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Does the 'New Economy' Measure up to the Great Inventions of the Past?

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  • Gordon, Robert J

Abstract

Many observers have declared the ‘New Economy’ to be an Industrial Revolution even more important than the Second Industrial Revolution of 1860-1900, and this Paper raises doubts about this comparison. It shows that the recent acceleration in productivity growth in the US economy can be attributed to a technological acceleration within durable manufacturing and to increased investment in computers in the rest of the economy. But there has been no acceleration of trend growth in US multi-factor productivity in the 88% of the economy outside of durable manufacturing. In comparison with the Great Inventions of 1860-1900, the ‘New Economy’ falls 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 as a Great Invention because much of its use involves substitution of existing activities from one medium to another, because much Internet investment involves defence of market share rather than creation of something of social value, because much Internet activity duplicates existing activity like mail order catalogues, while the latter have not faded away, and finally because much Internet activity, like daytime e-trading, involves an increase in the fraction of work time involving consumption on the job.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2607.

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Date of creation: Nov 2000
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Handle: RePEc:cpr:ceprdp:2607

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Keywords: Computers; Economic Growth; Internet; New Economy; Productivity;

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References

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  1. Erik Brynjolfsson & Lorin Hitt, 1996. "Paradox Lost? Firm-Level Evidence on the Returns to Information Systems Spending," Management Science, INFORMS, INFORMS, vol. 42(4), pages 541-558, April.
  2. Dudley, L., 1996. "Communication and Economic Growth," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9620, Universite de Montreal, Departement de sciences economiques.
  3. David, Paul A, 1990. "The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox," American Economic Review, American Economic Association, vol. 80(2), pages 355-61, May.
  4. Robert J. Gordon, 2000. "Interpreting the "One Big Wave" in U.S. Long-Term Productivity Growth," NBER Working Papers 7752, National Bureau of Economic Research, Inc.
  5. Stiroh, Kevin J, 1998. "Computers, Productivity, and Input Substitution," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 36(2), pages 175-91, April.
  6. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557, March.
  7. Daniel S. Hamermesh & Sharon M. Oster, 1998. "Tools or Toys? The Impact of High Technology on Scholarly Productivity," NBER Working Papers 6761, National Bureau of Economic Research, Inc.
  8. Robert J. Gordon, 1996. "The Time-Varying NAIRU and its Implications for Economic Policy," NBER Working Papers 5735, National Bureau of Economic Research, Inc.
  9. Bresnahan, Timothy F. & Gordon, Robert J. (ed.), 1997. "The Economics of New Goods," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226074153, March.
  10. Thor Hultgren, 1960. "Changes in Labor Cost During Cycles in Production and Business," NBER Books, National Bureau of Economic Research, Inc, number hult60-1.
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  12. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 70, pages 538.
  13. Erik Brynjolfsson & Loren Hitt & Shinkyu Yang, 2002. "Intangible Assets: How the Interaction of Computers and Organizational Structure Affects Stock Market Valuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 137-198.
  14. Alan Greenspan, 1999. "The American economy in a world context," Proceedings 637, Federal Reserve Bank of Chicago.
  15. Robert J. Gordon, 1999. "U.S. Economic Growth since 1870: One Big Wave?," American Economic Review, American Economic Association, vol. 89(2), pages 123-128, May.
  16. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
  17. Robert J. Gordon, 1993. "The Jobless Recovery: Does It Signal a New Era of Productivity-led Growth?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 271-316.
  18. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
  19. Susanto Basu, 1995. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," NBER Working Papers 5336, National Bureau of Economic Research, Inc.
  20. Joel Mokyr, 1997. "Are we living in the middle of an Industrial Revolution?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 31-43.
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