Technology and Opportunity

1. Technology and Opportunity J. Bradford DeLong U.C. Berkeley and NBER October 8, 2002 For the Francisco Partners Fall 2002 Investors Conference The Inn at Spanish Bay, Pebble Beach, CA

3. Reasons for Investors to Be Optimistic The information-age technological revolution continues as fast as ever, even through the recession. Officially-measured labor productivity growth rate of 5 percent in 2002 is not out of the question. Crude corrections for statistical biases lead to the guess that the average American worker will be 6 percent more productive in 2002 than in 2001. 6 percent productivity growth coupled with 3.5 percent output growth bad news for workers: American workers will work 2.5 percent fewer hours in 2002 than in 2001--and the unemployed are not pleased. Such an upward storm in productivity is unheard of in recession while the unemployment rate is still rising.

4. Durability of Productivity Surge Unheard-of (for a recession) upward storm in productivity. Most productivity gains will be captured by consumers and workers in lower prices and higher wages. But some will be captured by firms in higher profits. And the faster the productivity growth in the 2000s, the greater is the profit slice of the pie. Productivity in computation has improved at a steady pace of 60 percent per year since the end of the 1940s. Our current technological revolution looks to be--relative to the size of the economy--fifteen times as big a deal as the original industrial revolution. And the original industrial revolution was a big deal indeed.

5. Industrial Revolutions Create Mismatches Huge mismatches between supply and demand: Newly-wealthy consumers demand things that do not yet exist. Innovative producers see ways to produce what has been demanded in vastly cheaper ways. Instead of a smooth flow of supply and demand, the economy becomes full of turbulence: Each vortex is the source of a fortune. What kind of mismatches should we expect to see? Historical analogies.

6. Historical Analogy: Railroadization Like much of telecom, software, and even hardware, railroads promised enormous economies of scale: Build it once, and then run any number of trains over it. Like our modern data processing and data communications technologies, the railroad was an enormous technological leap: It lowered the cost land bulk transport by a hundredfold. Like our internet boom, there was extraordinary and wild enthusiasm: If they could capture as profit just one-tenth of the cost savings the railroads… And like our internet bust, there were moments when investors in New York and London suddenly realized that they had been total fools. Plus huge frauds

7. Fraud, Bust, and Reorganization In the 1880s and 1890s J.P. Morgan and its clients picked up bankrupt railroads with greatly distressed debt for a song: Crammed unattractive junior securities down the throats of bondholders. Found managers who could run them efficiently and profitably. Without the burden of amortizing debt issued during the previous bubble the new managers could slash rates. Vicious price wars. Consequences of newly-cheap land transportation: Sears, Roebuck and Montgomery Ward. Meatpacking. Swift and Armour. But Federal preemption of state-level “health and safety” regulations.

8. Applying the Analogy For the Baldwin Locomotive Compan of Philadelphia, read "Intel." For Carnegie Steel, read "Cisco." For the Central Pacific with its repeated bankruptcies, read "Global Crossing”: lthough somehow I don't think we are likely to have a Winnick University at the end of all this. The mass bankruptcies of 19th century railroads: Had everything to do with: Financial management. Irrational exuberance Had nothing to do with: technological opportunities and long-run benefits of rail transportation So today's shakeout has little to do with ultimate economic benefits of computers and communications.

9. And What Are the New Industries of the Future? Where are today's counterparts of Sears, Roebuck and Montgomery Ward? Who will find that modes of information and product distribution that had previously been unthinkably costly are now gold mines? Where are today's counterparts of Swift and Armour? Who will build technologically-sophisticated systems--the equivalent of assembly-line slaughterhouses and refrigerated transport cars--on top of vastly cheapened high-bandwidth links? If we can get the regulatory framework right. Where are today's equivalents of Singer Sewing Machines? Singer found that it could not sell sewing machines in its early years without providing a salesman to provide hands-on training in how to teach people to use sewing machine to each wholesale customer. Could it have afforded to keep a large-enough sales force without the railroad? I'm a professor. So I'm allowed to say that I leave these extensions as exercises for the students.