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Technology, investment linked in growth of national wealth

STANFORD -- New technology doesn't replace jobs, it makes them, but only if nations invest enough capital to make effective use of it, two Stanford University economists say in a new book.

Michael Boskin, currently on leave to be chairman of the president's Council of Economic Advisers, and Lawrence Lau explore these ideas in a chapter titled "Capital, Technology and Economic Growth."It is in a book, Technology and the Wealth of Nations, which incorporates several years' research in the Technology and Economic Growth Program of Stanford's Center for Economic Policy Research.

With comparisons of five nations in the postwar period, the book challenges long-standing models of how technical progress contributes to a nation's economic growth. Specifically, Lau and Boskin found that new technology in the postwar period primarily has augmented the value of capital, not of labor, and that investment decisions can have an amplified effect on the economy.

"The results of our growth accounting exercise identify technical progress as the most important source of economic growth," they write.

Why, then, has the idea rich United States been stagnating while Japan, Germany and France have been getting richer? Lau and Boskin calculate that almost two-thirds of technical progress requires new physical investment to produce growth in a nation's economy.

"If you have more capital [investment], you get more economic benefit from technical progress," Lau said. Conversely, "it doesn't matter if all your scientists turn out good ideas if nobody is using them."

"If you talk to any industrialist, they would say that's obvious," he said. However, economists have always assumed technical progress primarily augmented the value of labor, or of labor and capital equally, he said.

New technology, it was assumed, accounted for some growth in gross domestic product. However, it was considered a fixed input, beyond a nation's control, that worked primarily by augmenting the value of labor - that is, new technology helped one worker produce what previously had taken 1.2 workers.

Lau and Boskin, however, analyzing input and output data for five nations, say they found that technology primarily augments the value of capital.

"Suppose you had an invention that allows you to type twice as fast, so the output increases as if the number of typists had doubled," Lau said. "We are saying, it actually looks more like the number of typing machines doubled," making it useful to employ more typists.

This is "terrible news," he says, for those economists and government policymakers who believed government policies on a wide range of subjects from interest rates to taxes did little to alter a nation's wealth trajectory.

"It means that there is no steady state [growth path] to economies, except in special circumstances," Lau said. If technical progress augments capital more than labor, then investment decisions can have an amplified effect on the economy.

"In the intermediate run - 5 to 25 years - changing the savings rate will make a significant difference" in national wealth, he said.

The net national savings rate for U.S. government, business and households was about 7 percent of the gross national product from 1950 to 1980 but dropped to 2 percent by the end of the 1980s, according to a study last year by Stanford economist John Shoven. Investment did not collapse but was accomplished by relying on foreign capital. Reversing the fall in the savings rate, Shoven argued, was essential to make real wages of American workers grow in the future.

One implication of Lau and Boskin's finding that technical progress saves capital rather than labor is that "structural unemployment in the aggregate economy is unlikely to be technologically induced," they write. "Instead, new technology makes a given quantity of capital go further as a complementary input to labor."

They also caution against interpreting their study to mean that investments in human capital - education and training - have gone to waste. An increase in the number of individuals who are computer literate, for example, may show up in their statistics as an increase in the number of computers, or capital.

"There are certain unsolved puzzles" with the new growth model, Lau said. "The rate at which technical progress augments capital across countries is different. We don't have a complete explanation yet, but all countries [studied] have had capital augmenting progress."

West Germany, France and Japan have capital augmentation rates of 11 to 13 percent annually, the researchers found, whereas the United States and United Kingdom had rates in the range of 6 to 8 percent.

Because technical progress primarily augments the value of capital, Lau said, it means that a national policy to encourage national economic competitiveness must stimulate both research and development of new technology, and capital investment in its use.

Technology and the Wealth of Nations, a new Stanford University Press book, is edited by Nathan Rosenberg, the Fairleigh S. Dickinson, Jr. Professor of Public Policy in the Stanford Department of Economics; Ralph Landau, consulting professor of economics and chemical engineering at Stanford; and David Mowery, associate professor of business at the University of California- Berkeley.



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