined worldwide data and used the observed minimum and the observed maximum for each indicator. Thus for example, worldwide they observed the number patents granted to residents per million of the population and saw that this ranged from 0 to 994. The range 0-994 then became the goalpost against which countries performance is measured. Or, to take another example, the observed minimum of electricity consumption was 22 kilowatt hours per capita and the maximum 6,969. The range is therefore 22 to 6969, and this became the goalpost for purposes of measurement.