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A Long Boom?
J. Bradford DeLong
Comments on the "new economy" at the September 18, 1999 Haas Business School Leading Edge Conference. The presider over our session was Peter Leyden, who has just co-authored a book: The Long Boom. My talk draws in obvious and straightforward ways on my work with Michael Froomkin, and on projects I amwriting with Stephen Cohen and John Zysman...
Peter Leyden and his coauthors--Peter Schwartz and Joel Hyatt--have painted a deliberately optimistic scenario: the long boom. Could it come to pass? Could the world economy experience a "long boom"? Could the next generation see the median American material standard of living rises at something like 3% per year rather than the something like 1% per year that we have grown used to since 1973, and in which other countries join the first world not singly (as Italy joined in the 1960s, Japan in the 1970s, and Korea hopes to join in the 1990s) but in battallions?
Economists love to say "on the one hand, on the other hand." We believe that there is a lot of value in raising your confusion over an issue to a higher level by giving you lots of reasons for and against. Harry Truman wished for a one-handed economist. But I have two hands. And I remember the first rule of forecasting: give a number or a date, but not both.
Whether the next generation is going to see a return of productivity growth to the levels seen back before 1973 or not depends on the answers to two questions: "Is there really a new economy--an E-conomy?" and "Will we provide it with the proper support--the proper resources and rules?"
Technological Tsunami: Moore's Law
The driving force underlying the E-conomy is the ongoing explosion in our productivity at making the integrated circuits that underpin all of modern computer and communications technologies. Bck in 1965 Intel Corporation founder Gordon Moore projected that the density of transistors on a silicon chip would double every twelve months. He was somewhat overoptimistic (now people say every eighteen months) but largely correct. And to this day people wanting to refer to this technological explosion in microelectronics call it "Moore's Law".
Information processing power grows along with transistor density, while the cost to make a chip of given size stays roughly constant. Our computers today have 66,000 times the processing power at the same cost as the computers of 1975. Moore's Law still has at least another ten years--seven generations--to run. Our computers in 2010 will have ten million times the processing power of the computers of 1975.
How does the information-processing revolution compare to other, previous waves of innovation? Let's compare the past forty years of progress in information processing with the replacement of the steam engine by the electric motor. In 1869 America's steam engines delivered 1.2 million horsepower to America's manufacturing firms. By 1939 America's electric motors delivered 45 million horsepower to America's manufacturing firms. This was roughly a forty-fold increase in mechanical power in seventy years--a five percent per year increase in muscle power.
At the end of the 1950s, the moment at which electronic computers had largely replaced electromechanical calculators, there were roughly 2000 installed computers in the world--machines like Remington Rand UNIVACs, IBM 650s or 702s, or DEC PDP-1s with processing power that averaged perhaps 10,000 instructions per second. Today--forty years later--there are approximately 200 million active computers in the world with processing power that averages approximately 100,000,000 instructions per second. This is a million-fold increase in forty years--a thirty-five percent per year increase in information processing power.
The price of computers has fallen more than ten thousand-fold in a single generation; the price of semiconductors has fallen even faster. The measured productivity performance of America's whole economy--the rate of increase in labor productivity in all of nonfarm business--has not been especially impressive in the 1990s: only some 1.6% per year. The measured productivity performance of those industries that produce information technology goods--semiconductors, fiberoptics, and so forth--has been astonishing: an average annual rate of increase of value added per worker of nearly 25% per year.
Technological Tsunami: The Network
The extraordinary build-out of the network is as remarkable as the explosion in computing power. Back in the early days of networking--in the 1960s and 1970s--it was thought that high-speed data communications would require special data-friendly phone lines. P[lain ]O[ld ]T[elephone ]S[ervice] would be capable of carrying data transmissions at the 103 standard 300 bits per second, or perhaps at most the V.22bis standard 2400 bits per second, but few if any people thought it would attain the 53000 bits per second claimed or the 40000 bits per second typically achieved by the latest generation of modems.
This wave of innovation in data communications has allowed the rapid building-out of the build-out of the world wide data network on top of the already-existing phone network. It has thus shaved a telephone-equipment generation off of the time it would have otherwise taken to wire the United States for the internet. Today the U.S. has one internet computer for every fifteen citizens. And more than 60 million computers are now on the internet.
Looking forward, at least half the phone lines in the U.S. are suitable for high-speed DSL service. Approximately three-quarters of the households not suitable for DSL service are potential customers for cable modems.
Just a Leading Sector
But nothing that I have said so far is the story of an "E-conomy." What I have said so far is the standard story of a "leading sector"--an explosion of invention and innovation in a narrow sector of the economy that revolutionizes productivity in making a small range of commodities. There have been many such leading sectors in the past--air transport in the 1960s, television in the 1950s, automobiles in the 1920s, organic chemicals in the 1890s, railroads in the 1870s. Yet they did not change the standard dynamic of economic growth. They were the standard dynamic of economic growth.
So what, if anything, is different this time?
Tools and Gadgets
One way to put it is to draw the distinction that Stephen Cohen does between "gadgets" and "tools." Gadgets are things that make life easier or industry more productive, but that can be slotted into well-defined and unchanged places in existing patterns of life or of industry organization. The automatic transmission is a gadget: it allows you to tune the radio or talk on the phone while driving because you don't have to keep one hand on the clutch and so makes life easier and more pleasant, but a car with an automatic transmission still does what a car does.
By contrast, the electric motor is a tool. It made possible--among other things--the assembly line. No longer did factory floors have to be arranged in order to make sure that each machine was connected to the network of belts and shafts that transferred energy from the prime-mover central steam engine. Instead factory floors could be arranged to make the flow of work simple, easy, and automatic. Stanford economic historian Paul David says that it took forty years for American industry to figure out how to reorganize itself to efficiently take advantage of the potential of electric motors. We call that reconfigured system by the name of "mass production." And the long-run consequences--industrial, organizational, social--were enormous.
So are the--revolutionary--improvements in computer and communications technology gadgets? Do they principally allow us to add pretty graphs to our reports, learn about the weather whenever we choose rather than having to wait until twenty-five minutes past the hour, save Land's End thirty cents a month in catalog distribution costs because we will access their catalog online, and allow underlings to collect much more information that bosses never look at?
We think that there is a very good chance that 100 years from now people will look back at our current wave of technological innovation and conclude that they are "tools." The tools of the industrial revolution amplified muscle power: you didn't have to rely on a human or a horse anymore. The tools being forged today are powerful: you don't have to rely on human memory, or on human eyes scanning pages and pages of poorly-sorted information, to remember or organize things. The technological tools that are being forged today will be used to calculate, sort, search, organize--amplify what we might as well call brain power in an analogy to the industrial revolution's amplification of muscle power--in every economic activity in which organization, information processing, or communication is important. And organization, information processing, or communication is important in every single economic activity.
Thus it could be very big.
But there is no guarantee that we here in the United States will do a good job of nurturing--incubating--supporting--the industrial, organizational, and social transformations needed to take full advantage of the potential opened up by this explosion in brain power.
An Analogy: the Gilded Age
Consider, for example, the coming of the large corporation to late-nineteenth century America. You needed more than the improvements in technology. Now we can look back and say that the coming of the large corporation needed four things:
You needed legal and institutional changes--limited liability and investment banking--to assemble the capital to build factories on the scale needed to serve a continental market. You needed political changes--antitrust policy--to try to make sure that the enormous economies of scale within the grasp of the large corporation were not achieved at the price of replacing competition by monopoly. You needed institutional changes to make sure that the new corporations could serve a continental market.
For example, think of Swift and Armour: mass-slaughter the beef in Chicago, ship it dressed to Boston, and undercut local small-scale Boston-area slaughterhouses by a third at the butchershop. A very good business plan that produced large profits for entrepreneurs and investors and a much better diet at lower cost for consumers, unless the Massachusetts legislature required--for "health" and "safety"--that all meat sold in Massachusetts be inspected live and on the hoof by a Massachusetts meat inspector in Massachusetts immediately before slaughter. Without the right system of governance--in this case public governance, federal preemption of state health and safety regulation affecting interstate commerce--you wouldn't have had America's highly efficient Chicago meatpacking industry. That piece of the late-nineteenth century industrialization wouldn't have fallen into place.
The Gilded Age industrialization of America gave us some malefactors of great wealth, the core endowment of at least one major west coast university as ex-governor of California Leland Stanford used a sweetheart deal between the Central Pacific Railroad he promoted and the Central Pacific Credit and Construction Company that he owned to divert a lot of British investors' money into his own pockets--crony capitalism at its finest. It also gave the average American the highest standard of living and the most productive industry in the world in the first half of the twentieth century.
But in Europe (where there was no continental market but instead national tariffs) you didn't get the ability to capture economies of scale to such a great degree. In Britain (with next to no pre-World War I development of investment banking) you didn't get assembly of the pools of capital to build the large factories in the first place. In Germany (with no antitrust policy worthy of the name) there was no break on the cartelization of modern industry. Political theories that German industrial cartels poisoned Germany's politics in the first half of the twentieth century are now out of favor. But there is no doubt that cartel-driven output restriction made Germany a poorer place.
Because American institutions changed to support, nurture, and manage the coming of mass production and the large-scale business enterprise chronicled by Alfred Chandler--and because European institutions did not--it was America that was on the cutting edge of the future. In Leon Trotsky's words, America was "the furnace where the future was being forged," in the first half of the twentieth century.
Fumbling the Future
In what ways could we not have a long boom? What could go wrong, and cut off what seem to be a very promising series of possibilities opened up by new technology?
Consider, again, nineteenth century Britain--but not compared to the United States, compared to Germany. In 1850 Manchester--the heart of the industrial revolution--showed the potential and the dangers of the industrial revolution. The potential was the enormous increase in productivity and output. The dangers were found in the slums, for the British government was not then investing in the infrastructure needed to keep its rapidly-expanding urban population healthy, let alone to provide education for its urban children.
Few in Manchester noticed that the British government was not building schools for children of workers migrating in from the countryside to the jobs in the new factories. Yet it was clear to keen-eyed observers even then that industrial technology was rapidly becoming both closely linked with science and increasingly sophisticated. By the end of the nineteenth century the lack of a well-schooled workforce meant that the post-steam-engine technologies of electricity, metallurgy, and chemistry found themselves much more at home in late nineteenth century Germany--where investments in schools had been made.
Thus Britain entered the twentieth century and its half-century death struggle with anti-democratic German regimes having squandered a large initial edge in technology and productivity: its political leaders hadn't even realized that nurturing the next generation of industrial development required upgrading the literacy and technical skills of the workforce.
Gilded Age America did, and nineteenth-century Britain didn't, change its industrial, economic, institutional, and political structure to take full advantage of the possibilities opened by new technologies.
Just as the second industrial revolution of the late nineteenth century required a technically-literate workforce (which the British government did not take steps to provide) so the American economy over the next generation will need a computer-and-communications-literate workforce. It will need the inventors and innovators to push out the envelope of the possible in the us of these technologies as well as their production. It will need the engineers and technicians to staff the information technology and communications industries themselves--and to manage the interfaces between the rest of the economy and information technology. And it will need every single American to have the basic knowledge of the interface conventions and methods of operation of the network and its computers that they can be productive users.
At the moment our educational system does not seem up to the task.
As the parent of two children in California's public elementary schools, this example resonates. My daughter's kindergarten class last year was larger than my class when I went to kindergarten in Pasadena in 1965. I think that one consequence of increasing income inequality in America in the past quarter century has been a decline in effective political support for public services for the middle class like schools.
Moreover, think that educational system reform will pay dividends only in two decades or more.
As a Berkeley faculty member, I look at those of our undergraduates and graduate students who come from outside the United States, and I think "how stupid is our immigration policy." Your average Berkeley student is going to be a valuable net asset to wherever he or she lives--so why aren't American politicians fighting to keep them?
There are other resource-related issues as well:. To name three: the availability of finance, making sure that organizations have the right incentives to keep backbone traffic flowing smoothly, and the question of who is going to provide the fundamental research and development spending to keep the pipeline of new technologies filled.
In the generation and a half after World War II the federal government--along with a few other specialized institutions like Bell Labs and Xerox PARC--did amazing things to support fundamental R&D. But in recent decades this commitment has begun to erode. What will replace it?
And then there are rules--systems of private and public governance--to keep the waves of innovation, experimentation, and development coming. Silicon Valley has turned out to be an enormously fertile industrial ecology for nurturing this technoeconomic revolution. How can we make it work better? What must we guard against that could it make it work not very well?
What are we now doing and failing to do to support or fail to support our developing "new economy"? I don't have all the answers. But I do know that anyone who believes that a long boom is possible must believe that the industrial, economic, and social transformations about to be triggered are large--and that the U.S. government and the institutions of its industrial ecology will move rapidly and effectively to support the requirements of these transformations.
But I am out of time.
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