Technical Change, Competition, and the Poor

By Prasch, Robert E. | Journal of Economic Issues, June 2003 | Go to article overview

Technical Change, Competition, and the Poor


Prasch, Robert E., Journal of Economic Issues


Economists today conventionally assume that new technologies necessarily improve the lives of those who are willing to pay money to purchase the products or processes that embody them. The conclusion follows from their premises--given "economic rationality" (defined as an informed and consistent focus on one's own self-interest) and a "free market"--new technologies by definition must improve the lives of those who pay money to adopt them. As to those who either refuse to buy or cannot afford these new technologies, it is presumed that they will remain at a position of satisfaction (degree of utility) equivalent to the status quo ante.

But can we imagine or articulate another perspective? What about new technologies that are expensive to purchase and set up yet are relatively cheap to use once they are acquired and numerous people are using them? Translated into the jargon of economics, I wish to consider the case of technologies that feature high fixed costs, low marginal costs, and substantial "network externalities." One possible result is that a new technology, a more expensive one, can become dominant while simultaneously becoming a necessity for others who may have preferred the status quo ante. In such situations one possible outcome is that a new and more expensive technology can replace older ways of doing things, ways that also featured lower fixed and possibly lower average costs. A possible result is that the median person may be better off after the adoption and diffusion of the new technology (whether he or she is in fact so is an issue that will not be addressed here), even as the cost of "subsistence" rises. In such a case poverty would be a more difficult condition to escape if, as I am supposing, access to the new technology in question is a condition for minimal economic and social participation in the larger society.

Consider the case of the credit card. Not much more than twenty years ago, one could book a plane ticket or hotel room or rent a car by providing a cash deposit. With the diffusion of the credit card, this approach is rarely an option today. In short, for most of us a credit card, considered as a consumer "technology," has become a de facto necessity. Even if one chooses not to borrow against it, it serves as a signifier of trustworthiness, and its widespread use makes its possession a necessity for anyone who wishes to participate in a wide variety of transactions, including transactions that could formerly be conducted without it. For people who have low and variable incomes, access to a credit card is both expensive and inconvenient. It follows that for the poor the introduction of the credit card has meant that accessing a substantial portion of the world of consumption is now more expensive.

Another example is the automobile. After most Americans adopted the automobile as their primary mode of transportation, a variety of other changes occurred. Among them, low-cost forms of transportation, such as railroads and trolleys, went into decline as the automobile became the nation's dominant mode of transportation. In America trains and trolleys are less fully networked, poorly supported, and less reliable than seventy-five years ago. Moreover, after car ownership became the norm, zoning increasingly separated commercial from residential lands such that access to a dependable automobile is increasingly an implicit or explicit condition of employment. Today a reliable personal vehicle has largely evolved from an option to a necessity.

I believe that the dynamics of technical change sketched above are more common than may be supposed. If I am correct, and I believe I am, there are important implications for our understanding of the level of income that constitutes a "minimum or "subsistence" in this country. In addition, such an understanding of technology provides a different perspective on a related issue--America's much commented upon "consumer culture. …

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