Technological Change (TC) is a term that is used to describe the overall process of invention, innovation and diffusion of technology or processes. The term is redundant with technological development, technological achievement, and technological progress.

In essence TC is the invention of a technology (or a process), the continuous process of improving a technology (in which it often becomes cheaper) and its diffusion throughout industry or society.

In its earlier days, technological change was illustrated with the ‘Linear Model of Innovation’, which has now been largely discarded to be replaced with a model of technological change that involves innovation at all stages of research, development, diffusion and use.

Harrod first dealt with the problem of the character of inventions in his book The Trade Cycle in 1936. His trade cycle theory was based on the interaction of the Keynesian multiplier and the acceleration principle.

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According to the multiplier doctrine, an increase in investment determines increase in income, which in turn is partly spent thus generating new income and so on, in a convergent process depending on the proportion of leakage at each stage.

According to the accelerator, net investment in fixed capital takes place when there is a prospected increase in demand that cannot be faced by existing equipment. The actual increase in investment depends on the rate of interest, which determines which of the available technologies will be chosen by entrepreneurs.

In this scheme, an increase in income determines an increase in demand, which stimulates investment and in turn creates additional income. One of the possible outcomes of this process is growth at a constant rate. Harrod, however, stressed that such a state of moving equilibrium is unstable, as a slowing down of the rate of growth would amplify itself and eventuate in a depression.

The trade cycle is an inevitable consequence of the fact that the factors on which the intensity of the multiplying and accelerating effects depend vary as income grows: in particular, as people become more affluent they tend to save a higher proportion of their income, thereby diminishing the multiplier and determining a decrease in the rate of increase in income, and so on cumulatively.

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Technological change is one of the several degrees of freedom in Harrod’s system that may affect its rate of growth, as inventions could alter the amount of additional capital necessary to obtain the supplementary output to meet the prospected increase of consumption.

In this context, the most natural notion of’ neutrality’ regards the constancy of the capital/output ratio at a given rate of interest.

If this were the case, technological progress would not affect the growth process; if the capital output ratio increased, more investment would be triggered by the same prospective increase in consumption thereby further boosting economic growth; and conversely in the opposite case.

Sir Roy Harrod put forward a classification of technical progress which was different from Hicks’s classification, and came some years after Hicks’s contribution. Harrod first put forward his classification in an article in 1937, but expanded it in a book published in 1948.

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He defined as neutral Technical Change and changes one where the capital coefficient (capital-output ratio) does not change in the Progress presence of a constant interest rate. Broadly, he suggested that if, when the interest rate is constant, the distribution of the total national product between capital and labour stays constant, then it is neutral technical progress.

If we consider perfect competition and take interest rate as equal to the rental of capital and hence equal to the marginal product of capital, then Harrod-neutral technical progress is a statement about the relationship between capital-output ratio and the marginal product of capital.

If we consider the per-worker production function, then an upward shift in the per-worker curve is said to represent Harrod-neutral technical change if at any constant value of capital-output ratio, the marginal product of capital stays the same.