Unit 2 Technology and incentives

2.13 Summary

• Rapid improvements in technology and living standards began in Britain in the eighteenth century. Productivity grew faster than population, allowing an escape from the Malthusian trap into a period of increasing wages and continuously rising average material living standards.
• To help explain how and why this Industrial Revolution happened, we develop a model of how firms adopt new production technologies, to reduce costs and make higher profits.
• Economic decisions, such as the choice of technology, involve a comparison of costs and benefits that can be understood using the concepts of opportunity cost, economic cost, and economic rent, and the incentives provided by relative prices.
• Individuals, firms, and countries can all benefit from higher productivity if they specialize in producing goods in which they have a comparative advantage, and trade with each other.
• Gains from specialization were facilitated by the shift to production in firms, and the expansion of markets in Britain and its colonies.
• Economic models are simplified representations of complex economic processes. Our model shows how cheap coal and high wages gave British firm owners incentives to develop and apply new technologies that used less labour and more machines (powered by fossil fuels), in pursuit of innovation rents.
• Important factors in the expansion of manufacturing were access to coal, and raw materials including cotton and sugar (calories for the non-farm workforce) produced by enslaved workers in the British colonies of the Caribbean and North America. Therefore the first Industrial Revolution was a global phenomenon, supported by capitalism in Britain and Britain’s colonies and slavery in the rest of the world.
• Over the past two centuries, cheap coal, oil, and other carbon-based resources along with rising wages provided ongoing incentives to increase the use of energy and economize on labour. The resulting build-up of CO₂ and other greenhouse gases caused dangerous increases in global temperatures.
• To address the dual challenges of climate change and the elimination of global poverty, changes in the incentives to use fossil fuels along with other public policies are necessary.