Does the “New Economy” Measure up to the Great Inventions of the Past?

1. Does the “New Economy” Measure up to the Great Inventions of the Past?

2. The New Economy is characterized as the transformation in the U.S. economy that is wiping out the 1972-1995 productivity slowdown, inflation, the budget deficit, and the business cycle

3. Enthusiasts vs. Skeptics

4. Enthusiasts believe that the New Economy does measure up to the inventions of the past “A perceptible quickening in the pace at which technological innovations are applied argues for the hypothesis that the recent acceleration in labor productivity is not just a cyclical phenomenon or a statistical aberration, but reflects, at least in part, a more deep-seated, still developing shift in our economic landscape.” Alan Greenspan

5. True enthusiasts believe the New Economy is a fundamental industrial revolution as great or greater in importance than past inventions, particularly electricity and the internal combustion engine, which transformed the world at the turn of the last century

6. Skeptics

7. Skeptics are concerned whether the New Economy deserves the recognition of an industrial revolution of the same caliber as the great inventions of the late nineteenth century and early twentieth century

8. Skeptics find that the recent productivity revival occurred primarily within: • the production of computer hardware • peripherals • telecommunications equipment • significant spillover to the 12 percent of the economy involved with the manufacturing durable goods • the remaining 88 percent of the economy, is almost completely unaffected by the New Economy’s productivity growth

9. In order to answer our question, we will look at how the computer and the Internet have affected the quality of life in comparison to the great inventions of the past

10. Dissecting the Revival in U.S. Productivity Growth • The New Economy • Hedonic Regression Technique • Moore’s Law

11. Table 1: Growth rates of output, input and multifactor productivity, 1870 - 1999 • Why was growth so fast during the years 1913 - 1972? • How far does the New Economy reach into the remaining 88% of economic activity? • Output growth running at a faster pace than a sustainable long term growth trend.

12. Table 2: Decomposition of growth in output per hour into contributions of cyclical effects and structural change in trend growth • Decompositions between trend and cyclical productivity growth • How can this acceleration be explained? • Price measurement and labor quality

13. How the Great Inventions Helped Us Escape from the Bad Old Days •  The First Industrial Revolution (1760 – 1830) began largely in Britain •  Even with list of innovations of this time period (the steam engine, the power loom, etc.), multifactor productivity grew very slowly •  The Second Industrial Revolution (1860 – 1900) took place simultaneously in the U.S. and Europe •  The Second Revolution, with the revolution of electricity, and internal combustion engine, etc, led to the golden age of productivity growth from 1913 to 1972

14. The Question at Hand •  Are the roles of the computer and Internet likely to constitute a Third Industrial Revolution, with lasting productivity gains comparable to the second one?

15. Life in the “Bad Old Days” •  The urban streets of the 1870s and 1880s were filled with horses and pigs •  The dangers of spoiled food •  Before invention of electricity, urban streets were a chaotic jungle of horse-drawn conveyances of all types

16. Cont… •  Travel between cities very dangerous •  In 1882, only 2% of New York City’s houses had water connections •  Danger of working in mines and mills •  Other dangerous working conditions

17. The Great Inventions • A set of great inventions which can be grouped into five “clusters” came into this world during the 19th and 20th century • Each of these clusters had a primary breakthrough

18. Electricity • Electric light and electric motors • Decentralization of the source of power • Improvements in consumer appliances • Refrigeration and air conditioning

19. Internal Combustion Engine • Personal autos • Motor transport • Air transport • Derivative inventions: suburb, highway, supermarket • Elimination and reduction of ills from late 19th century

20. Gas and “Rearranged Molecules” • Petroleum and natural gas • Processes which rearrange molecules • Chemicals, plastics, and pharmaceuticals • Helped reduce air pollution created by industrial and heating uses of coal • Made possible new and improved materials and products • Helped to conquer illness and prolong life

21. Entertainment, Communication, Information Innovations • Telegraph - 1844 • Telephone - 1876 • Phonograph - 1877 • Popular photography - 1880s and 1890s • Radio - 1899 • Motion pictures - 1881 to 1888 • Television - 1911

22. Running Water & Plumbing • Most tangible improvement in everyday life from running water, indoor plumbing, and urban sanitation infrastructure • “Mokyr and Stein (1997, p.146) credit Louis Pasteur’s germ theory of disease for the great decline in mortality in the four decades prior to WWI…”

23. Effects of the Five “Clusters” • Increase in per capita income and wealth during 1913-72 • “Golden years of productivity” • Improvement in living standards

24. ? • “Will the information revolution spawned by the computer create as great a change in living conditions as the major inventions of the late 19th and early 20th century?”

25. The Declining Cost of Computer Power and the Pervasiveness of Diminishing Returns

26. Several differences exist between the computer and the great inventions: • the most significant difference is the rate of decline in the price of computer power • rapid declines during 1950-1980 period which was dominated by the mainframe computer • the period of 1980-1995 was dominated by the shifting from mainframe to personal computers prior to the Internet also experienced decline

27. Existing computer price deflators that do not factor in the radical decline in the price per calculation that occurred in the transition from mainframe to personal computers • accounting for the radical decline in the price per calculation, changes the annual rate of price decline between 1972-1987 from 20 percent per annum to 35 percent per annum • thus, the technological advance created by the New Economy in previous years may be less significant than previously thought

28. Diminishing Returns • rapid decline in the marginal utility or benefit of computer power as the intersection of the supply and fixed demand curve decline • Gary Becker developed the idea of “household production,” this is the activity combining market goods and time • thus, the fixed supply of time is a fundamental limitation on the ability of exponential growth in computer speed and memory to create commensurate increases in output and productivity • an exponential rate of decline in output-to-capital ratio and an equally sharp decline in the marginal productivity of computer capital

29. Many industries such as airlines, banks, and insurance companies began using mainframe technology in 1960s and 1970s and still use them today • usage of personal computers primarily to access the mainframe database • personal computers are secondary in the evolution of computer technology and came about as a result of decline in costs of computer power • it is possible that the main productivity gain has already been achieved since computers have been around for almost 50 years

30. Finally, computers run into diminishing returns due to the limitations in replacing humans by computers • computers make up a large part of capital in many industries, but the contribution of capital to productivity growth is relatively small • the need for human contact (doctors, pilots, bankers, chefs, barbers) creates diminishing returns for the productivity of computers

31. The Positive and Negative Sides of the Internet • Accelerated rate of price decline in computer attributes • Supply and demand effects • Why have the productivity effects of the internet been so moderate?

32. The Internet Economy • Internet infrastructure • Internet applications • Internet intermediary layer • Internet commerce layer

33. Consumer Benefits of the Internet • E-mail • E-commerce • Comparison to inventions of the past

34. Why the New Economy in general and the Internet in particular have failed to boost MFP growth outside the durable manufacturing sector • Market share protection • Recreation of old activities • Duplicative activity • Consumption on the job

35. A Final Response by New Economy Optimists • Computers have added greatly to output, but the benefits have been mismeasured • Intermediate to final goods transition • Is consumer surplus greater from present technology or from the inventions of the past?

36. Conclusion • The New Economy - acceleration in rate of technical change in IT together with development of the Internet • Dynamic explosion of productivity growth in durable manufacturing sector • Productivity explosion has boosted economy’s rate of productivity growth • Inflationary pressures held down

37. However… • The New Economy has had very little effect on the 88% of the economy outside of durable manufacturing • In that part of the economy, MFP has actually decelerated • Fundamental limitation of the contribution to productivity of computers in general and the Internet • Rapid diminishing returns of initial computer applications • Much of the Internet use represents a substitution from one type of entertainment or information-gathering for another

38. Internet surfing does not stand up to the inventions of The Second Industrial Revolution • “It represents as far smaller increment in the standard of living than..” • Electric light, factory efficiency by electric motor, flexibility and freedom from automobiles, saving of time and shrinking of world by airplane, new materials by chemical industry, communication through telephone, radio & television, and enormous improvements in life expectancy, health, and comfort achieved by urban sanitation and indoor plumbing