What do you mean by progress? Does progress mean more stuff being made in that segment, as in, able to produce more of it? Production technology or the technology product itself? In either case I think the are inextricably linked from the top down.

I meant technological progress that improves the price-performance tradeoff. I measure it by "what sort of prices do I see when I go to Amazon and search for USB flash drives?"

Where I disagree is "On either end, therefore, the incentives for innovation seem low". If the tools are there, people will find ever more awesome ways of using them, and that is the history of tech progress!

I do agree that if the tools are there and people get them (essentially) for free they'll find ways to use it. If the tools are there but at exorbitant prices, they won't. This gets back to the question of whether it's easy enough to improve the price-performance tradeoff sufficiently dramatically to get to the threshold where people are willing to pay for it. The existence of early adopters and intermediate populations can help bridge the chasm.

Thanks once again for your comments!