Resistance to New Technology and Trade between Areas
Holmes, Thomas J., Schmitz, James A., Jr., Federal Reserve Bank of Minneapolis Quarterly Review
The theme of this article is that competition, here modeled as the movement of goods between two areas, reduces resistance to new technology and, hence, leads to increased technology adoption and wealth. The article develops a model in which the extension of markets leads to reductions in activities that block new technologies.
Why build a model that has a new role for competition in creating wealth? As an empirical matter, the introduction of markets brings tremendous increases in wealth. (See, for example, Rosenberg and Birdzell 1986.) This has been observed over and over and is again being witnessed, for example, in Southeast China. However, there is still plenty of uncertainty among economists as to why competition, or the extension of markets, has been so successful in creating wealth. Two mechanisms are clearly at work: the extension of markets leads to increases in specialization and facilitates comparative advantage. But it is not clear that these mechanisms alone account for the tremendous success of markets. Other mechanisms may be as, or even more, important.
Why introduce the particular mechanism we explore - that an extension of markets leads to reductions in resistance to new technology? Our motivation here is also primarily empirical, that is, based on observation. We noticed a large number of industries in which the extent of the market for the industry's good explained, in large part, the degree to which new ways of producing the good were resisted. Below, we present a few brief industry case studies - for the construction, automobile, and dairy industries - that make this point. The U.S. construction industry is one in which, because of the nontransportable nature of the good, the extent of the market is narrow. Given this, we are not surprised by the significant resistance to new production techniques that is found in this industry. Though the auto industry is one in which the good can be moved across areas, the industry in the United States has been relatively more open to competition than has the European car industry. In our view (and in the view of industry observers), the more rapid adoption of Japanese lean production methods in the United States is due to greater resistance to these methods in Europe that resulted from the European car market being relatively more closed to competition - that is, to Japanese cars. The final example we discuss below is one in which resistance to a new technology in the U.S. dairy industry - namely, the use of a growth hormone genetically engineered to increase the milk production of cows - failed because the extent of the market was too great.
The model we develop is a simple general equilibrium model that determines the extent of resistance to new technology at each of a number of (usually two) locations or areas. We ask how the extent of resistance depends on the extent of markets. By extent of markets, we simply mean whether or not goods can move between the two areas.
In the model, the sources of resistance to new technology are groups of individuals who stand to lose rents if a new technology is introduced. In the real world, these rents take a number of forms: for example, returns to skills in a technology that is less efficient than the new one or returns to a privileged position granted, say, by the government. In the model, we take the rents to be returns to skills in a less efficient technology. Hence, we use the term skilled groups to refer to the people who stand to lose rents if the new technology is adopted. We assume that the skilled groups can use a regulatory/political process to attempt to block the new technology. To keep matters as simple as possible, that process is largely kept in the background in this article. We assume the process is such that the skilled groups have the means, at certain resource costs, of constructing barriers to the efficient technology.
We first study a single area, area A, showing that under some conditions skilled groups erect barriers to new technology. …