The Internet is wonderful. I can scan the latest issues of my favorite South American newspapers before their regular readers are even out of bed. The Internet also helped me get in touch with the children of a fellow soldier with whom I had served 40 years ago and who later was killed in Vietnam. Both of these, until recently, would have been difficult. But do such marvels really increase the amounts of goods and services we will have to meet society’s needs and wants?
MIT economist Robert Solow, who won the 1987 Nobel Prize largely for his work on why economies grow, was skeptical at an earlier phase of the “computer revolution.” That year, he noted: “You can see the computer age everywhere these days except in the productivity statistics.” His astute observation became known as “Solow’s paradox.” But does it apply to the personal computer and the Internet? Do they, in fact, contribute little to measured national output?
Anecdotally, it is obvious that the Internet and search engines like Google can make information flow much easier. When I was a history student 35 years ago, the University of Minnesota library got a handful of newspapers from Latin America. They often arrived a month or more after publication. For current news from developing nations, one had to scan specialized airmail newsletters that summarized developments on a weekly basis. If something important occurred, you could search the New York Times or Washington Post, usually in vain, or wait weeks to get details as the physical newspapers trickled in from Rio or Lima.
Now, if I am suffering insomnia at 2 a.m., I can read that day’s papers not only from national capitals like Santiago, Chile or Buenos Aires, Argentina, but also from regional cities like Recife, in Brazil, or Arequipa, Peru. Before the Internet, not even the CIA had such capability.
For me, this marvel is simply a hobby. But instinctively, one believes that such easy information transfer must help businesses here or abroad make better decisions. Improved decision-making allows society to get more out of the same set of resources.
But despite plentiful anecdotes about the wonders of computing, even back in the mainframe days of the 1950s and 1960s, sophisticated economic research that tried to tease out the effects of computers usually found them to be very small. Some research found negative returns to increasing investment in computers in the 1960s and 1970s. Most economists agreed Solow’s observation was factually correct.
One explanation is U.S. productivity growth was in the doldrums from the early 1970s to the early 1990s, much below levels that had prevailed from 1945 to 1972. The reasons for this slowdown are still debated. But productivity began to grow faster in the 1990s. And it seemed clearly related to widespread adoption of the personal computer and the Internet.
Alan Greenspan recognized this early and argued the U.S. economy could grow faster than many economists thought without experiencing inflation. He probably was right, although the jury is still out on the long-term effects of money growth while Greenspan headed the Fed.
Historians note that many important inventions take decades to boost real output significantly. Thomas Newcomen developed a primitive but useful steam engine by 1710. James Watt improved it greatly by 1770. But water power for production continued to dominate well into the 1800s. The widespread application of steam to ship and rail transportation did not occur until a century after the early engines were used to pump water from British mines. Only in the last half of the 1800s did steam power contribute its enormous boost to the global economy.
Edison developed a practical incandescent light bulb in 1879 and formed an electricity utility in 1882. But my house, built in St. Paul in 1900, still had gas lamps. It was not until the 1920s that adapting electricity to industry boosted national output to a significant degree. And it was not until 1925 that even half the homes in our country had electricity.
Parenthetically, the electrification boom of the 1920s, like the high-tech boom of the 1990s, was accompanied by irrational exuberance in stock markets that eventually gave many investors financial bloody noses.
These historians counsel patience. Productivity gains from the Internet are real and growing. It just takes time for such efficiencies to show up in the things economists tabulate. In the meantime, enjoy the Internet.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.