Economic Effects of Technological Innovations

This paper reports on research which is both historical and analytical. The historical aspect of this study comprehends the years 1899-1939 and reports on the behavior of costs, wages, output and related physical measures in 5 basic industries plus "all manufacturing." Generally speaking the ratios of labor and capital inputs to total output during this period do not show the kinds of "substitution effects" that might have been expected during the period covered. The data indicate that technological innovation and investment were, in fact, neutral in terms of labor-capital ratios which prevailed during this period. These are, of course, only long-run phenomena. Transient patterns generally produce changes in the physical ratios which, however, are subsequently offset in value terms. Furthermore only industry aggregates are examined. Evidently, then, any individual firm may find itself out of line with these ratios at any moment of time depending on its status as an innovator, follower, etc. Flow models are developed to interpret and explain these results. In these models the physical substitutions are depicted as being subsequently counterbalanced by market price reactions flowing from these (or other) investment decisions. These models are, of course, not restricted to the period under consideration and can therefore be used to guide analyses and investigations for subsequent periods. Thus, for instance, consider the investment decisions of management in the period under review--i.e., 1899-1939. These decisions were based on piecemeal analyses and rule-of-thumb guides. Is it the case that more sophisticated techniques--such as those which accompany operations research developments--will produce a difference in the observed ratios of labor to capital inputs in these (or other) industries? The models and the results presented in this study raise this question in a way that may prove helpful in a subsequent analysis designed to test the effects of operations research--or other factors--on the investment decisions now being undertaken. Alternatively, these models and results may provide helpful guidance in particular applications. Thus, for instance, if persistence is assumed for the phenomena we note, then issues of short- vs. long-run strategy become of major importance for possible consideration and incorporation in any operations research models used to guide investment decisions.