Posted on 11/30/2003, 10:46:54 PM by Lando Lincoln
There's nothing like a recession to generate new fallacies while resurrecting old ones. I while ago I came across one that hinged on the view that America had not only excess capacity because of "overinvestment" but had also developed a "technological overhang". The author seems to think that this "overhang" which consists of a whole range of new technologies was depressing the economy. If only investment was able to keep up with new technologies recession could always be averted, was the underlying refrain.
Let's ignore the obvious fact that the overhang approach contradicts the existence of excess capacity which many erroneously attribute to a aggregate overinvestment. In plain English, not only can't have both — in reality you can't have either. What the writer overlooked is that at any point in time, and I mean any point, there always exists a range of new techniques and inventions which are more productive then the currently employed ones. What should be asked is why these techniques are ‘neglected’.
The answer would be obvious to any businessman. In order to invest in these techniques and inventions businesses would have to scrap their present capital combinations in which a great deal has already been invested. Scrapping this investment in favour of new investments would impose losses on businesses.
The Bessemer process is a good example of what I mean. This revolutionary steel making process was invented in 1854 in Britain and within a short time massive investments were made in the process. However, in 1864 Frederick Siemens invented the open-hearth method which was superior to the Bessemer process. By about 1901 steel production from the Siemens method exceeded production from the Bessemer process.
So why did steel makers who had invested in the Bessemer process still stick with it after the Siemens method had long proved itself the superior technique? (I still remember a couple of my lecturers arguing that the Bessemer case was an example of the refusal of nineteenth century British businessmen to take risks.
How these businessmen were supposed to predict the advent of Siemens' invention is something these lecturers never revealed to us students). It’s very simple, really. The Siemens method wasn't superior enough to warrant the immediate scrapping of Bessemer investments. Those who lament this situation don't realise that businesses have to make decisions according to current and expected costs and revenues.
The rate of return from investing in the Siemens method would have had to exceed the return from the Bessemer process by such a margin that the difference between their costs of production per unit of steel times the yield would have had to be big enough to make expenditure on the open hearth method worthwhile.
Put it another way. Old investments will be scrapped when the superiority of the alternative investment is great enough to compensate for the expenditure it requires. The Siemens method did not fit this bill. This made it preferable to operate with the obsolete Bessemer process until it was time to replace it or until the alternative method fell far enough in price to justify investing in it. The same really holds for any investment. That's why firms don't immediately rush out to replace their computers with the latest version. (Just think of those firms who have complained about Microsoft's constant upgrades).
Of course, this doesn't answer the question: Why do potentially profitable new techniques and inventions go unexploited? Because the savings are not immediately there to take advantage of them. Investment involves opportunity costs. When you invest in one technique that is a sunk cost — gone but not always forgotten.
New inventions and techniques usually require a complex production structure. One only has to think of what goes into making computer chips to realise how complex and expensive these investments are. And this finally brings us to present conditions in the US.
The '90s monetary boom created masses of credit that were used as a substitute for real savings, making it appear that there were abundant savings to fund all the new technologies. There wasn't, something the recession quickly revealed. Unfortunately, it appears that some commentators became so accustomed to hyped up situation that they interpreted it as now being normal. Even though reality has since dawned some of them seem unable to adjust to the fact that a situation where new techniques and inventions go unexploited is not only the norm it is also a healthy state of affairs, so long as the situation has not been created by state interventionism.
When every so-called technological breakthrough and invention immediately attracts investment think of the South Sea Bubble. John Stuart Mill sadly remarked that those booms left many businessmen and eager investors “to repent at leisure.” And that was written 173 years ago.
Gerard Jackson is Brookes' economics editor
Lando
It still does my work and isn't needing those patches against those new "vulerabilities!" I'll up-grade the first time one of my key suppliers races ahead to one of the newer versions, forcing the issue, just like the last time!
I've done enough of being the pioneer that takes all the arrows!!!
Aw, cmon, where's your sense of adventure? Somebody has to be the first to adopt all of these shiny new technologies.
Gee whiz, you're just no fun any more....
Oh I'm lotsa fun! Let's just say I've matured a bit! Kinda like the old story about the young bull and the old bull, y'know. In this "Gelded Age," it's kinda surprising that I'm still any kind of a bull, however!!!
I see they've got a woman playin in the Skins Game today
This isn't "new technologies", this is planned obsolescence. My main gripe against Micro$oft is that they have gotten people used to the idea that it's OK for software to be unreliable.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.