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Hi-tech Innovation and Productivity Growth: Does Supply Create Its Own Demand?

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  • Robert J. Gordon

Abstract

This paper argues that the late 1990s boom in ICT investment was unsustainable for both macro and micro reasons; we are unlikely again to witness an interval in which computer hardware investment grows at an annual rate greater than 30 percent for five straight years. Analysts who base their optimism on the role of Moore's Law in creating endless exponential growth of computer power neglect the need for an equally rapid explosion in the demand for computer power. Simply put, this paper argues that supply does not create its own demand. Yet a failure of ICT investment to revive to the ebullient growth performance of the late 1990s does not doom productivity growth to slip back to the dismal pre-1995 era. Instead, we argue that conventional analyses have exaggerated the contribution of ICT investment to the post-1995 productivity performance. Productivity can continue to grow at respectable rates even if ICT investment continues to slump. While accepting the contribution of ICT production to economy-wide productivity growth, the paper cites four reasons to suspect that standard analyses have exaggerated the contribution of ICT use, the so-called capital deepening' effect. First, these analyses unrealistically assume that the productivity payoff of computer use is instantaneous upon installation. Second, recent research indicates that the strong revival of productivity growth in retail trade occurred for reasons other than ICT use. Third, differential productivity growth across states in the U. S. appears to be related to ICT production but not to ICT use. Fourth, retailers in Europe use the same ICT equipment as in the U. S. yet have failed to enjoy a productivity revival, again indicating that factors other than ICT use are central.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9437.

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Date of creation: Jan 2003
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Handle: RePEc:nbr:nberwo:9437

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  1. Zvi Griliches, 1998. "Productivity, R&D, and the Data Constraint," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 347-374 National Bureau of Economic Research, Inc.
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  8. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  9. C.J. Krizan & John Haltiwanger & Lucia Foster, 2002. "The Link Between Aggregate and Micro Productivity Growth: Evidence from Retail Trade," Working Papers 02-18, Center for Economic Studies, U.S. Census Bureau.
  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.
  11. Eric Bartelsman & Andrea Bassanini & John Haltiwanger & Ron Jarmin & Stefano Scarpetta & Thorsten Schank, 2002. "The Spread of ICT and Productivity Growth: Is Europe Really Lagging Behind in the New Economy?," CEPN Working Papers halshs-00289168, HAL.
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Cited by:
  1. Alan Hughes & Michael S Scott Morton, 2005. "ICT and productivity growth - the paradox resolved?," ESRC Centre for Business Research - Working Papers, ESRC Centre for Business Research wp316, ESRC Centre for Business Research.
  2. Susanto Basu & John G. Fernald & Nicholas Oulton & Sylaja Srinivasan, 2003. "The Case of the Missing Productivity Growth: Or, Does Information technology explain why productivity accelerated in the United States but not the United Kingdom?," Harvard Institute of Economic Research Working Papers 2021, Harvard - Institute of Economic Research.
  3. Dobrescu, Emilian, 2006. "Integration of macroeconomic behavioural relationships and the input-output block: Romanian modelling experience," MPRA Paper 35748, University Library of Munich, Germany.
  4. Dobrescu, Emilian, 2006. "Macromodel of the Romanian market economy (version 2005)," MPRA Paper 35749, University Library of Munich, Germany.
  5. Clarke, George R.G., 2008. "Has the internet increased exports for firms from low and middle-income countries," Information Economics and Policy, Elsevier, vol. 20(1), pages 16-37, March.
  6. Jinghai Zheng & Angang Hu & Arne Bigsten, 2009. "Potential output in a rapidly developing economy: the case of China and a comparison with the United States and the European Union," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 317-342.
  7. Satyajit Chatterjee, 2011. "A theory of asset price booms and busts and the uncertain return to innovation," Business Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 1-8.
  8. Morana, Claudio, 2004. "The Japanese stagnation: an assessment of the productivity slowdown hypothesis," Japan and the World Economy, Elsevier, vol. 16(2), pages 193-211, April.
  9. Andrew Sharpe & Jean-François Arsenault, 2008. "ICT Investment and Productivity: A Provincial Perspective," CSLS Research Reports, Centre for the Study of Living Standards 2008-06, Centre for the Study of Living Standards.
  10. Mirko Draca & Raffaella Sadun & John Van Reenen, 2006. "Productivity and ICT: a review of the evidence," LSE Research Online Documents on Economics 4561, London School of Economics and Political Science, LSE Library.
  11. Lorenzo Codogno & Francesco Felici, . "Assessing Italy's Reform Challenges:What Do Growth Accounting and Structural Indicators Say?," Working Papers 8, Department of the Treasury, Ministry of the Economy and of Finance.
  12. Kevin J. Lansing, 2008. "Speculative growth and overreaction to technology shocks," Working Paper Series 2008-08, Federal Reserve Bank of San Francisco.
  13. Stephan Seiter, 2005. "Productivity and Employment in the Information Economy: What Kaldor’s and Verdoorn’s Growth Laws Can Teach the US," Empirica, Springer, vol. 32(1), pages 73-90, 03.
  14. Richard Florida & Charlotta Mellander & Kevin Stolarick, 2008. "Inside the black box of regional development: human capital, the creative class and tolerance," Journal of Economic Geography, Oxford University Press, vol. 8(5), pages 615-649, September.
  15. Christine Zhen-Wei Qiang & Alexander Pitt & Seth Ayers, 2004. "Contribution of Information and Communication Technologies to Growth," World Bank Publications, The World Bank, number 15059.
  16. Aikaterini Kokkinou, 2006. "Innovation and Productivity a Story of Convergence and Divergence Process in EU Countries," ERSA conference papers ersa06p452, European Regional Science Association.
  17. M. Ayhan Kose & Roberto Cardarelli, 2004. "Economic Integration, Business Cycle, and Productivity in North America," IMF Working Papers 04/138, International Monetary Fund.
  18. Tai-Yoo Kim & Jihyoun Park & Eungdo Kim & Junseok Hwang, 2011. "The Faster-Accelerating Digital Economy," TEMEP Discussion Papers 201173, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Apr 2011.
  19. Susanto Basu & John G. Fernald & Nicholas Oulton & Sylaja Srinivasan, 2003. "The Case of the Missing Productivity Growth: Or, Does Information Technology Explain why Productivity Accelerated in the US but not the UK?," NBER Working Papers 10010, National Bureau of Economic Research, Inc.
  20. Atanas Leonidov, 2003. "“The New Economy”," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 3-33.

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