Dear John Kay
23rd December 1999
The New Economy is a fuzzy phrase. Sometimes it implies unprecedented technological change. At other times it simply means the exceptionally good behaviour of the American economy. I would argue that although the current US boom will come to an end, new technology is going to raise the growth rate of developed economies. This is more heroic than it sounds because a small difference in growth rates compounds into big differences in living standards over decades. It also implies-as did earlier waves of new technology-big changes to the way we live and work.
I am normally sceptical about forecasts, especially breathlessly optimistic ones. But the speed at which the new technologies are spreading is phenomenal. By 2010, our computers will have 10m times the processing power of a 1975 computer. The price of computers has already fallen 10,000-fold within a single generation. Worldwide, total computer power has been growing at a rate of 35 per cent a year during my life, compared to the 5 per cent a year growth delivered by steam engines and their successor electric engines in the period between 1869 and 1939.
It took radio 37 years to reach a global audience of 50m; it took television 15 years. But it took the worldwide web only three years following development of the Mosaic web browser in 1994. In 1990 there were only 300,000 computers linked to the precursor net. Now the volume of internet traffic is doubling every 100 days. I am getting breathless-but these are staggering numbers.
Are they anything special? Growth always has a vanguard sector, and often these have been linked to communication. It was rail in the 1840s and 1870s, cars and radio in the 1920s, television in the 1950s, air travel in the 1960s. What makes us suppose that telecommunications and computers are different?
What is more, so far, only in the US is there any sign that the New Economy is delivering faster productivity growth. From an average of 1.2 per cent a year in 1970-90, growth in GDP per worker rose to an average of 1.6 per cent in the 1990s, and it has surged since mid-1995 to 2 per cent or more, rather than diminishing as you might expect at this stage of a business cycle. But no other country has yet shared this experience-certainly not Britain.
The explanation for this apparent “business as usual” outside the US is that new technologies have to be embodied in new investment, and this takes longer than we imagine. Although new technologies are now spreading rapidly, the spreading has taken place very recently. In particular, the network technologies, like the internet, are very new. The internet is said to be 30 years old, dating to the first Arpanet link in the US. But the internet as we now understand it really began in 1990.
It took 50 years between the development of the technical capacity to generate electricity and the building of the first power station in the US (in 1882), and then another 50 years before electricity powered as much as four fifths of American businesses and households. Paul David has described how American industry took 40 years to reorganise itself in order to exploit efficiently the electric motor. It needed more than the spread of the technology-the list of pre-conditions included limited liability, development of the banking industry, free trade and a reliable framework of contract law and competition policy. It also required universal primary education for the workforce. When these arrived, the world got mass production and mass consumption.
Businesses just didn’t spend much on the new technologies until the current expansion began in 1992. Since then this investment has been growing at a double-digit annual rate. The information technology (IT) share of the American economy almost doubled from 4.2 per cent in 1977 to 8.2 per cent in 1998. And IT now accounts for more than a quarter of the growth in American GDP.
In a paper debunking the New Economy, Robert Gordon found that he could attribute recent productivity growth to three things: better measurement of prices; the normal increase any economic expansion brings; and productivity growth in the computer hardware industry itself. To Gordon, this proves that the computer revolution is having no broader impact on the economy. To me, on the other hand, it is a sign that the anecdotal evidence of change is showing up for the first time in conventional economic statistics.
If I am right and he is wrong, there will be big implications for the way we lead our lives. Think back 150 years. Rail and steam laid the cultural and intellectual foundations for a shift to other new technologies such as telegraphy, photography, optics and chemicals. The railway, in particular, fired Victorian imaginations in the same way that the internet inspires many of us. It gave Britain a national time and transformed the notion of punctuality. It made urbanisation possible by allowing food to be transported to the towns. Railways changed people’s understanding of distance and underpinned 19th-century globalisation. Computer technology also affects the link between work and workplace, dissolving the boundaries which confined work to particular offices and factories and to monitored hours of the day.
So I don’t dismiss the possibility of a Wall Street crash as dot.com companies tumble. But I do believe that something profound is changing beneath the economic surface.
Dear Diane Coyle
27th December 1999
You begin by noting that there is a lack of clarity about what is meant by the New Economy. I agree. If all that is being said is that the US has enjoyed an abnormal period of growth in the 1990s, or that computer power is increasing at a rapid rate, then we can stop the debate here: we do not disagree.
But the claims of many proponents of the New Economy are much more grandiose. They claim that changes in information technology in general, and the growth of the internet in particular, constitute a discontinuity in economic life with few (if any) precedents in economic history. Moreover, this discontinuity will fundamentally change how we live our lives and the ways in which we do businesses. Consequently, many of our conventional views about the limits to economic growth and the nature of competitive advantage-even the principles of economics themselves-are now irrelevant. More specifically, American shares are still cheap, even though they are valued on a basis quite out of line with historical experience.
Like you, I am sceptical about forecasting and I certainly would not say with confidence that the above assertions are untrue. But I can say with confidence that the current evidence in support of them is negligible.
Unlike many advocates of the New Economy, you at least have a sense of historical perspective. We both recognise that in the past there have been developments in technology which really were discontinuities. The invention of printing freed us from a world in which knowledge could only be shared among small groups of people who knew each other, making wide-ranging scientific advance and commercial organisation possible. Until the discovery of steam technology, power was limited to what could be supplied by animals; and modern manufacturing was inconceivable. Before successive developments in transport-canals, railroads, automobiles, planes-the distribution of most goods was confined to small geographic areas, as was the capacity to organise their production. This meant that there was little purpose to large corporations.
With the benefit of hindsight, we can see how these technological developments defined the structure of modern economies and the laws of modern economics-the division of labour, competitive and comparative advantage, the evolution of standardised manufacturing processes and multinational corporations. Maybe it is my own lack of imagination, but I cannot see that anything we are experiencing today is of comparable, far less greater, significance. Like you, I benefit from ordering books from Amazon.com and consulting travel timetables on my PC. But these seem small steps forward compared with the difference between having no printed material and buying books; between being confined to places within walking distance of home and being able to cross the world in 24 hours.
In short, rapid and fundamental technical advance is not new. It is fashionable to claim that we are in an age of unprecedented organisational and technological change, but I am not so sure. Someone looking back in 1900 on the events of the preceding century would have seen the transformation of an economy based on small, self-sufficient, agricultural communities into a predominantly urban world, increasingly focused on big manufacturing units in which impersonal employment in corporations had displaced self-employment and master-servant working relationships.
The 30 years before 1970 made television, cars and domestic appliances available to ordinary people for the first time. In the same period, we saw the development of commercial air transport, the introduction of artificial materials and textiles, the invention of many new drugs, and the introduction of seemingly boundless sources of nuclear power. Outside the field of information technology, progress has been frankly disappointing since 1970. The planes we fly in are much the same; our treatments for cancer, heart disease and hypertension have improved only incrementally; few new materials have proved commercially important. New energy technologies failed, and we are back to burning fossil fuels, somewhat more efficiently. An observer less excited by the internet than you might find our times rather dull by historical standards.
And my scepticism is supported by the figures. Until recently, New Economy enthusiasts had to confront Robert Solow’s observation that “computers are everywhere except in the productivity statistics.” They had to argue that we were measuring things wrongly: now, following a slight upward blip in US productivity data, they claim that the statistics are right and begin to prove their point. But this follows 20 years of anguish over the American productivity slow-down. In Europe-which had done rather better than the US until this decade-productivity growth has been disappointing. Everything we see is consistent with the hypo-thesis of broadly stable rates of technological change and underlying productivity growth.
Students, journalists, business people all like to be told that the rules of the game have changed completely and the old knowledge doesn’t apply any more. It saves the bother of acquiring the old knowledge, assimilating it and applying it. It fills magazines and employs consultants. But I suspect there is life in the old knowledge yet.
2nd January 2000
You find today’s technological advances unexciting. I agree that any changes in our lives which I can imagine will pale by comparison with the improvements in life expectancy and quality of life delivered by the past 200 years of technical progress and economic growth. Still, what I read about biotechnology and genetic engineering, nanotechnology and materials technology suggests the possibility of a new surge in the rate of change.
Computer technology is important not only because it allows us to exchange information electronically rather than on paper, but because it has facilitated other areas of progress. Biotech research would not have been possible without raw computer power. Information technology is the equivalent of steam power for the human brain. Economists attribute most of the increase in per capita incomes over time to “technical progress”; even so, the results of dramatic technical change are never fully captured in conventional economic statistics. For example, conventional estimates of national output cannot take account of the welfare benefits of new goods. David Landes, in his economic history of the world, noted that Nathan Mayer Rothschild, the richest man on earth at the time, died for want of an antibiotic which would cost about $10 today.
So, yes, I do still believe that the economic statistics are not fully capturing the extent of current progress. However, I have a hunch that we will need a new metric for the future unit of economic well-being-one which involves time. Time use is a pretty good measure of consumption in an economy dominated by services. Alan Greenspan has characterised the impact of the new technology as reducing the information void in which businesses operate. Companies have lacked timely information about what their customers want. Decisions were based on information that was days or weeks or even months old. This meant keeping large stocks of inventories, and enough people to cope with the unexpected. But information technology is allowing businesses to respond more accurately and more swiftly to demand, and at lower cost. We are moving towards an economy operating in real time. Measured in this way, I think you would see that something new has arrived.
4th January 2000
We agree that for two centuries now the rapid and consistent commercial application of new technologies has changed lifestyles and raised incomes. Advocates of the New Economy claim that the nature and pace of this process has changed fundamentally. I am not sure how committed you are to this proposition, but it seems to be the essential difference between us.
We also agree that there is not much in conventional economic statistics to support the claims made for the New Economy. The best that can be said is that, in the last three to four years, productivity growth in the US has exceeded past trends by an account which, if it continued for three or four decades, would make a big difference. You argue-with other New Economy adherents-that the statistics are inadequate: that one of the things the New Economy has changed (or should change) is the way we measure economic progress.
I am sympathetic to the argument that growth is understated because new goods and quality improvements are not adequately taken into account in national income statistics. The medical example you cite is a forceful one. It is astounding that our national accounts almost completely fail to record advances in medical technology. But the omission you identify also led to the underestimation of economic growth 50 years ago-when antibiotics became widely available. It implies no error in recording the pace of change today.
This is not just a debating point. You argue that the New Economy-a distinct break in the historical trend-is hidden by measurement errors in the national accounts. To do so you must claim not only that economic growth is understated, but that it is understated today by more than it was understated in the past. You do not make this claim, and I think you would find it difficult to justify. Much of the impact of information technology has focused on business-to-business transactions-whereas earlier technological innovations (cars, medicine, television) directly influenced the quality of life. It is with advances of the latter type that the problem lies. Improvements in business processes should be measured quite well by our standard procedures. If a widget manufacturer plans inventories better and reduces design and lead times, this will show up in our measures of prices.
So I am puzzled when you suggest that we should measure production by inputs of time rather than its value. Nathan Rothschild bought many hours of attention from the finest physicians in the world who did him no good: today, a tyro doctor could identify his illness and write out a prescription in five minutes. This is how improvements in medical technology result in the growth of labour productivity. It is precisely because we measure output by inputs of time-one doctor hour is assumed to be the same as another-that our statistics sometimes mislead. Maybe we need new metrics, but they must continue to focus on the value of output-as traditional economic criteria seek to do, if not always successfully-not the volume of input.
The development and accumulation of applied science is cumulative. The next generation of technologies will depend on computers, as computers themselves depend on electricity and as the commercial exploitation of electricity was based on the earlier development of steam power. In this sense, everything always depends on what has gone before. Once again, there is nothing new; or rather, there is everything new about the specific technology, and nothing new about the process of change itself.
5th January 2000
I agree that the process of technical change itself is not new. But I do believe that the nature of these new technologies is special. They certainly seem to put a premium on knowledge, perhaps making labour a bit more like capital, at least temporarily and at least for a lucky minority of workers.
Like many non-scientists, I am hampered by my ignorance. Biotechnology, however, seems to offer undreamt of possibilities for transforming and improving the quality of life. If there were nothing special about it compared to, say, antibiotics, I wonder if we would be engaged in the current philosophical and ethical debates? Perhaps you don’t want to describe all this, and of course the internet itself, as unprecedented, but I remain an unabashed New Economy enthusiast.
7th January 2000
Three millennia ago, I would have had to visit you to deliver my oral response, and others could learn of our disagreements only from the reports of those who had heard us debate. In the days of classical Greece, my messenger would have brought you a written record prepared by my scribe. The dark ages followed, but in the 15th century printing took over from manual copying. Later, the Royal Mail offered a public messenger service. About 150 years ago, immediate contact along wires became possible: communication was no longer restricted to the speed of a horse or a pigeon. First there was laborious transcription via the telegraph, then direct speech transmission by telephony. For 20 years now we have been sending text instantaneously along wires by facsimile reproduction. And today we have conducted this correspondence by e-mail. This means that no permanent text of our thought need exist, although as a matter of fact I printed out your contributions, and I guess you did the same with mine.
You seem to see in this last change an event of transcendental significance. I see another step in a long process of technical advance, a process in which successive steps are typically smaller but more frequent. It seems to me very odd, in this history of communications, to attach singular importance to the e-revolution: odd if we look back at the previous revolutions, and odder still if we look at what might be yet to come. We have always been able to imagine communication between individuals happening without there being a physical record of their thoughts-one day, although not for another 100 years I suspect, we might be able to do it.
It is exciting, at the beginning of a new century, to think of the changes in technology and institutions that may be ahead. I share your sense that the great new frontier is biology. It really does seem likely, given the pace at which our fundamental knowledge of the nature of life and growth is developing, that within a few decades medicine and nutrition will be wholly unrecognisable. And who knows which of the other scientific advances we can envisage today, but not yet achieve, will come to fruition? Personal travel that uses plentiful airspace rather than congested roads? Fuel technologies that make burning fossils a thing of the past? The ability to control the climate?
With a sense of historical perspective that is submerged by today’s e-babble, we can see that some of these dreams will have to become reality simply to ensure that the pace of change over the next century is as rapid as the pace of change has been over the last two centuries. And we need to regain that perspective, and think more than once before concluding that today’s events are wholly exceptional and that lessons from historical and economic analysis are irrelevant.
In reality, it is uncanny the degree to which the current internet frenzy in business and financial markets parallels, not just in general but in detail, the speculative manias of the 1840s, the 1920s, and other notorious episodes of economic history. Then, as now, there was some basis for the hype-railways, radio and automobiles were indeed important innovations. But, in retrospect, we can see how financial promoters and self-proclaimed experts used the opportunity given by these very conspicuous technical advances to fleece a credulous public: and, in retrospect, that these new products, undeniably significant, were simply part of a continuous history of economic development. Maybe it really is different this time. But I’m not going to throw away my old economy texts and histories yet.