Does Technical Knowledge Always Lead to Economic Growth?

by
Frank Shostak
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Many economists believe that technical knowledge is the key to economic growth. If this is the case, why do third world economies continue to experience poverty, since these economies can access the same technical knowledge as the developed world? Therefore, technical knowledge being the key to economic growth is not the case as economic growth depends upon the pool of consumer goods.

To maintain life and well-being, man must have at his disposal an adequate amount of final consumer goods. These goods, however, are not readily available—they have to be extracted from nature. Without tools at his disposal, man can only secure from nature the minimum goods for his survival.

The current state of available goods determines the creation of labor-enhancing tools. If the pool of goods can only support one day of work, then creating a tool that requires two days of work will not be undertaken, setting the limit on the projects that can be implemented.

Richard von Strigl writes:

Let us assume that in some country production must be completely rebuilt. The only factors of production available to the population besides labourers are those factors of production provided by nature. Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production, a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year. . . . The greater this fund, the longer is the roundabout factor of production that can be undertaken, and the greater the output will be.

It is clear that under these conditions the “correct” length of the roundabout method of production is determined by the size of the subsistence fund or the period of time for which this fund suffices.

Eugen von Böhm-Bawerk writes: “The entire wealth of the economical community serves as subsistence fund, or advances fund, and, from this, society draws its subsistence during the period of production customary in the community.”

Whatever weakens that subsistence pool undermines the prospects for economic growth. People engaged in production require access to final consumer goods, or the subsistence pool, to support themselves. Improving that infrastructure of access enables economic growth, so improving that infrastructure occurs because of an increase in the subsistence pool.

Allocating consumption goods toward maintaining and expanding that infrastructure permits savings. Some people, rather than consuming the goods at their disposal, instead channel these goods to those engaged in the production of tools and machinery, which enable a better infrastructure. Improving the infrastructure permits both an increase in consumer goods and the introduction of services that were not available before.

New ideas can do very little for real economic growth without an expanding pool of consumer goods. In Man, Economy, and State, Murray Rothbard wrote that technology, while important, must always work through the investment of capital in order to generate economic growth. Quoting Ludwig von Mises, Rothbard writes:

What is lacking in these [underdeveloped] countries is not knowledge of Western technological methods (“know-how”); that is learned easily enough. The service of imparting knowledge, in person or in book form, can be paid for readily. What is lacking is the supply of saved capital needed to put the advanced methods into effect.

So, regardless of technological knowledge, real economic growth requires an expansion of savings. An expansion in savings permits an increase in the stock of capital goods, while the increase in capital goods permits an increase in economic growth. Technological knowledge by itself is insufficient.

While knowing how to make a particular tool is obviously important, the information alone is not enough. Parts to make the tool must be produced before they can be assembled into a final product, and people employed to produce these parts in the meantime must have access to final consumer goods in order to be able to live.

If the subsistence pool comprises final consumer goods, how do producers of intermediate goods—like tools and machinery—contribute to this pool? These producers do not directly supply final consumer goods but, instead, offer a means to secure these goods, as well as time.

According to Rothbard:

Crusoe without the axe is 250 hours away from his desired house; Crusoe with the axe is only 200 hours away. If the logs of wood had been piled up ready-made on his arrival, he would be that much closer to his objective; and if the house were there to begin with, he would achieve his desire immediately. He would be further advanced toward his goal without the necessity of further restriction of consumption.

With the introduction of more advanced tools and machinery, new consumer goods can be produced, which were not available prior to the creation of these new tools. If the acquired tools and equipment turn out to be useless, then the savings of those who purchased these tools and equipment are squandered. Saved final consumer goods that were transferred to the producers of these tools and machinery are therefore simply consumed and make no contribution to the subsistence pool. We can conclude, then, that the production of useless tools and equipment weakens the pool of consumer goods.

How about services such as medical services? What about things such as education or the services offered by music and the arts? Should we include them in the subsistence pool?

Without the availability of final consumer goods, services such as art and medical services cannot be generated. Those providing these services must also be sustained. Once the collection of consumer goods increases, however, the economy can create more services.

Contrary to popular economics, we suggest that the key for economic growth is not technical knowledge but the expansion of consumer goods, which requires savings. Technology is necessary to know how to create and build capital goods. However, even there, the goods that are created through technological advances must be able to satisfy consumer needs and desires.

About Frank Shostak

Frank Shostak is an Associated Scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. He received his bachelor's degree from Hebrew University, master's degree from Witwatersrand University and PhD from Rands Afrikaanse University, and has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University.

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