4.8 Conclusion: How good is the model?
In this chapter, we constructed models of how firms choose among a set of possible technologies, of the benefits of technological progress, and of the benefits of specialization.
However, as we explained in Chapter 1, models are not complete pictures of reality. After building these models, we want to step back and ask whether they get anything wrong or leave out anything important. In this closing section, we focus on some possible downsides to specialization and technological progress.
What is left out in decisions about technology?
- principle of individual and societal interests
- Individuals doing the best they can often does not lead to the best outcomes for all people or for the environment.
The drive for innovation rents and increased profits promotes technological progress. However, it can also lead to serious harm. Because firms need to focus narrowly on reducing costs, they have little incentive to consider costs that they do not have to pay themselves. As a result, firms may ignore the environmental consequences of their actions, illustrating the principle of individual and societal interests.
Consider the Bunker Hill Company, which chose a technology that polluted the air and harmed the health of the local population because those outcomes had no financial implications for the company. The firm had no incentive to change its technology to something less polluting, because that technology would push its costs up.
Workers on an automated production line with packaging and cutting of meat in a modern chicken processing factory. Meat processing factories often value speed and productivity over the safety of their workers.
- rules of the game principle
- The rules of the game affect how the players play the game, the size of the gains from cooperation available to the players, and how the gains are divided among the players.
- rules of the game principle
- The rules of the game affect how the players play the game, the size of the gains from cooperation available to the players, and how the gains are divided among the players.
The increased use of artificial intelligence tools by both firms and individuals is a good example of how market competition can lead firms to adopt technologies that impose other costs on people and the environment. As this article from the MIT Technology Review details, these tools come with a real cost to the environment.
This example helps explain why market competition can lead firms to adopt technologies that may impose costs on other people, animals, and/or the environment. However, as we know from the rules of the game principle, these incentives can change if the institutions are changed.
Is specialization always a good thing?
One such drawback was noted by the philosopher and economist Adam Smith in his 1776 book, The Wealth of Nations: “The man whose whole life is spent in performing a few simple operations, has no occasion to exert his understanding or to exercise his invention. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.”
Despite the many advantages of specialization described in Section 4.6, specialization has some important downsides and limitations.
Specifically, specialization can pose risks to some households. Many poorer households, especially those in low- or middle-income countries, prefer to remain diversified rather than specialized in their work. Such households find it too risky to start a business or engage in just a single line of work, because any substantial loss in income would severely limit their ability to feed, house, and clothe themselves and their families.
Indian woman cooking dosas for people on the street in Andhra Pradesh, India.
For example, many poor Indian households diversify rather than specialize. A survey by Nirmala Banerjee in West Bengal, India, showed that the average family had three people who worked, sharing seven occupations among them. Often, the women sell dosas (a rice and bean breakfast food) in the morning. During the day, they make small amounts of money collecting trash; gather firewood to sell; and work as short-term laborers and/or sell fruit, vegetables, and clothing (mostly saris). Similar patterns of diverse occupations occur in Côte d’Ivoire, Guatemala, Indonesia, Pakistan, Nicaragua, Panama, and Mexico.
For a family with limited or no wealth and exposure to income uncertainty in any single pursuit, reducing risk becomes an important priority. As a result, diversification may be the best they can do, and it may mean foregoing some of the apparent advantages of specialization.
Another illustration of the principle of individual and societal interests is how specialization does not guarantee that everyone specializing will benefit from increased productivity. In US history, for example, the enslaved population of the South prior to the Civil War certainly did not benefit from the specialization in which they were violently forced to engage. In this example of the rules of the game principle, how the benefits of specialization are divided among the population depends on institutions.
Getting the good without the bad
In Chapters 3 and 4, we’ve seen how the technological progress associated with capitalism has produced both tremendous increases in the average standard of living as well as much harm to the environment, and to people who were denied access to those benefits. Can we organize society to enjoy the benefits of capitalism while minimizing the harms? That is the question we will turn to in the next two chapters.
Skill and learning objectives
- Reading and interpreting an empirical graph (and its terms)
- Reading analytical graphs and tables
- Using analytical graphs and tables
- Defining terms
- Translating a story into an abstract model
- Reading comprehension (difficult material)
Concepts to be learned
- Technology as a process
- Firms doing the best they can
- Innovation rents
- Relative prices
- Gains from specialization
- Technological progress
- Using models to understand concrete examples
Seeing the Principles in Action
| Principle | Example | Everyday Economics |
|---|---|---|
| Interdependence principle | Families today rarely produce all of the goods and services that they use or consume. Everyone depends on goods and services sold by firms and on the work of others. | Are there any goods or services you produce on your own or in your household? What firms, workers, or members of your household do you depend on to get by in your day-to-day life? |
| Doing the best you can principle | Firms do the best they can by choosing technologies that allow them to produce outputs at the lowest possible cost. | Find some examples of firms that have adopted or developed a new technology to lower their costs. Did doing so earn them innovation rents? (If you’re not sure, engage with an AI chatbot to brainstorm some ideas.) |
| Rules of the game principle | A change in the rules of the game can make certain technologies costly or illegal, such as the Clean Air Act that made certain polluting technologies unavailable to firms. | What other laws or regulations have been implemented that change the technological options available to firms? Are there laws or regulations you think should be passed that would affect the technologies firms can use? |
| Trade-offs and opportunity costs principle | Abed and Britta compare their opportunity costs for each of their two tasks—making slides and writing—to determine who has a comparative advantage in each task. | When dividing up household chores with family members or roommates, how did you decide who did what? In which chores did you have a comparative advantage? Was there a person who had an absolute advantage? |
| Principle of gains from cooperation and conflict of interest | Although there are gains from cooperation when different parts of the world specialize in different goods and services, people have conflicts of interest over how to divide the gains. | Have you worked on a group project in school where there was conflict over how the grade was assigned to individual group members? How was that conflict resolved? |
| Principle of individual and societal interests | The owners of a firm doing the best they can may feel compelled by market competition to choose a technology that goes against the interests of society by harming workers or the environment. The owners don’t pay the costs and members of society bear them instead. | Find some examples of technologies that firms adopt that may harm their workers or the environment. Have you ever worked at a job with such a technology? Were other safer or less harmful technologies available? Why do you think the owners of the firm or the managers chose to adopt them? Who bore the costs? |
References
Allen, Robert C. 2009. The British Industrial Revolution in Global Perspective. Cambridge University Press.
Allen, Robert C. 2009. “The Industrial Revolution in Miniature: The Spinning Jenny in Britain, France, and India.” The Journal of Economic History 69(4): pp. 901–927.
Allen, Robert C. 2011. Global Economic History: A Very Short Introduction. Oxford University Press.
Allen, Robert C. 2020. “Spinning Their Wheels: A Reply to Jane Humphries and Benjamin Schneider.” The Economic History Review 73(4): pp. 1128–1136.
Anderson, J. L. 2008. Industrializing the Corn Belt: Agriculture, Technology, and Environment, 1945–1972. Northern Illinois University Press.
Banerjee, Nirmala. 2006. A Survey of Occupations and Livelihoods of Households in West Bengal. Mimeo Sachetana.
Berg, Maxine, and Pat Hudson. 2023. Slavery, Capitalism, and the Industrial Revolution. John Wiley & Sons.
Bessen, James. 2015. Learning by Doing: The Real Connection Between Innovation, Wages, and Wealth. Yale University Press.
Gordon, Robert. 2017. The Rise and Fall of American Growth: The US Standard of Living Since the Civil War. Princeton University Press.
Hobson, John M. 2020. Multicultural Origins of the Global Economy: Beyond the Western-Centric Frontier. Cambridge University Press.
Ibn Khaldun, Franz Rosenthal, N. J. Dawood, and Bruce Lawrence. 2015. The Muqaddimah: An Introduction to History. Princeton University Press.
Inikori, Joseph E. 2002. Africans and the Industrial Revolution in England. Cambridge University Press.
Lafond, François, Diana Greenwald, and J. Doyne Farmer. 2022. ”Can Stimulating Demand Drive Costs Down? World War II as a Natural Experiment.” The Journal of Economic History 82(3): pp. 727–764.
Manuelli, Rodolfo E., and Ananth Seshadri. 2014. “Frictionless Technology Diffusion: The Case of Tractors.” American Economic Review 104(4): pp. 1368–1391.
Pomeranz, Kenneth L. 2000. The Great Divergence: Europe, China, and the Making of the Modern World Economy. Princeton University Press.
Riello, Giorgio. 2013. Cotton: The Fabric That Made the Modern World. Cambridge University Press.
Ritchie Hannah, Pablo Rosado, and Max Roser. 2023. “Data Page: Solar photovoltaic module price” in “Energy.” Data adapted from IRENA, Nemet, and Farmer and Lafond.
Smith, Adam. (1776) 2003. An Inquiry into the Nature and Causes of the Wealth of Nations. Random House.
Williams, Eric. 2021. Capitalism and Slavery. UNC Press Books.
Wrigley, Tony. 2010. Energy and the English Industrial Revolution. Cambridge University Press.
