The Economic Impact of ICT: A Perspective from the Age of Steam

1. The Economic Impact of ICT:A Perspective from the Age of Steam Nick Crafts Financial support from the Economic and Social Research Council under grant R000239536 is gratefully acknowledged

2. Economic History Perspective Can help to make better sense of today’s world and not to over-react to changes in the economic environment.

3. General Purpose Technologies (Lipsey et al, 1998) • Over time are found to have many uses and complementarities … are pervasive • Initially have much scope for improvement • Eventually come to be widely used and lead to (large) rise in aggregate productivity growth BUT • Initially may have no positive impact on growth or even imply a slowdown phase

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

5. Steam as a General Purpose Technology • Steam Engines, Railways, Steamships • James Watt’s Invention : 1769 • Liverpool & Manchester Railway : 1830 • Steamship crosses the Atlantic : 1838

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

7. 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 in 1770 • The big breakthrough was not James Watt but the move to the high pressure steam engine after 1850 • TFP spillovers were unimportant prior to 1850 but may have been significant after 1870

8. 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

9. Total Steam Contribution to Growth of Labour Productivity (% per year) Source: Crafts (2003): includes railway, steamships, steam engines

10. ICT Contribution to US Labour Productivity Growth (% points per year) Source: Oliner and Sichel (2003)

11. The Progress of ComputingReal Cost MIPS-E ($1998) Source: Nordbaus (2001)

12. Impacts of GPTs on Growth • ICT much bigger impact on American growth in recent past than steam ever had on UK growth • Costs of computing have fallen much faster than did costs of steam power • Society seems to be getting better at exploiting GPTs more rapidly

13. Railway Capital Authorised (£mn) Source: Gayer, Rostow & Schwartz (1953)

14. Railway Share Prices (June 1840=100)

15. GWR and LNWR in the 1840s

16. REVENUE GROWTH

17. Social Savings • The basis of Fogel’s celebrated analysis of the impact of railroads on American economic growth • Measures the benefits to users of a new technology from reductions in costs (area under the demand curve) • Many of the users may be in other countries

18. RAILWAY BENEFITS

19. RATES OF RETURN • Average private rate of return = 5%, 1830-70 • Average social rate of return = 15%, 1830-70

20. Lessons from Railways • Railway mania ended in tears • Profits from railways less than optimists had hoped • Revenues exceeded expectations ... but so did costs! • Competition reduced prices • Users gained much more than investors

21. Freight Social Savings from Railways, c.1913 (% GDP) Sources: Coatsworth (1981); Summerhill (2003)

22. NASDAQ Composite Index

23. The New Economy and Stock Prices • It was a bubble but fundamentals (trend growth) had improved • Dot.coms experience would not have surprised someone who lived through the 1840s • Economic gains from ICT not a mirage but few of them will be reaped by investors

24. Does Innovation Generate Supernormal Profits? (Nordhaus, 2004) • Innovators capture about 2% of the total socialgain from technological progress • Appropriability is low(7%) and depreciation is high (20% per year) • 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 to match that of earlier technologies including railways

25. Social Savings from ICT, 1992-99 (% GDP) Source: Bayoumi & Haacker (2002)

26. Globalization • Enhanced integration of international markets • Promoted by reductions in transport and communications costs ….. both steam and ICT do this • But is the effect to centralize or disperse economic activity?

27. Transport/Communication Costs • VERY HIGH: activity is dispersed • VERY LOW: activity is dispersed • INTERMEDIATE: agglomeration with feedback effects based on large markets and linkages

28. Steam Power and Industrial Location • Reduced transport costs for goods rather than services both on land and at sea • Industry moved closer to natural resources • Manufacturing cities proliferated in Europe and North America • Definitely not the 21st century

29. Railways and Effective City Size • Labour productivity in cities rises with own city size and numbers of population ‘within reach’ • 80 minutes seems to be the cut-off point • In 1906, population within 30 km raises productivity, in 1840 within 6 km • Suggests railways had substantial productivity externalities perhaps around 10% GDP in 1906 (Crafts and Leunig, forthcoming)

30. Real Cost of Ocean Shipping(1910 = 100) Source: Harley (1988)

31. Steam-Powered Globalization • Helped manufacturing and the City • Hurt arable agriculture, especially land rents • Did not destroy Lancashire textiles • Reduced Anglo-American wage gap by 28% points (O’Rourke, 1996)

32. Wheat Prices Sources: Harley (1980); Mitchell (1988)

33. Mass Production and Mass Distribution (Chandler, 1977) • Developed in a subset of American industry in late 19th century • Based on integration of the market following completion of main rail network • Changed American industrial geography …. centralizing rather than dispersing

34. ICT and Industrial Location • More outsourcing: reduced gains from vertical integration • Facilitates trade in business services including mutually beneficial offshoring • But cities continue to have the great advantage of lots of people close together

35. Employer Wage Costs, 2003 ($/hour) Bureau of Labor Statistics, McKinsey

36. Offshoring of Computer and Business Services • Gains for both countries but losses for some individuals; reduces business costs and lowers prices to consumers in OECD. • Imports of computer and business services = 0.4% US GDP in 2003 • Evidence suggests no net employment reduction from outsourcing in US (Amiti & Wei, 2004)

37. Economic Interactions and Distance Source: Venables (2001)

38. Economic Geography and International Inequality(Redding and Venables, 2004) • Most (60-70%) cross-country income variation accounted for simply by location relative to other countries • market access (export demand) • supplier access (import supply) • Move 50% closer to trading partners would raise income by about 25%

39. World Market Access Source: Redding & Venables (2004)

40. Death of Distance • Would have truly dramatic effect on world distribution of economic activity and income • But “greatly exaggerated” • ICT enables some things to go to the periphery but enhances the strengths of the core at the same time (e.g. strengthens London as a financial centre) • Like steam, ICT rearranges geography but doesn’t abolish it

41. Who Should do a Course in Economic History? • Sadder but wiser investors who lost their savings in the dot.com boom and bust • Growth economists baffled by the Solow Productivity Paradox • Protectionist politicians who believe that offshoring will undermine our prosperity