The IT Revolution and The New Economy

Objectives To understand better: 1. What the IT revolution means to the economy. 2. How the IT revolution compares to previous economic revolutions. 3. Whether the productivity and GDP growth rates of the past decade are telling us about the IT revolution. 4. What economists think it reasonable to expect from IT in the future.

Outline 1. Learning from history. 2. Productivity and IT in principle. 3. Economic data since 1991, what do they mean? 4. What can we say about the future?

Three events in history are in different ways especially relevant to our discussion of the current IT revolution. 1. The Industrial Revolution. 2. The invention of the telephone. 3. The invention and distribution of electricity and electric motors and lights.

What caused the Industrial Revolution? 1. Population growth? 2. Population concentration and leisure? 3. Invention of medicine? 4. Inventions such as the cotton gin, sewing maching, power loom, steam engine, steamboat, farm machinery? 5. Division of labor? 6. Information technology?

Why did population grow like this? By chance at first and then this growth ignited the industrial revolution? This is logical e.g. if this growth made the division of labor possible and then the greatly increased production… Think of this as reaching the first rung on a fire escape ladder. Then you climb up the steps to the top.

Population concentration and leisure? Urbanization: concentrations needed for factory system concentrations create new markets Leisure: For example, the aristocrat has the time to dabble in science.

Koch, Pasteur both 1800s Virchow, Harvey 1800s & 1600s Fleming, Jenner 1900s & 1700s

The Semmelweis story reveals how bad medicine was even in the late 1800s.

Could inventors or even single inventions have caused the Industrial Revolution? Or did it cause them?

Electricity: In the 18th Century, electricity came to be understood and it was a frequent source of fun for parlour games. Many of the practical applications didn't come until the 19th Century with inventions such as the electric light bulb, phonograph, motors.

But, complete electrification came only by the 1930s in FDRs Rural Electrific- ation Administration the "REA" Above: electric feed grinder; Below: rural creamery.

The telephone: When Alexander Graham Bell invented the telephone and began to sell them, the value of a telephone to a given person generally increased as more people bought telephones.

This illustrates the phenomenon of increasing returns (the opposite of what every economics student was taught, which was the "law of diminishing marginal returns"). This might happen with the current IT revolution caused by computers and the internet.

Adam Smith and the Division of Labor Was this the key?

Johannes Guttenberg Inventor of the printing press. Motive: He was trying to pay off some debts by making indulgences in large quantities for the church.

Marco Polo The other leg of the "information revolution" that might have triggered the Industrial Revolution.

But, what are the lessons for us? What does this imply for our IT revolution? My choices: 1. Tech revolutions may take many decades, even centuries to play out. 2. The current IT revolution was probably not the first. 3. Pinning economic growth to a specific source is often difficult. 4. IT revolutions may even accelerate due to increasing returns.

Growth in GDP depends on these factors: 1. Productivity growth. a. Technological change. b. Improvements in physical capital. c. Improvements in human capital -- education. 2. Growth in availability of factors.

A look at U.S. recent productivity growth: From 1965 up to 1997.

The upturn in the 1990s.

CountryProduct ivity CountryProduct- ivity Australia96Italy106 Austria102Japan82 Belgium128The Neth.121 Canada97Norway126 Denmark92Spain84 Finland93Sweden93 France123 NoteSwitzerl.94 Germany105 OECDTurkey36 Greece75Average=United K.100 Ireland U.S.120

Part 2: Recap and review: How does IT improve productivity in principle? My personal choices: 1. Speeds up diffusion processes. 2. Improves matches of consumer and product. 3. Enables improved production process controls. 4. Improves matches in business to business markets. 5. Helps to create new products. 6. Others.