ICT as a GPT: an Historical Perspective

1. ICT as a GPT: an Historical Perspective Nicholas Crafts

2. The Solow Productivity Paradox “You can see the computer age everywhere except in the productivity statistics” Robert Solow, 1987

3. Solow Paradox Revisited • Even before the mid-1990s ICT had a much bigger impact than steam or electricity • The Solow paradox was based on unrealisticexpectations…initially new technologies have a small weight in the economy • The growth potential of GPTs has been realised more quickly over time

4. Steam as a GPT Steam Engines, Railways, Steamships James Watt’s invention: 1769 Liverpool & Manchester Railway: 1830 Steamship crosses the Atlantic: 1838

5. Steam Engine Technology Took a long time to become cost effective in most sectors Coal consumption per hp per hour fell from 30 lb pre-Watt to 12.5 lb for Watt engine to 2 lb by 1900 when psi reached 200 compared with 6 in1770 The big breakthrough was not James Watt but the move to the high pressure steam engine after 1850 Cumulative effect on British labour productivity over 150 years similar to that of ICT on American labour productivity over 35 years

6. Sources of Power, 1760-1907(Thousand Horsepower) Source: Kanefsky (1979a, p338); not including internal combustion engines

7. Total Steam Contribution to Growth of Labour Productivity (% per year) Source: Crafts (2004); includes railway, steamships, steam engines

8. Implications • Small contribution of steam pre-1830 helps explain Crafts-Harley view of industrial revolution • Strong contribution of steam power in second half of 19th century says climacteric not explained by hiatus between GPTs • Puts Solow Paradox into perspective

9. The Computer and the Dynamo(David, 1991) • The big impact of commercial electricity on American productivity was in the 1920s, 40 years after Edison • TFP spilloversa key aspect of the 1920s’ productivity surge; factory design improved through learning externalities in transition from drive-shafts to wires • Across manufacturing sectors, change in TFP growth strongly correlated with change in electric motors • Impact of TFP spillovers is to raise Y/L growth in manufacturing by 2.4, whole economy by 0.7pp/year

10. Contributions to US Labor Productivity Growth(Crafts, 2002; Oliner et al., 2007)

11. Real Hedonic Price Index for Electric Motors in Sweden(Edquist, 2010)

12. Source: Nordhaus (2007)

13. Capital Cost and Annual Cost per Steam Horsepower per year (£ current) Note: the estimates are for a benchmark textile mill in a low coal cost region like Manchester

14. Impacts of GPTs on Growth ICT much bigger impacton American growth in recent past than steam ever had on UK growth Costs of computing have fallen much faster than did costs of electrical power or steam power ICT is historically remarkable Society seems to be getting better at exploiting GPTs more rapidly

15. Does Innovation Generate Supernormal Profits?(Nordhaus, 2004) • Innovators capture about 2% of the total social gain from technological progress • The US stock market valuation of ‘new economy’ firms grew between 1995 and 2000 at a rate that implied owners could capture 90% of the social gain • Yet the appropriability of gains from ICT unlikely tomatch that of earlier technologies including railways

16. Social Savings vs. Growth Accounting • Alternative methodologiesto estimate contribution of new technology to economic growth • Social savings pioneered by Fogel (1964) for US railroads; measures reduction in cost • Social savings amounts to a subset of growth accounting; net vs. gross effects • Social saving focuses attention on the benefits; generally speaking, in the long run users get the benefitsof a new technology (Nordhaus, 2004)

17. Social Savings of Railways • Transport benefits = total economic benefits • Fogel’s upper bound measure: A + B + C + D + E • Under perfect competition real cost of rail transport falls at rate of TFP growth (price-dual measure) • Compared with growth accounting includes own TFP contribution but no spillovers and no capital deepening • Capital deepening not ‘unique’; in absence of railway other normal-returns investments

18. PT PT0 D E A B C PTI D1 D D2 T0 T1 Transportation Figure 2

19. Social Gains from Railways, 1912(%GDP)

20. Welfare Benefits • Growth accounting focuses on increase in productive potential but social savings highlights user benefits • Not necessarily the same in an open economy • British railway-users got nearly all the benefits • Cotton textiles in the industrial revolution: foreign consumers took 60% of the benefits of British technological progress (Harley,1999)

21. Transport Benefits May Not Capture Allthe Economic Benefits • Wider economic benefitsmay be relevant; cf. recent developments in transport CBA • Understanding the characteristics of the transport-using sector matters • Imperfect competition (freight) • New goods (passengers) • Agglomeration benefits from industrial re-location, bigger cities etc = TFP spillovers(both)

22. City Size and Labour Productivity • Elasticity of labour productivity with respect to city size in range 0.04 to 0.11 • Robust result but could be one or more of several reasons • Effective city size is the key concept; population with 80 minutes of UK NUTS1 region has positive effect on productivity (Rice & Venables, 2004) • If railways increased effective city size, there would be a TFP spillover

23. Better Transport: with Productivity Externality

24. TFP Spillovers • In danger of being unduly neglected; clearly the really hard part of evaluating impact of GPT • GPTs often have geographic implications and that may be key source of spillovers • Intra-sectoral correlation of capital in use and TFP growth does not necessarily capture these

25. Growth in No-ICT-Production Country(Oulton, 2010) yc= Bh1-α –β(kc)α(kICT)β Δp/p = μc – μICT < 0 Δyc/yc = μc + (1-α-β)Δh/h + αΔkc/kc + βΔkICT/kICT User cost = marginal product, so Δyc*/yc* = μc + (1-α-β)Δh/h + αΔyc*/yc*+ β(Δyc*/yc – Δp/p) Δyc*/yc* = Δc*/c* = (μc – βΔp/p)/(1-α-β) + Δh/h

26. Implications • So in open economy consumers get higher growth from technological progress in foreign ICT even though no domestic ICT production • Projected ICT-use effectson long-run growth generally much bigger than ICT-output effects • Economies like Ireland which export ICT production have a negative terms of trade effect on real income

27. ICT-Use Effects vs. ICT-Output Effects (% per year)(Oulton, 2010)

28. Special Features of Celtic Tiger Growth • Pivotal role for export-platformFDI and supply-side policy designed to attract it • Exceptionally large share of ICT production(Domar weight = 22.6%) • GDP much bigger than GNP and terms of trade adjustment to real income growth unusually large • Employment growthmade a large contribution to real GDP growth

29. Contributions to Labour Productivity Growth, 1995-2001 (% per year) Source: Timmer and van Ark (2005)

30. Growth of Real GNP(% per year)

31. Europe and ICT • European countries have generally not matched USA in ICT contribution to growth; UK does relatively well • “American diagnosis”is too much regulation too much taxation, too little competition (the ‘corporatist legacy’) • Less ICT production but also smaller ICT capital-deepening contribution; the latter is the worrying diagnostic • ICT-using services(e.g., distribution) have been Europe’s Achilles Heeland may be where regulation has slowed diffusion most

32. Regulation and the contribution of ICT-using services to aggregate productivity growth ICT using services, 1996-2001 Correlation coefficient: -0.62 t-statistic: -3.35 Product market regulation (inward-oriented), 1998 Source: Nicoletti & Scarpetta (2005)

33. UK in the ICT Era • Compared with big continental economies, UK fares much better with ICTthan with Fordist manufacturing • Thatcherite reforms have lagged pay off • Competitive product markets and flexible labour markets are favourable to relatively rapid diffusion of ICT • NB: downside is exposure to large and badly-regulated financial services sector

34. Social Capability and ICT • Standard American criticisms of Europe at least equally valid for 20 years before 1995 • Social capability depends on requirements of the technological epoch • It is not that there is more regulation but rather that existing regulation is more costly in the ICT world

35. Policy Lesson • Social capability that facilitates diffusion is the key to good productivity performance • Technology transfermatters much more than domestic R & D; 5/6 new technology comes from R & D in ROW (Eaton & Kornum, 1999) • Intangible capital rather than just R & D is key to exploiting new technology (Haskel et al., 2009)