Web Didn't Deliver High Economic Growth

* Article. Does the "New Economy" Measure up to the Great Inventions of the Past? By Robert Gordon. NBER Working Paper No. 7833, Issued in August 2000

URL = http://www.nber.org/papers/w7833

Abstract

"This paper raises doubts about the validity of this comparison with the Great Inventions of the past. It dissects the recent productivity revival and separates the revival of 1.35 percentage points (comparing 1995-99 with 1972-95) into 0.54 of an unsustainable cyclical effect and 0.81 points of acceleration in trend growth. The entire trend acceleration is attributed to faster multi-factor productivity (MFP) growth in the durable manufacturing sector, consisting of computers, peripherals, telecommunications, and other types of durables. There is no revival of productivity growth in the 88 percent of the private economy lying outside of durables; in fact when the contribution of massive investment in computers in the nondurable economy is subtracted, MFP growth outside of durables has actually decelerated. … The paper combines the Great Inventions of 1860-1900 into five clusters' and shows how their development and diffusion in the first half of the 20th century created a fundamental transformation in the American standard of living from the bad old days of the late 19th century. In comparison, computers and the Internet fall short. The rapid decline in the cost of computer power means that the marginal utility of computer characteristics like speed and memory has fallen rapidly as well, implying that the greatest contributions of computers lie in the past, not in the future.

The Internet fails the hurdle test as a Great Invention on several counts. First, the invention of the Internet has not boosted the growth in the demand for computers; all of that growth can be interpreted simply as the same unit-elastic response to the decline in computer prices as was prevalent prior to 1995. Second, the Internet provides information and entertainment more cheaply and conveniently than before, but much of its use involves substitution of existing activities from one medium to another. Third, much internet investment involves defense of market share by existing companies like Borders Books faced with the rise of Amazon; social returns are less than private returns. Fourth, much Internet activity duplicates existing activity like mail order catalogues, but the latter have not faded away; the usage of paper is rising, not falling. Finally, much Internet activity, like daytime e-trading, involves an increase in the fraction of work time involving consumption on the job."

Discussion

Henrik Rood:

"The discussion here is an eternal one. Using the Internet for leasure / distraction isn’t easily found in productivity statistics.

It is however a different game if you look at this from the mirror side.

How much has advertising improved in comparison to paper/TV-ads? E.g. value-for-money from advertisements, that science that once was 50% unmeasurable hits-or-misses?

Where did that money go? Reduced advertisement budgets or increased monopolistic competition (probably the latter).

Statisticians do a lot of things, in particular in the USA, with hedonistic pricing in quality/performance adjustments. E.g. if shoes improve in quality, we don’t suddenly observe a shift in the number of feet, wearing them.

In the same way, the improvements in raw computing power is reduced by observations that actual spending on PC’s / Laptop’s as part of the business or household capital is far more stable, but the computers improve a lot. Hedonistic pricing corrections remove that “performance inflation” e.g. “What Grove gaveth, Gates taketh”.

Gordon already pulled that trick in 2000. Claiming that the breakthrough improvements from advances in computing power were the first devices. But he tends to overlook the mass diffusion effects (from mainframe to handheld).

The key problem, already quite visible in Robert Gordon’s 2000 papers for NBER, was the observation that most productivity improvements were ultimately traced back to improvements in manufacturing.

Today the US economy is far less manufacturing oriented than even 15 years ago. A lot of those jobs have been shed / shipped to Asia.

The second major source of human wealth improvements of the industrial revolution can be linked to a.o. improved health, better nutrition, or the strong improvement of domestic technologies, that enabled women to enter the workforce.

I think that would Robert Gordon have studied The Netherlands in the last 4 decades, he would have run into a lot more difficulties with his hypothesis. A prime reason is that in The Netherlands in the late 1980s women only comprised ca. 15% of the labor workforce, while today they have surpassed men, albeit not in working hours.

The Netherlands, despite its liberal image since the 1960s, was a deeply social conservative country close to Ireland and Portugal. The USA after Rosie with the Riveter has been much more in front of that.

It is often important to grasp that part of the 1990s Ireland Celtic Tiger as well as the economic advances of The Netherlands who went up to the top ranks (GDP per capita levels surpassing the USA even in purchasing power parity over the last 25 years) was due to rather late mass-entry of women in the workforce.

It is always extremely difficult to get rid of such effects entirely in the type of econometric studies people like Robert Gordon do, as it is difficult to capture all productivity improvements in service economies.

The prime point is however that in the set of models that Robert Gordon uses, he doesn’t control for corporate institutional features. E.g. monopolistic competition (a few firms dominating each specific market) has been a feature of the ICT-sector and began overwhelming the remaining economy during the last two decades.

This raised monopolistic competition causes the increases in rents aside from productivity increases. It results in accumulation of wealth at corporate shareholders, as profits are due both to productivity improvements and rent-extraction.

I wonder if Gordon would be able to run his date of 1860 – 1930 including a dummy variable for anti-trust regime strengthening (Theodore Roosevelt) and then 1950-2010 with anti-trust weakening (say Reagan/Thatcher, but Carter/Thatcher might also work) to get a control for “more or less rent-seeking allowed” as institutional environment variable." (arch-econ mailing list, june 2013)

More Information

• article in Business Week by New America Foundation that suggest that the internet hasn't had a major positive impact on economic growth.

- http://www.businessweek.com/articles/2013-06-20/what-the-web-didnt-deliver-high-economic-growth

Some excerpts from the article:

"The Internet has had a dramatic impact on people’s lives and how they spend their time. It sparks uprisings, makes shopping easier, helps people find their soul mates, and enables governments to collect troves of useful data on potential terrorists—and, apparently, on their own citizens. What the last decade demonstrates, however, is that the information revolution hasn’t generated economic prosperity. It’s tempting to believe an innovation can unlock the secret to high growth. But that way of thinking is almost certainly wrong."