Tuesday, February 19, 2008

Still More on Wealth, Markets and Technological Diversity

I seem to be embarked on a series of posting, as I think through an issue on technological indexes. I began with a posting on the World Bank's report titled Global Economic Prospects 2008: Technology Diffusion in the Developing World. I continued with "A Thought About Wealth and Technological Diversity". This is the third in the series.

Think about the Industrial Revolution. It was the epoch of mass markets. Large numbers of people were able to emerge from subsistence levels to satisfy the next emerging felt needs (here I refer to Maslow's needs hierarchy). Mass production involved mechanization to realize economies of scale, through the American System of manufacturing extending to Ford's auto production lines. Steam engines powered the factories as well as the railroads and steamships that distributed the manufactured goods through their mass markets. The telegraph helped to schedule the system, as did the emergence of large, hierarchical organizations. The printing press lead to the development of catalogs and print media funded by the advertisers selling into mass markets.

In thinking about the Information Revolution, i am guided by books such as The Long Tail: Why the Future of Business is Selling Less of More by Chris Anderson and Microtrends: The Small Forces Behind Tomorrow's Big Changes by Mark Penn. The post-industrial societies are populated by people who have largely satisfied their basic needs, and are more motivated by needs for self actualization. The technology allows targetting smaller and smaller segments of the market, and manufacturing more diversified products. The Internet and point to point communication replaces mass media, and transportation systems allow much more disaggregated distribution patterns.

I suggest that the Industrial Revolution took place in a time in which circumstances encouraged and rewarded innovations promoting mass markets, while the Information Revolution is taking place in a time in which circumstances encourage and reward more innovations promoting highly differentiated markets for some goods, while continuing to reward mass markets for other goods (commoditization of computer operating systems, commercial aircraft, commercial freighters, etc.), often those which require very large initial investments prior to production.

Think then about the size of markets. Assume it takes 50,000 units to justify a productive activity. That would be one person out of 1000 if the geographic market included 50 million people. It would require only one person out of 10,000 if the market included 500 million people. This would suggest that expanding markets, as has been done by the creation of multinational regional markets such as the European Common Market, can also encourage innovation in manufacturing, distribution, advertising, and business models.

Thus I would suggest that higher per capita income found in rich nations encourages more innovation to meet the increasingly diversified markets responding to increasing attention to self actualization needs, and that the expansion of markets across national boundaries also encourages more innovation. In this latter case, there is both the innovation involved in new mass production activities, such as would be involved in the creation of satellite communications systems and commercial airliners, but also in the creation of new products for niche markets and the processes for their manufacture, sales and distribution.

Since World War II, the poorest countries have remained very poor, while rich countries have continued to grow richer. Thus the range in per capita GDP has grown larger. Moreover, the European Common Market and the North American Free Trade Association have increased the market size for the richest nations. (Indeed, for some high income products markets have indeed become much more global.) If my argument above is correct, then the technology gap should have become much wider between the largely subsistence economies in the poorest nations and the post-industrial economies of the most affluent regions.

Think of a society's technology as a complex structure of interlocking units, which is pyramidal in form. The peak technologies in the modern world might be those which allow the planning of a manned voyage to mars, or the creation of a web of satellite communications and remote sensing devices, or perhaps the World Wide Web built over an infrastructure of a billion computers connected via a global fiber optic and satellite communications network.

While there may well be a more rapid transfer of technologies to developing countries at the base of these pyramids -- cell phones, improved seeds, new pharmaceutical products -- I don't see much transfer of the ability to travel to other planets or to build satellite networks to developing nations.

Moreover, new peak technological capabilities are being created in developed nations that can barely be recognized in developing nations. For example, models are being created to simulate the human body going down to a cellular level, using ganged networks of supercomputers.

I suspect that the technological gap between rich and poor nations is greater now than at any time in the past. In terms of the metaphor of the structure of a societies technologies, comparing the rich areas of the world versus the poorest, the rich have both a more complex and extensive structure and higher technological peaks.

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