Technology The Engine of Sustained Growth

Technology: The Engine of Sustained Growth

Right, let's talk about something that's literally shaping your future - and I don't just mean your TikTok algorithm. We're diving into technology and economic growth, and trust me, this is way more interesting than it sounds. Think of it as the economics behind why your gran's Nokia 3310 could survive a nuclear blast, but your iPhone can basically run NASA.

The Growth Problem (It's Not What You Think)

You're playing a video game where you start with one worker, one tool, and one plot of land. Easy enough - you produce, let's say, 100 units of whatever. Now, you add another worker. Logic says you should get another 100 units, right? Wrong. Welcome to the world of diminishing returns, where economics gets as cruel as a Netflix algorithm that keeps recommending shows you've already watched.

This is the fundamental problem economists like Robert Solow were wrestling with. Countries can't just keep throwing more people and machines at production and expect exponential growth forever. It's like trying to make a cup of tea stronger by adding more and more tea bags - at some point, you're just wasting tea bags and creating a bitter mess.

But here's where it gets interesting: some countries seem to have cracked the code. They keep growing, generation after generation. How? The answer isn't more workers or more factories - it's better ideas.

What Is Technology? (It's Not Just Gadgets)

When economists talk about technology, they're not just chatting about the latest iPhone or whether your gaming setup can run Cyberpunk 2077 without melting. They mean something much broader: ideas and knowledge that help people produce more output from the same inputs.

Think of it like cooking. You could have the same ingredients, the same kitchen, the same amount of time - but if you know Gordon Ramsay's techniques versus just winging it, you're going to produce vastly different results (and hopefully with less shouting).

Technology is the recipe, not the kitchen. It's knowing how to build a faster computer, not the computer itself.

The Magic of Ideas: Why Technology is Different from Everything Else

Ideas have two superpowers that make them completely different from regular stuff:

1. Non-Rival Nature (The Ultimate Share Button)

Remember when your parents said "sharing is caring"? Well, ideas took that to heart. Unlike physical things, ideas don't get used up when someone uses them. If I teach you how to make the perfect cup of tea, I don't lose that knowledge - we both have it now.

China's progress in AI is facilitated by a robust ecosystem that integrates infrastructure, data, talent, and innovation, and one reason for this is that AI algorithms and techniques can be shared and built upon without depleting the original innovation.

It's like having a Netflix password that never expires and can be used by infinite people simultaneously (don't tell Netflix I said that).

2. Non-Excludable Nature (The Piracy Problem)

Ideas naturally want to be free - like water flowing downhill or your dog gravitating toward the most expensive shoes in the house. The only way to stop people from using an idea is through legal frameworks like patents, copyrights, and trademarks.

This is why Moderna couldn't just let any pharmaceutical company reverse-engineer their COVID-19 vaccine and start selling it. Without intellectual property rights, companies wouldn't invest billions in research because any competitor could just copy their work immediately.

The Farmer's Dilemma: Why Ideas Change Everything

Let's get back to our farming example. You've got one farmer, one tractor, and one plot of land producing five tonnes of crops. Add a second tractor, and you might get six tonnes - not ten, because the farmer can only use one tractor at a time, and the land can only handle so much.

But now add technology - the idea of which crops grow best in that soil type. Suddenly, that same farmer with the same tractor and land might produce seven tonnes. Add another idea - the optimal watering schedule - and maybe you're up to nine tonnes.

Two farmers can use both ideas simultaneously without interfering with each other. The ideas might even work better together, creating a synergy that economists absolutely love to talk about at dinner parties.

Measuring the Unmeasurable: The Solow Residual

So how do you measure something as abstract as "ideas"? Robert Solow came up with a brilliantly simple approach that's basically economic detective work:

1. Figure out how much your inputs (labour, capital, etc.) grew

2. Calculate how much output should have grown based on those inputs

3. Compare that to how much output actually grew

4. The difference? That's technology doing its magic

This difference is called Total Factor Productivity (TFP) growth, or more casually, the Solow residual. It's essentially the economic equivalent of "well, we can't explain this growth any other way, so it must be better ideas."

The Cloud Computing Reality Check

Here's where things get even more interesting, and why measuring technological progress is harder than explaining why you are on TikTok to your parents. Take cloud computing - enterprise spending on software and IT services - particularly artificial intelligence, cloud computing, and cybersecurity technology - is expected to enable the most growth in the tech market over the coming year.

Imagine you're measuring a company's productivity and you notice they're buying fewer computers, hiring fewer IT staff, but somehow producing more. Your first thought? "Wow, amazing technological progress!"

But wait - they haven't actually reduced their computing power. They've just shifted from buying their own servers to renting Amazon Web Services. It's like thinking your friend has become incredibly organised when they've actually just hired a personal assistant.

Economist Daniel Sichel had to account for this in his research. Between 2009 and 2016, cloud data storage prices fell by 17% annually, and cloud computing prices dropped 7% yearly. Companies genuinely could do more with less spending - that's real technological progress, not just accounting tricks.

The China Story: When 8% Growth Meets Reality

Let's talk about the ultimate economic growth story: China. Between 1978 and 2003, China's per capita GDP grew at about 8% annually. Using the rule of 70 (where 70 divided by the growth rate tells you how long it takes to double), that means China's economy doubled every 8.5 years.

Over 25 years, it doubled three times, making 2003's per capita GDP eight times larger than in 1978. If that pace continued for another 75 years, by 2078, each Chinese person would theoretically have a per capita GDP of $2.5 million (in 2003 money). That would make every Chinese citizen richer than most current millionaires.

Sounds ridiculous, right? That's because it is.

Economists Barry Bosworth and Susan Collins did the detective work of China's 7.3% annual GDP per worker growth between 1978 and 2004:

• 3.2 percentage points came from more capital (machines, buildings, etc.)

• 0.3 percentage points came from better education

• 3.6 percentage points came from technological progress

Based on Solow's theory, China's sustainable long-term growth rate would be closer to 3.6% - still impressive, but not "everyone's a millionaire by 2078" impressive.

The Modern Tech Revolution: AI and Beyond

Fast-forward to today, and we're witnessing what might be the biggest technological revolution since the internet. In Deloitte's 16th annual Tech Trends report, AI is the common thread of nearly every trend. Moving forward, it will be part of the substructure of everything we do.

As of August 2024, the Cyberspace Administration of China has approved a list of more than 180 large language models (LLMs) for general use, illustrating the broad swath of Chinese tech companies fighting for domestic market share. This isn't just about chatbots - it's about fundamental changes in how we process information, make decisions, and solve problems.

Think about it: AI can now write code, diagnose diseases, trade stocks, and even help students with their IB Economics homework (though hopefully not during exams). Each of these applications represents technological progress in Solow's sense - producing more output from the same inputs.

The Energy Paradox: Progress Has a Price

But here's another story that would make Christopher Nolan proud: new technologies are also hiking energy demand. Electricity demand from the sector could reach 1,000 terawatt hours (TWh) in 2026, as compared to 460 TWh today.

This creates a fascinating economic puzzle. Technology is supposed to make us more efficient, but some of our most advanced technologies are energy-hungry beasts. It's like having a 90s Ford Mustang V8 engine model that can drive itself but drinks petrol like a formula one racer.

Why This Matters for Your Future

You might be thinking, "This is all very interesting, but what does it mean for me?" Well, here's the thing: you're living through one of the most significant technological revolutions in human history.

The careers you'll have, the problems you'll solve, and the world you'll inherit are all being shaped by technological progress happening right now. Understanding how technology drives economic growth isn't just related to IB Economics - it's understanding the forces that will determine your living standards, job prospects, and the world your kids will grow up in.

Countries that figure out how to foster technological innovation will thrive. Those that don't will be left behind, still trying to grow their economies by just adding more workers and machines - a strategy about as effective as trying to win a Formula 1 race with a horse and cart.

The Bottom Line

Technology isn't just about having the latest gadgets or the fastest internet. It's about ideas - better ways of doing things that create value from the same resources. It's why some countries can maintain economic growth for generations while others stagnate.

And here's the beautiful part: unlike natural resources or even human labour, ideas can be shared, built upon, and improved indefinitely. Every time someone figures out a better way to do something, they're not just helping themselves - they're potentially helping everyone.

So the next time you're scrolling through TikTok on your smartphone, remember: you're not just consuming content. You're participating in the greatest engine of sustained economic growth humanity has ever created. Just maybe don't put that in your next economics essay.

Key Takeaways:

• Sustained economic growth requires technological progress, not just more inputs

• Technology (ideas) has unique properties: non-rival and non-excludable

• The Solow residual measures technological progress as unexplained growth

• Real-world measurement is complex and requires careful analysis

• Current AI revolution represents significant technological progress

• Understanding technology's role in growth is crucial for future economic success

Think About This: If ideas are non-rival and can be shared infinitely, why don't all countries have the same level of technology? What barriers prevent the free flow of ideas, and how might these barriers be changing in our digital age?

Stay well