Growth Accounting with Technological Revolutions

G enerally, technological progress proceeds at a slow and measured pace, with only incremental improvements seen in existing products and technologies in the economy. At times, however, the pace accelerates, and the economy experiences a technological revolution during which radically new products and technologies are introduced. Recent discussions suggest that the world economy is currently experiencing just such a revolution, or paradigm shift, and that this revolution accounts for some of the observed decline and rebound of productivity growth. For example, David (1991) argues that the effect of information technologies on today’s economy is comparable to the effects of the introduction of the dynamo and the subsequent availability of electric power in the late-nineteenth and early-twentieth centuries. It is important to understand the effects of technological progress as reflected in productivity growth because productivity growth determines the economy’s long-run growth of output, consumption, and factor income such as wages. In this article I consider one particular parable of a paradigm shift. This story builds on three assumptions: first, that technological change is associated with the introduction of new goods, in particular that new technologies are embodied in new machines; second, that production units learn about the newly introduced technologies, that is, new technologies do not immediately attain their full productivity potential, but instead productivity increases gradually for some time; and third, that the experience which production units have with existing technologies affects their ability to adopt new technologies.1