Capital expenditures vs. technological progress

Let's look at a classic example of technological progress. Say that Sam is a scribe. He spends his days hand copying books and manuscripts. It takes him an average of 1 day to copy a book. Then the printing press is invented. These new devices allow books to be issued at a rate of 10 per day. The output is the book. In this case, an improvement in the technology used to produce output (from quill pen to printing press) leads to an increase in the output quantity. The invention and implementation of the printing press thus qualifies as technological progress.

Let's now consider an example of capital expenditures. Say Sam now runs a printing press and puts out 10 books per day. Then Sam purchases 3 more printing presses, all of which he can operate simultaneously. Now Sam can use more of the same technology to increase his daily output to 40 books. Notice here that output increased, but the quantity--not the quality--of the capital created this increase. The new upsurge in output is due to an increase in capital expenditures, and not due to technological progress.

To claim that either increased capital expenditures or increased technological progress are superior is improper. Instead, each is required for sustained economic growth. Because technological progress is unpredictable--that is, it is present and very important at times and not at others--capital expenditures are able to increase productivity with current capital. When technological progress is ready to provide new capital for production, then the importance shifts. In this way, the forces of capital expenditures and technological progress work hand in hand to increase productivity.

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