Does the "New Economy" Measure up to the Great Inventions of the Past?
During the four years 1995-99 U. S. productivity growth experienced a strong revival and achieved growth rates exceeding that of the golden age' of 1913-72. Accordingly many observers have declared the New Economy' (the Internet and the accompanying acceleration of technical change in computers and telecommunications) to be an Industrial Revolution equal in importance, or even more important, than the Second Industrial Revolution of 1860-1900 which gave us electricity, motor and air transport, motion pictures, radio, indoor plumbing, and made the golden age of productivity growth possible. 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 thejob
|Date of creation:||Aug 2000|
|Date of revision:|
|Publication status:||published as Gordon, Robert J. "Does The 'New Economy' Measure Up To The Great Inventions Of The Past?," Journal of Economic Perspectives, 2000, v14(4,Fall), 49-74.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Erik Brynjolfsson & Lorin Hitt, 1996.
"Paradox Lost? Firm-Level Evidence on the Returns to Information Systems Spending,"
INFORMS, vol. 42(4), pages 541-558, April.
- Brynjolfsson, Erik. & Hitt, Lorin M., 1995. "Paradox lost? : firm-level evidence on the returns to information systems spending," Working papers 3786-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- 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.
- 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.
- Dale W. Jorgenson & Kevin J. Stiroh, 2000.
"Raising the Speed Limit: U.S. Economic Growth in the Information Age,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 31(1), pages 125-236.
- Dale W. Jorgenson & Kevin J. Stiroh, 2000. "Raising the Speed Limit: US Economic Growth in the Information Age," OECD Economics Department Working Papers 261, OECD Publishing.
- repec:ucp:bknber:9780226074153 is not listed on IDEAS
- 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.
- 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.
- Dudley, L., 1996.
"Communication and Economic Growth,"
Cahiers de recherche
9620, Universite de Montreal, Departement de sciences economiques.
- Thor Hultgren, 1960. "Changes in Labor Cost During Cycles in Production and Business," NBER Books, National Bureau of Economic Research, Inc, number hult60-1, May.
- 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.
- Alan Greenspan, 1999. "The American economy in a world context," Proceedings 637, Federal Reserve Bank of Chicago.
- Basu, Susanto, 1996.
"Procyclical Productivity: Increasing Returns or Cyclical Utilization?,"
The Quarterly Journal of Economics,
MIT Press, vol. 111(3), pages 719-51, August.
- Susanto Basu, 1995. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," NBER Working Papers 5336, National Bureau of Economic Research, Inc.
- Robert J. Gordon, 1996.
"The Time-Varying NAIRU and its Implications for Economic Policy,"
NBER Working Papers
5735, National Bureau of Economic Research, Inc.
- Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
- Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
- Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557, July.
- Stiroh, Kevin J, 1998. "Computers, Productivity, and Input Substitution," Economic Inquiry, Western Economic Association International, vol. 36(2), pages 175-91, April.
- 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.
- 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.
- Daniel S. Hamermesh & Sharon M. Oster, 2002. "Tools or Toys? The Impact of High Technology on Scholarly Productivity," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 539-555, October.
- Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:7833. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.