[RG summarizes his updating of his views. Now he includes the whole durable manufacturing sector in the revolution, not just computer manufacturing. That seems like a big thing to just include out like he does. Couldn't this arguably also just be a new instance of idea that productivity figures, measured in terms of units, have never seemed to makes sense for the service sector, either before or after computers?]
[Also contains a proposition containing the term "marginal utility" that isn't trivially true.]
Financial Times ; 26-Jul-2000
Not much of a new economy
Robert Gordon finds little evidence of a third industrial revolution taking place across most of US industry:
By ROBERT GORDON
The "new economy" has been compared in importance to the invention of electricity and the internal combustion engine, and journalists frequently describe it as an industrial revolution. Is this comparison to these great inventions of a century ago justified?
It would be much too broad to describe the new economy as "everything the electronic computer has ever achieved". Decades ago, mainframe computers transformed the production of bank statements, telephone bills, and facilitated multimillion trading days on securities markets. But the mainframe did not budge the growth rate of US productivity from the doldrums during the dismal years of 1972 to 1995.
Yet the new economy is suddenly upon us, represented by the miracle of American economic growth since 1995 outstripping what was previously thought possible. A focused definition of the new economy is the acceleration of technical change in computer production since 1995.
As shown in the chart, the price of computer power measured in megabytes of memory or gigabytes of hard drive capacity fell after 1995 at 30 to 40 per cent a year - double the rate of price decline before 1995. This technological acceleration has been accompanied by the invention of web browsers and widespread internet access.
My sceptical view of the new economy starts with an empirical observation that US productivity acceleration has been lopsided. While productivity growth has taken off in durable manufacturing, including not only computer hardware but also telecommunications, automotive manufacture and steel-making, there has been no visible productivity pay-off for massive computer investment in the remaining 88 per cent of the economy.
The second part of the sceptic's case relates to the description of the new economy as an industrial revolution. First, let us "peel the onion" of the US productivity acceleration since the end of 1995, when productivity has grown 2.75 per cent at an annual rate, in contrast to the dismal years of 1972 to 1995 when the growth rate was only 1.42 per cent a year. The chart peels apart this acceleration of 1.33 percentage points a year into its underlying components.
First comes the cyclical component. When output growth is unsustainably fast - as in 1999 - productivity also grows faster than its sustainable long-run trend. This removes 0.5 percentage points, leaving the acceleration in the sustainable trend at 0.83 percentage points. Two minor components - changes in measurement and a slight improvement in labour composition - account for another 0.19 points, reducing unexplained acceleration to 0.64 points.
This 0.64 points was achieved almost entirely within the durable manufacturing sector, consisting of a 0.29 contribution from faster technical change in computer hardware, and another 0.28 from technological acceleration in the rest of durable manufacturing. What is left over for the remaining 88 per cent of the economy outside durables? Only 0.07 per cent - a mere pittance.
The vast majority of computers are installed outside durable manufacturing. The standard arithmetic used by economists suggests that this massive investment in computers, the so-called "capital-deepening" effect, should have increased productivity growth by about 0.33 points - not the mere 0.07 that emerges from my analysis. Either the computers have been remarkably unproductive, or there has been a technological retardation outside the durable goods sector. Something is wrong; what could it be?
There are a number of differences between the computer and the great inventions of the late 19th century, but perhaps the largest is the unprecedented rate of decline in the price of computer power. Elementary economics shows that this rapid decline in the marginal cost of computer power must be matched by an equally rapid decline in its marginal utility, or benefit. Exponential increases in computer capability collide with a fixed supply of human time to invoke diminishing returns to computer capability at an unprecedented rate. In my case, the PC on my desk represents 30 times as much GDP as the one that sat there in 1983, but neither my mind nor fingers move any faster now.
The important puzzle of the new economy is why the internet has attracted such huge amounts of investment in computer hardware and software without any visible productivity pay-off outside durable manufacturing. At least four factors may play a role in this: market share protection; re-creation of old activities; duplicative activity; and personal internet use while at work.
First, the need to protect market share against competitors explains much internet activity. Barnes and Noble and Borders would have been content to play a dominant role in book retailing, but were forced by competition from Amazon to become "clicks and mortar" organisations.
Second, much internet content is not truly new, but rather consists of pre-existing forms of information - airline schedules and stock quotes - made available more cheaply and conveniently. In contrast, the great inventions of the late 19th century created truly new products and activities.
Third is duplication. Much e-commerce is an alternative to mail-order catalogue shopping. Yet the catalogues have not disappeared. Indeed, with the exception of the initial step of replacing a human telephone response with a computer interface, e-commerce duplicates all the other costs of catalogue retailing: building and stocking warehouses, selecting items from warehouse shelves, and so on.
Fourth is the problem of the growing distraction of personal web surfing. One research service found that people spend more than twice as much time online at the office as they do at home. Employers are so disturbed by the continuing use of office computers for personal use that the number of companies using "surveillance software" to monitor their employees' e-mail usage is soaring.
The rapid onset of diminishing returns suggests that the greatest productivity contribution of computers lies in the past, not in the future. Enthusiasts should reconsider whether the new economy and internet will transform everyday life as profoundly as did electric light, the electric motor, home appliances, the commercial aircraft, and other components of the second industrial revolution of a century ago.
The writer is Stanley Harris professor of economics at Northwestern University
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