Recently the Science section of the New York Times ran an article about too many cows — that is, too many cows who produce milk. In this little story lies a great illustration of the Economics of Innovation.
The science is straightforward. A few years ago somebody perfected a system for nearly isolating male and female producing sperm. Instead of getting a female calf with 50% probability a breeder could change the odds significantly. The article explains the consequences. Breeders used this technique to produce more milk-producing cows.
Some aspects of the economics are also straightforward, and the reporter got that. The productivity of targeted reproduction increases. Breeders could use this technique to increase the birth of milk-producing cows who descended from their best milk producers. Hence, there are two effects. First, more cows are born more quickly. Second, not only will more cows be born more quickly, but the new ones will be good milk producers.
What are the consequences of this technical improvement? The reporter got the most obvious effect, but missed some subtle effects.
The article discusses the oversupply of cows and milk, as well as the decline in prices for milk. Every student of supply and demand recognizes the connection between supply and prices. Technical change reduced the cost of supply of goods at all levels of production, and that reduced prices.
This article misses the piece of that analysis that usually does not make it into intermediate microeocnomic discussions about technical change. Not only do prices change, but so too do the value of assets used in production today. The milk produced by all cows has become less valuable. The productivity advance reduces the value of herds held by farmers.
That goes further. What will happen in the long run? Eventually the price of milk-producing cows will fall, lining up with the fall in price of milk. But the adjustment will be slow and painful for many milk-producers. Their businesses has become permanently less valuable.
That is the nature of technical invention. The deployment of the new displaces something that had been perfectly viable until then. It ain’t pretty for the producers to go through a change like this, but it is great for consumers. It eventually results in cheaper milk for every drink, cheaper ice cream for every cone, and cheaper cheese for every cracker.