Wednesday, December 10, 2008

Reconsidering the IT Revolution's Place in History

By Nader Elhefnawy

Contrary to the common claims that we live in a time of accelerating technological progress, many observers have pointed to slow and often disappointing progress in fields ranging from commercial air travel, to energy production, to medicine and longevity. Several plausible explanations have been offered for this:

* An intellectual property regime that has got out of control, so that it is now stifling innovation.1
* Falling R & D spending in an age of "financialization" and "short-termism."2
* Diminishing returns on investment in established areas of technology.3
* Slow economic growth since 1973 since, according to many long wave theorists, slow growth historically favors the continued use of "sustaining" technologies over the exploitation and proliferation of "disruptive" ones.4

The great exception to this stagnation is usually held to be information technology, which is widely credited with driving recent increases in productivity.

There is, of course, little question as to the significant impact technologies like the personal computer and Internet access have had on our way of life. Yet, it may be the case that they have had far less impact at the macroeconomic level. During the 1980s and early 1990s, a "productivity paradox" (known as the Solow paradox) in which the investment in information technology failed to produce improvements in productivity was widely noted. While the situation appeared to improve by the mid-1990s (when the rate of productivity growth increased from 1.3 to 2.5 percent a year or more), one study indicates that the gains were all in the information technology sector, failing to materialize in other areas.5

One economist, Robert J. Gordon, has offered three arguments as to why the computer's impact may have been underwhelming.6 These are

* The weak impact of information technology on activities requiring eye-hand coordination thus far.
* The "rapid decline in the marginal utility of computing power," improvements early on ceasing to be meaningful and becoming instead a pursuit of features largely for fear of falling behind rather than any practical gain they offer. A good example is the features on word processing programs.7
* The likelihood that computers have been less helpful in letting businesses do new things than offering new ways to do old ones. In most cases it has merely substituted for or duplicated ongoing commercial activities, and in doing so often raised the cost to a company of defending its market share. A good example of this is brick-and-mortar bookstore chains which have been forced to open web sites to keep up with the market after the appearance of

Of course, one could argue that Gross Domestic Product has its limitations as a unit of measure, and that it may simply have failed to count in many real gains these technologies afford their users. However, it can be pointed out that GDP is at least equally inadequate at taking stock of the full costs of information technology at the macroeconomic level. These include

* The rapid depreciation of IT capital (i.e., software and computers).
* The costs of computer crime, which the OECD recently estimated to be in the range of $100 billion a year; and the cost of the computer security services purchased to help check such crime.8
* Certain one-time problems, like the Y2K bug, which is estimated to have cost as much as $600 billion during the late 1990s ($780 billion in 2008 dollars, or roughly 1.5 percent of global GDP at the time).9

According to economist Roland Spant, the failure to include such depreciation in Gross Domestic Product may mean growth rates have been overstated by as much as 0.5 percent a year in the 1995-2000 period in some advanced economies.10 Similarly, Gross Domestic Product registers the services purchased to deal with problems like crime and Y2K as gains rather than costs.

This warrants a reconsideration of much of what is taken for granted about recent economic history. It certainly throws into doubt a common explanation given for the fall of the Soviet Union, namely that it was simply unable to keep up with "New Economies" turbo-charged by the microchip. (After all, computerization only generated meaningful productivity increases after the Soviet collapse, and even then may have been comparatively minor.11) It also throws into doubt the sources of U.S. growth in the late 1990s, and contributes to suspicions about the reality of that growth in the years since, much of it centered on a suspected understatement of inflation.

Of course, none of this necessarily rules out greater future impact. One notable study indicates that such modest contributions have been the historical norm in comparably early phases of other technological revolutions, like steam and electricity.12 The advent of "strong" artificial intelligence, especially in combination with robotics, would explode the constraints that have hitherto existed on applying computing power to economic productivity. Consequently, it may be that the ultimate significance of the computer revolution depends on the success or failure of technologists to realize those possibilities.

1 Ha-Joon Chang, Bad Samaritans (New York: Random House, 2008), pp. 122-144.
2 See James Crotty, "The Neoliberal Paradox: The Impact of Destructive Product Market Competition and Impatient Finance on Nonfinancial Corporations in the Neoliberal Era," Policy Economic Research Institute, Research Brief (Jul. 2003); John R. Graham, Campbell R. Harvey, and Shivaram Rajgopal, "The Economic Implications of Corporate Financial Reporting," Journal of Accounting and Economics 40 (2005), pp. 3–73.
3 W. Brian Arthur, "Increasing Returns and the New World of Business," Harvard Business Review 74.4 (Jul.-Aug. 1996), pp. 100-109. Also see Michael O'Hanlon, Technological Change and the Future of Warfare (Washington D.C.: Brookings Institution Press, 2000), p. 194.
4 While Joseph Schumpeter viewed upswings in the cycle as driven by the innovation of "leading sectors," other theorists, like Nikolai Kondratiev, or Ernest Mandel, argued that other economic stimuli led to the capitalization on technology. For a discussion of technological innovation and growth in long wave theory, see Joshua S. Goldstein, Long Cycles: Prosperity and War in the Modern Age (New Haven, CN: Yale University Press, 1988), pp. 21-98. For a discussion of disruptive and sustaining technologies, see Clayton Christensen, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fall (Cambridge, MA: Harvard University Press, 1997). The energy sector in particular seems to reflect such patterns. See Marshall Goldberg, "Federal Energy Subsidies: Not All Technologies Are Created Equal," Renewable Energy Policy Project, Research Report, Jul. 2000, p. 2; Robert M. Margolis and Daniel M. Kammen, "Underinvestment: The Energy Technology and R & D Policy Challenge," Science 285 (Jul. 1999), pp. 690-692; Margolis and Kammen, "Energy R & D Innovation: Challenges and Opportunities for Technology and Climate Policy," in Stephen Schneider, Armin Rosencranz, and John-O Niles, eds., A Reader in Climate Change Policy (Washington D.C.: Island Press, 2001).
5 Christine Cooper, "The Persistence of the Productivity Paradox," Jul. 2001. Accessed at
6 Robert J. Gordon, "Does the 'New Economy' Measure up to the Great Inventions of the Past?" Journal of Economic Perspectives 14.4 (Fall 2000), pp. 49-74.
7 The problem may be exacerbated by poor decision-making on the part of consumers in this area, often characterized a drive to acquire the newest (and "best") rather than cost-benefit calculations. Rochlin, Trapped in the Net: The Unintended Consequences of Computerization (Princeton, NJ: Princeton University Press, 1997), pp. 29-34.
8 "Cybercrime toll threatens new financial crisis," New Scientist, Nov. 20 2008. Accessed at .
9 For a discussion of Y2K, see William M. Evan and Mark Manion, Minding the Machines: Preventing Technological Disasters (Upper Saddle River, NJ: Prentice Hall, 2000), pp. 58-79.
10 However, it may also understate the rate of growth in some other countries. See Roland Spant, "Why Net Domestic Product should replace Gross Domestic Product as a Measure of Economic Growth," International Productivity Monitor 7 (Fall 2003), pp. 39-43. Accessed at
11 This claim was recently reiterated in Max Boot's War Made New. A far more likely explanation would seem to be the Soviet government's slashing economic investment in the 1970s in an attempt to maintain consumption while continuing to run its arms race with the West. The economic weakness that resulted (exacerbated when the price of oil dropped after the mid-1980s), and Mikhail Gorbachev's particular strategy for redressing that weakness, created an opening for dissenters (particularly among Soviet elites) which ultimately led to the dismantling of the Soviet Union. See David Kotz and Fred Weir, Revolution From Above: The Demise of the Soviet System (New York: Routledge, 1997).
12 Nicholas Crafts, "The Solow Productivity Paradox in Historical Perspective," Nov. 2001. Accessed at

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